Author Topic: Tax loss harvesting in excess of $3000 for a FIRE-er.  (Read 3089 times)

cpthammer

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Tax loss harvesting in excess of $3000 for a FIRE-er.
« on: December 19, 2014, 01:25:52 PM »
Hi everyone,

I have a complicated question about tax loss harvesting, and I can't find an answer.

I just realized Vanguard allows me to divide my VTIAX (International Index Fund) into specific lots for the purpose of sale, allowing me to realize as much loss as I want without having to sell a huge amount of stock.  This is great.

I'm about to FIRE this week (yay!!!).  My income is huge this year and will be very low next year. 

My question is this:

Is there an advantage to selling stock so as to realize more than a $3000 loss now?

I haven't sold any stock at all this year, so I have no capital gains to cancel out.  I did, however, receive thousands in dividends (mostly qualified dividends). 

Can I count any of my loss in VTIAX against these dividends for tax purposes, or is there never much of a point to realizing (harvesting) more than a $3000 loss in a year?  Yes, I know you can carry over excess losses to future years, but that shouldn't help since my capital gains tax rate will be zero in retirement.

Thanks in advance everyone!

Honest Abe

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #1 on: December 19, 2014, 06:23:25 PM »
Be careful for the wash rule if your dividends automatically reinvest (if you harvest a loss on VSIAX for example and then 2 weeks later your dividends repurchase shares of VSIAX you won't be able to write down the loss.)

MDM

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #2 on: December 20, 2014, 01:08:30 AM »
Be careful for the wash rule if your dividends automatically reinvest (if you harvest a loss on VSIAX for example and then 2 weeks later your dividends repurchase shares of VSIAX you won't be able to write down the loss.)

...but only for the number of shares purchased by dividend reinvestment.  In other words, if you sell 100 shares and dividend reinvestment purchases 2 shares within the 30 day wash sale rule window you can deduct the loss on 98 of the 100 shares. 

Note also that the basis of the 2 shares purchased by dividend reinvestment can be increased by the amount of loss disallowed by the wash sale rule.

Honest Abe

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #3 on: December 20, 2014, 04:41:29 AM »
@MDM That is correct thank you

cpthammer

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #4 on: December 20, 2014, 08:52:22 AM »
I posted this question on Bogleheads and got my answer.  You can't claim TLH losses against dividends, only against capital gains from sale of appreciated stock.

I will sell some VTIAX next week for a 3K loss (but no more!)

DrF

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #5 on: December 22, 2014, 10:22:57 AM »
Why not wait until Jan 1, sell a bunch of stuff for tax loss harvesting. I mean as much as possible so that you can carry it forward for multiple years.

Since you will have no income in 2015 it would be a fantastic year to convert a huge chunk of your 401k or traditional IRA into a Roth. The $3000 that you harvest on Jan 1 will allow you to transfer that much more in your first year of FIRE. Repeat for year 2, 3, ... until you use up all of your tax loss.

This way you can really build up your Roth pipeline over the first 5 years.

Cheddar Stacker

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #6 on: December 22, 2014, 11:53:14 AM »
Why not wait until Jan 1, sell a bunch of stuff for tax loss harvesting. I mean as much as possible so that you can carry it forward for multiple years.

Since you will have no income in 2015 it would be a fantastic year to convert a huge chunk of your 401k or traditional IRA into a Roth. The $3000 that you harvest on Jan 1 will allow you to transfer that much more in your first year of FIRE. Repeat for year 2, 3, ... until you use up all of your tax loss.

This way you can really build up your Roth pipeline over the first 5 years.

+1. Although I would still do the $3k now to offset 2014 income. Congrats on retirement.

And this in case you haven't read it: http://www.madfientist.com/tax-loss-harvesting/

seattlecyclone

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Re: Tax loss harvesting in excess of $3000 for a FIRE-er.
« Reply #7 on: December 22, 2014, 12:07:41 PM »
As you state, there won't be much benefit to tax-loss harvesting after retirement as long as your capital gains rate is zero. Instead, you should consider doing tax gain harvesting, where you sell (and then immediately re-buy) appreciated stock to realize tax-free gains up to the 15% tax bracket limit. This will increase your cost basis, which will help you if Congress ever decides to get rid of the 0% capital gains rate in the future. The downside is that this will increase your MAGI for health insurance subsidies under Obamacare, so the sales won't be completely tax-free if you buy insurance from the exchanges.