Accidentally realized losses in 401k rebalancing?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
noz
Posts: 1
Joined: Wed Nov 23, 2022 12:35 pm

Accidentally realized losses in 401k rebalancing?

Post by noz »

Hi all, first time poster. I am relatively new on my investing journey and would like some feedback, as I believe I just made a mistake while rebalancing my 401k for the first time.

I had a 401k from an old employer and the investments there were in high expense ratio target date funds. After reading bogleheads I made the decision to go the lazy portfolio route. So, I thought I'd do some tax loss harvesting/rebalancing and move the TDF into a low cost total market fund. I put in the order yesterday, felt great about the decision, went to bed.

This morning I woke up and checked the account and saw the order had gone through, but that I had a Realized Loss of about 3K. Reading some more about tax loss harvesting today, and I think I just made a mistake. Am I correct to assume that I can't harvest this loss, and I've just "sold low"? I think I learned my lesson, but is there any silver lining to what I did?

Feeling pretty dumb. Thanks in advance for all advice and input.
User avatar
KingRiggs
Posts: 995
Joined: Wed Dec 12, 2018 12:19 pm
Location: Indiana

Re: Accidentally realized losses in 401k rebalancing?

Post by KingRiggs »

One cannot TLH in a tax-advantaged account, only in a taxable account. Funds can be sold and bought without tax impact. It's only when yo sell that taxes are incurred.

Fear not, though! You may have "sold low" by selling your fund at a loss, but you also "bought low" assuming the new fund you bought into is in the same ballpark as far as stock/bond allocation goes. No major harm done.
Advice = noun | Advise = verb | | Roth, not ROTH | | "Remember, there's always money in the banana stand." - George Bluth, Sr.
User avatar
David Jay
Posts: 13170
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Accidentally realized losses in 401k rebalancing?

Post by David Jay »

Welcome to the forum!
KingRiggs wrote: Wed Nov 23, 2022 2:01 pm One cannot TLH in a tax-advantaged account, only in a taxable account. Funds can be sold and bought without tax impact. It's only when you sell take a distribution (i.e. make a withdrawal from the 401K account) that taxes are incurred.
Minor edit for clarity.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Katietsu
Posts: 6507
Joined: Sun Sep 22, 2013 1:48 am

Re: Accidentally realized losses in 401k rebalancing?

Post by Katietsu »

It seems your motivation was not primarily tax loss harvesting. It was to get out of a high cost fund and increase your equity exposure. You did those things. So if this is accurate, you made no mistakes.
User avatar
Nate79
Posts: 8638
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Accidentally realized losses in 401k rebalancing?

Post by Nate79 »

If you read the first line in the wiki on TLH you will see where you went wrong in your understanding.

https://www.bogleheads.org/wiki/Tax_loss_harvesting
User avatar
celia
Posts: 15354
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Accidentally realized losses in 401k rebalancing?

Post by celia »

You can buy, sell, exchange as much as you like inside retirement accounts without any tax consequences. The IRS doesn’t care. The only way taxes impact retirement accounts are that the money coming out of a pre-tax account (401k, Traditional IRA, Sep-IRA, etc.) is taxed as ordinary income (like wages). For Roth retirement accounts, only the money going into the account is taxed.

The only exception to this is when you sell something in your TAXABLE account at a loss AND in the previous 30 days or following 30 days you sell the same thing for a gain in a retirement account. (The gain is often from a dividend in the retirement account that the account owner forgot about.)

This is known as a “wash sale” which decreases the amount of loss in Taxable that can be claimed on your tax return. But it doesn’t impact the retirement account, just the Taxable account.
Post Reply