How to Turn Your Investment Losers Into Winners With Tax Loss Harvesting, #174

Retire With Ryan

As we move into the final months of 2023, it's again time to talk about tax loss harvesting and other tax-efficient investment strategies. On this episode, I'm going to discuss how you can potentially turn some of your investment losers into this year's winners when it comes to tax planning.

You will want to hear this episode if you are interested in...

• Developing tax-efficient investment strategies [1:44]
• The ins and outs of tax loss harvesting [5:52]
• Consolidating mutual funds and switching to ETFs [11:36]

Creating a tax-efficient investment portfolio

Developing tax-efficient investment strategies involves a careful understanding of market fluctuations and the implications of timing on investment outcomes. After all, the unpredictability of markets dictates that not every investment will yield positive returns each year. The S&P 500 is a prime example of market volatility. Since 1970, it has seen declines in 11 out of 53 years, indicating a 20% chance of investments losing value. This underscores the need for vigilance in managing portfolios as well as monitoring unrealized gains and losses for potential tax-saving opportunities.

One key strategy is using investment losses strategically to offset tax obligations. This approach not only lessens the current tax burden but also shapes a more tax-efficient portfolio for the future. I'm also a big believer in index-based investment strategies, particularly ETFs, as they typically generate fewer annual capital gains due to their structure. This makes them more tax-efficient compared to actively managed mutual funds.

Understanding tax loss harvesting

Tax loss harvesting offers a savvy way to mitigate tax liabilities by strategically selling investments at a loss to offset gains. The process involves several key points to consider. Selling an investment at a loss allows one to offset taxable capital gains for the year or deduct up to $3,000 against ordinary income. It's crucial to reinvest immediately to remain in the market, although buying back the same investment within 30 days risks triggering a wash sale, nullifying the loss.

A prudent approach involves comprehending the nuances: differentiating substantially identical investments, understanding the categorization of gains and losses, and being mindful of the wash sale rule. Evaluating options and considering fluctuations in the market during the 30 days before or after the sale becomes essential, urging a cautious yet strategic approach in leveraging tax loss harvesting to one's advantage. Consulting an accountant or utilizing accounting software can assist in navigating these complex but rewarding tax strategies. Listen to this episode for more on tax loss harvesting!

Resources Mentioned

• Retirement Readiness Review
• Morningstar

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