Tax Loss Harvesting vs Tax Minimization Strategy

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Topic Author
OneToughPuppy
Posts: 3
Joined: Thu Feb 13, 2020 2:28 pm

Tax Loss Harvesting vs Tax Minimization Strategy

Post by OneToughPuppy » Thu Feb 13, 2020 2:47 pm

Is tax loss harvesting much better than a tax minimization strategy or is there little difference?

I need advice on choosing a robo adviser for a taxable account. M1 Finance does not charge any fees but they do not have tax loss harvesting. M1 has a tax minimization strategy. When M1 sells securities, they prioritize the lots to sell in this order: 1st Losses that offset future gains, 2nd Lots that result in long term gains, 3rd Lots that result in short term gains. The other robo advisor I'm considering is Betterment. Betterment has tax loss harvesting but they charge about 0.25% - 0.4%. I like how I would have more control of my account at M1. Would I regret the tax advantage of tax loss harvesting if I choose M1?

JoinToday
Posts: 854
Joined: Sat Mar 10, 2007 9:59 pm

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by JoinToday » Thu Feb 13, 2020 3:29 pm

OneToughPuppy wrote:
Thu Feb 13, 2020 2:47 pm
Is tax loss harvesting much better than a tax minimization strategy or is there little difference?

I need advice on choosing a robo adviser for a taxable account. M1 Finance does not charge any fees but they do not have tax loss harvesting. M1 has a tax minimization strategy. When M1 sells securities, they prioritize the lots to sell in this order: 1st Losses that offset future gains, 2nd Lots that result in long term gains, 3rd Lots that result in short term gains. The other robo advisor I'm considering is Betterment. Betterment has tax loss harvesting but they charge about 0.25% - 0.4%. I like how I would have more control of my account at M1. Would I regret the tax advantage of tax loss harvesting if I choose M1?
Why are you using a robo adviser at all?

1. Selling the highest cost lots for tax minimization is virtually no additional effort at all. This feature is worth what you are paying for it at M1 (0%)
2. Tax loss harvesting is not that hard, I would never pay 0.25% - 0.4% for that service, year after year after year. Once your assets have appreciated in value sufficiently, the opportunity to do tax loss harvesting only happens occasionally. I did TLH in 2008 and 2014. My assets had a low enough cost basis that when the market dropped in Dec 2018, there was no TLH opportunities.
I wish I had learned about index funds 25 years ago

mega317
Posts: 3188
Joined: Tue Apr 19, 2016 10:55 am

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by mega317 » Thu Feb 13, 2020 3:33 pm

One can minimize taxes and also tax loss harvest, it isn't an either/or.

I kind of think someone sophisticated enough to ask this question doesn't need a robo.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

JBTX
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Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by JBTX » Thu Feb 13, 2020 3:39 pm

Tax loss harvesting is mostly just tax deferral. I've never had enough in taxable to bother with it.

The problem with these robo tax loss harvesting schemes is if you ever decide to get out you may have a tax mess on your hands.

If you go with certain tax efficient index funds that tax burden really should be very modest.

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Wiggums
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Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by Wiggums » Thu Feb 13, 2020 3:45 pm

M1 Finance does not offer tax-loss harvesting (TLH). But they do offer a new feature called “Tax Minimization” standard on all accounts. This feature enables you to sell asset positions in the most tax-favorable way.

Whenever you sell an investment, M1 Finance prioritizes the sale in a way that will minimize your taxes. The order of assets sold looks like this:

—Lots that don’t result in a tax liability
—Lots that result in long-term gains
—Lots that result in short-term gains

While it’s likely that this strategy will, in fact, minimize your taxes, it doesn’t seem likely to have the same consistent benefit that’s provided by TLH.

Topic Author
OneToughPuppy
Posts: 3
Joined: Thu Feb 13, 2020 2:28 pm

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by OneToughPuppy » Thu Feb 13, 2020 3:59 pm

JoinToday wrote:
Thu Feb 13, 2020 3:29 pm
OneToughPuppy wrote:
Thu Feb 13, 2020 2:47 pm
Is tax loss harvesting much better than a tax minimization strategy or is there little difference?

I need advice on choosing a robo adviser for a taxable account. M1 Finance does not charge any fees but they do not have tax loss harvesting. M1 has a tax minimization strategy. When M1 sells securities, they prioritize the lots to sell in this order: 1st Losses that offset future gains, 2nd Lots that result in long term gains, 3rd Lots that result in short term gains. The other robo advisor I'm considering is Betterment. Betterment has tax loss harvesting but they charge about 0.25% - 0.4%. I like how I would have more control of my account at M1. Would I regret the tax advantage of tax loss harvesting if I choose M1?
Why are you using a robo adviser at all?
1. Selling the highest cost lots for tax minimization is virtually no additional effort at all. This feature is worth what you are paying for it at M1 (0%)
2. Tax loss harvesting is not that hard, I would never pay 0.25% - 0.4% for that service, year after year after year. Once your assets have appreciated in value sufficiently, the opportunity to do tax loss harvesting only happens occasionally. I did TLH in 2008 and 2014. My assets had a low enough cost basis that when the market dropped in Dec 2018, there was no TLH opportunities.
I would like to try a robo adviser for my taxable account because they do all the rebalancing and I don't have to get emotionally involved in taking from my winners and giving to my losers. And I can invest into it with automatic monthly drafts

Thanks for sharing knowledge especially your experience with TLH in 2008, 2014 and 2018

nolesrule
Posts: 1491
Joined: Thu Feb 26, 2015 10:59 am

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by nolesrule » Thu Feb 13, 2020 4:02 pm

Wiggums wrote:
Thu Feb 13, 2020 3:45 pm
M1 Finance does not offer tax-loss harvesting (TLH). But they do offer a new feature called “Tax Minimization” standard on all accounts. This feature enables you to sell asset positions in the most tax-favorable way.

Whenever you sell an investment, M1 Finance prioritizes the sale in a way that will minimize your taxes. The order of assets sold looks like this:

—Lots that don’t result in a tax liability
—Lots that result in long-term gains
—Lots that result in short-term gains

While it’s likely that this strategy will, in fact, minimize your taxes, it doesn’t seem likely to have the same consistent benefit that’s provided by TLH.
And that is easy enough to do on your own.

nolesrule
Posts: 1491
Joined: Thu Feb 26, 2015 10:59 am

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by nolesrule » Thu Feb 13, 2020 4:03 pm

OneToughPuppy wrote:
Thu Feb 13, 2020 3:59 pm

I would like to try a robo adviser for my taxable account because they do all the rebalancing and I don't have to get emotionally involved in taking from my winners and giving to my losers. And I can invest into it with automatic monthly drafts
Do the rebalancing in your tax advantaged account. Rebalancing in a taxable account will generally not result in tax minimization.
Last edited by nolesrule on Thu Feb 13, 2020 4:14 pm, edited 1 time in total.

Topic Author
OneToughPuppy
Posts: 3
Joined: Thu Feb 13, 2020 2:28 pm

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by OneToughPuppy » Thu Feb 13, 2020 4:07 pm

Wiggums wrote:
Thu Feb 13, 2020 3:45 pm
M1 Finance does not offer tax-loss harvesting (TLH). But they do offer a new feature called “Tax Minimization” standard on all accounts. This feature enables you to sell asset positions in the most tax-favorable way.

Whenever you sell an investment, M1 Finance prioritizes the sale in a way that will minimize your taxes. The order of assets sold looks like this:

—Lots that don’t result in a tax liability
—Lots that result in long-term gains
—Lots that result in short-term gains

While it’s likely that this strategy will, in fact, minimize your taxes, it doesn’t seem likely to have the same consistent benefit that’s provided by TLH.
I agree that TLH is better than "Tax Minimization" but is it enough of an advantage to offset the 0.25% fees (Betterment has TLH) in comparison to zero fees at M1 with the tax minimization strategy

Thanks for you help!

teamDE
Posts: 274
Joined: Tue Jun 28, 2016 9:16 pm

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by teamDE » Thu Feb 13, 2020 11:53 pm

Wiggums wrote:
Thu Feb 13, 2020 3:45 pm
M1 Finance does not offer tax-loss harvesting (TLH). But they do offer a new feature called “Tax Minimization” standard on all accounts. This feature enables you to sell asset positions in the most tax-favorable way.

Whenever you sell an investment, M1 Finance prioritizes the sale in a way that will minimize your taxes. The order of assets sold looks like this:

—Lots that don’t result in a tax liability
—Lots that result in long-term gains
—Lots that result in short-term gains

While it’s likely that this strategy will, in fact, minimize your taxes, it doesn’t seem likely to have the same consistent benefit that’s provided by TLH.

I always get a little mixed up between focusing on minimizing taxes and maximizing actual gains. We often say don't let the tax tail wag the gains dog or something, right? Regarding the first item in the list above, wouldn't that imply there are no gains? Wouldn't i be better off selling a lot with high gains and pay some taxes on it then have no gains at all?

I would think the priorities would be something like:
1. Highest Long term gains (capture the gains at the lowest tax rate)
2. Highest Short term gains (capture the gains, i'll pay more in taxes, but at least i gain)
3. Losers (yeah, i can use this loss to offset some gains, but i still lost money on this investment..)

mega317
Posts: 3188
Joined: Tue Apr 19, 2016 10:55 am

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by mega317 » Thu Feb 13, 2020 11:58 pm

No that's not right. You have a bunch of shares of the same thing at the same price. You have determined how much you want to sell. Then you have a choice about how much tax to pay.
Another reason to keep your shares with the lower basis is you have the chance to never realize the gains. Charities and heirs will get a step up in basis.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

nolesrule
Posts: 1491
Joined: Thu Feb 26, 2015 10:59 am

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by nolesrule » Fri Feb 14, 2020 11:46 am

teamDE wrote:
Thu Feb 13, 2020 11:53 pm

I always get a little mixed up between focusing on minimizing taxes and maximizing actual gains. We often say don't let the tax tail wag the gains dog or something, right? Regarding the first item in the list above, wouldn't that imply there are no gains? Wouldn't i be better off selling a lot with high gains and pay some taxes on it then have no gains at all?

I would think the priorities would be something like:
1. Highest Long term gains (capture the gains at the lowest tax rate)
2. Highest Short term gains (capture the gains, i'll pay more in taxes, but at least i gain)
3. Losers (yeah, i can use this loss to offset some gains, but i still lost money on this investment..)
You aren't trying to maximize your gains when you sell. You are trying to maximize the amount of money you have remaining after taxes when you sell.

Trying to maximize gains when you sell will often result in having less money remaining after taxes, because you've paid too much tax to get the money out.

JoinToday
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Joined: Sat Mar 10, 2007 9:59 pm

Re: Tax Loss Harvesting vs Tax Minimization Strategy

Post by JoinToday » Fri Feb 14, 2020 11:18 pm

JBTX wrote:
Thu Feb 13, 2020 3:39 pm
Tax loss harvesting is mostly just tax deferral. I've never had enough in taxable to bother with it.

The problem with these robo tax loss harvesting schemes is if you ever decide to get out you may have a tax mess on your hands.

If you go with certain tax efficient index funds that tax burden really should be very modest.
1. It may tax deferral in part. TLH allows you to deduct $3K/ year against ordinary income (saves may approx $1K/year, incl calif taxes). And I expect to die without selling low cost basis shares; once my losses are used up, I will be withdrawing from my traditional IRA.

2. I am not sure of the mess of getting out of a TLH scheme, but I do know the difficulty of getting out from under an advisor that put you in proprietary funds or non-index mutual funds or individual stocks. "Mess" doesn't begin to describe how bad it is.

3. JBTX is correct: use tax efficient index funds.
I wish I had learned about index funds 25 years ago

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