Author Topic: Tax loss harvesting and rebalancing in our (common) post-FIRE scenario  (Read 227 times)

Mr. Green

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I'm writing this out to try and better get a grasp on the information but perhaps there are others who would have comments on it as well.

My wife and I are now FIRE so we're no longer adding to any retirement accounts. Unless we have windfalls (we sold some property last year) we're not adding to brokerage accounts either. With the recent stock market drop, it could be advantageous for us to do some tax-loss harvesting. The drop has also thrown our asset allocation off balance so it's a good time to do that as well. For the sake of simplicity, we have all our accounts with Vanguard (brokerage, tIRA, & Roth IRA for both of us) and we use a simple two fund strategy (Total Stock Market & Total Bond Market). We also have the entirety of our bond allocation in our tIRAs, leaving our Roth IRAs and brokerage accounts with just Total Stock Market shares.

Because we're FIRE, we take the dividends in our brokerage account as income each quarter. However, our tax advantaged accounts all reinvest dividends automatically. If I were considering tax-loss harvesting today, I would need to change the reinvestment of our tax-advantaged accounts to manual so that I wouldn't get hit with a wash sale at the end of this month when quarterly dividends roll in. We would sell shares of Total Stock Market into the S&P 500 Index in our brokerage account and, after 30 days, exchange them back.

If I also wanted to rebalance our asset allocation, I would need to sell bonds in our tIRA into something other than the Total Stock Market fund to avoid a wash sale. The same S&P 500 Index we'd harvest our tax losses into would be fine.

The tax implications for loss harvesting aren't quite the same for us as a working person because we longer generate enough income to be in higher tax brackets. Owing to ACA premium subsidies, our income remains low enough that all our capital gains are taxed at 0%. So the only way tax loss harvesting is valuable to us is if we don't have any capital gains this year because losses are first applied to those, then ordinary income. If we have no gains, we can use the tax losses to increase the size of our Roth IRA rollover at the end of the year. This is capped at $3,000 though. If something happened and we did have other capital gains during the year, tax-loss harvesting would have no real financial benefit to us.

In this situation, I'm kinda wondering if it's worth going through the hassle to, at most, increase our Roth IRA rollover by $3,000. If we have a child in the next year or two that will allow our income to increase with similar ACA subsidies. This would likely bring capital gains into play as part of our income strategy, which would wipe out the effect of any losses harvested over $3,000 and rolled into future years.

In thinking about this, I realized that tax-loss harvesting probably won't be an option for us much longer since we're no longer buying new shares. Ten or twenty years from now it's likely that all our shares will have appreciated to the point that future bear markets will no longer pull them down to capital loss territory.

tawyer

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We would sell shares of Total Stock Market into the S&P 500 Index in our brokerage account and, after 30 days, exchange them back.
Why would you exchange them back and not hold? Genuinely curious as to why you would because I do not understand why this is necessary. Wouldn't you only exchange them back if there were no more gains? Otherwise you would just be offsetting the earlier losses.

In thinking about this, I realized that tax-loss harvesting probably won't be an option for us much longer since we're no longer buying new shares. Ten or twenty years from now it's likely that all our shares will have appreciated to the point that future bear markets will no longer pull them down to capital loss territory.
I think TLH would remain relevant to you. If you reinvest dividends you will be buying new shares which, in 20 years, are more likely to become eligible for TLH than the ones you buy today. So, would you not want to sell your older shares to live off, given how much LTCG you can get taxed at 0%?