Tax Loss Harvesting on ~$25k (Betterment)

[thef0x]

I'm wondering about using Betterment for their tax-loss harvesting services.  I think it would end up costing under $100/year.

Would I end up saving a significant amount of money on taxes each year?  (We are talking over $200 USD).

I'm doing a very boring, set it and forget it, EFT/IndexFund strategy with $0 in comissions through Schwab.

Could anyone give me a rough range of $$ saved each year? 

Does it matter how much I'm contributing to the account on a yearly basis?

I'm pretty new to this specifically but am a quick learner.

Appreciate all your help!!

Thanks!
-Denny

[seattlecyclone]

In an average year, the market goes up, so you would save very little (if any) money on your taxes from loss harvesting. Even in a bad year, the most you can deduct is a net loss of $3,000. Multiply that amount by your tax rate and that's the most you can expect to save.

Also, there's nothing magic about loss harvesting. You can do it yourself by looking at your account every month or two, checking if any of your funds have gone down since you bought them, and selling them if so. The robo-advisors have the advantage of being able to check more often than a human would, but past a certain point the potential returns diminish considerably.

[thef0x]

Wonderful, thanks for your reply.

So takeaways from your response:

• If I'm in a 15% tax bracket, my max savings will be $450 and that's IF I can generate $3000 worth of loses / year (which is dubious).
• I can do it myself once a quarter (every 31 days, to be precise) and accomplish the same outcome for free.

Sound about right?


Would love feedback from others as well!
-Denny

[seattlecyclone]

If I'm in a 15% tax bracket, my max savings will be $450 and that's IF I can generate $3000 worth of loses / year (which is dubious).

Yes, $450 is the most you can save in the 15% bracket. On a $25,000 investment, a 12% drop from the initial purchase would be enough to generate $3,000 worth of losses. This isn't all that unlikely to happen once, shortly after you make your initial investment. Eventually your investment will appreciate enough that it's unlikely to ever be in the red again. For this reason, loss harvesting on index funds will generally only be possible for shares that you purchased in the last few years.

I can do it myself once a quarter (every 31 days, to be precise) and accomplish the same outcome for free.

You can check for losses whenever you want. The 31 day rule is just how long you have to wait before buying back into the exact same fund you sold to generate the loss. I was suggesting that you check at least quarterly because this will give you enough opportunities to harvest losses without being so often that you spend a lot of time on it. The robo-advisor will check every day. Again, checking that frequently is only likely to provide a little bit better outcome than checking monthly or quarterly, and this marginal benefit is unlikely to offset the advisory fee you pay them.

[thef0x]

Wonderful, great advice and thanks for the confirmation!

[lostformars]

$3,000 is the max that you can deduct against other income (wages). You would be able to deduct all losses against other capital gains (if any).

Warning! I often see people mention the 30 day period following the sale but you cannot purchase a "substantially identical" security within 30 days before or after the sale. And, this includes all of your accounts. This can be tricky if you have automatic deposits every month. It is also my understanding that dividend reinvestment counts as a purchase. Any purchases within the 30 days before or after the sale would disallow (postpone) a deduction on an equal number of shares sold. Once you have a wash sale you can see in the publication below that the resulting adjustments to other transactions gets messy.

https://www.irs.gov/publications/p550/ch04.html#en_US_2014_publink100010601

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade,
- Acquire a contract or option to buy substantially identical stock or securities, or
- Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

Also, if you have some money with Betterment and they are implementing tax loss harvesting transactions in any of your other accounts (outside of Betterment) might cause a wash sale and disallow the deduction in the Betterment account.

[Telecaster]

I think I'm missing something about tax loss harvesting.    I understand how it works and all that, but I don't see the advantage.  The reason being is that when you harvest the loss, you are simply resetting the basis lower, which means you have a higher future gain.

So, bird in the hand and all that, but is it actually worth it?   Kitces has a blog post on this topic:

https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/

[Bracken_Joy]

I think I'm missing something about tax loss harvesting.    I understand how it works and all that, but I don't see the advantage.  The reason being is that when you harvest the loss, you are simply resetting the basis lower, which means you have a higher future gain.

So, bird in the hand and all that, but is it actually worth it?   Kitces has a blog post on this topic:

https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/

Following- I've always wondered about this. Maybe I'm just not getting it, but it seems like you're moving the goal posts and it isn't an oft-repeatable strategy. What am I missing?

[bacchi]

TLH at a high tax bracket and take gains at a 0% tax bracket (when ER). He explains this in his post.

[seattlecyclone]

I think I'm missing something about tax loss harvesting.    I understand how it works and all that, but I don't see the advantage.  The reason being is that when you harvest the loss, you are simply resetting the basis lower, which means you have a higher future gain.

So, bird in the hand and all that, but is it actually worth it?   Kitces has a blog post on this topic:

https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/

Following- I've always wondered about this. Maybe I'm just not getting it, but it seems like you're moving the goal posts and it isn't an oft-repeatable strategy. What am I missing?

Let's just go through a simple example. For the sake of argument I'll assume that you pay a flat 25% tax on all income.

You buy 100 shares at $20 each. The stock market crashes the next week and the per-share value goes down to $10. You sell the shares, getting $1,000 cash and booking a $1,000 capital loss on your taxes. At a 25% tax rate, this loss gives you an extra $250 to invest. You take that $1,250 and buy 125 shares of a very similar fund. Two years later the market has recovered and the shares are worth $25 each. You sell them and receive $3,125 cash. Subtract your $1,250 cost basis and you get a capital gain of $1,875. The tax on this would be $468.75, leaving you with $2,656.25 after taxes.

What if you didn't harvest losses? You have 100 shares, with cost basis of $2,000, and you sell them for $2,500. You pay 25% tax on the $500 capital gain, leaving you with $2,375 after taxes. You can see that even with consistent tax rates, harvesting that loss and reinvesting the tax savings results in more after-tax money at the end.

In real life, the tax rates aren't consistent. The first $3,000 of capital losses counteracts your regular income at your regular marginal rate, while capital gains are taxed at a lower rate. Your tax bracket might also go down between now (during the accumulation phase) and later (when you're retired and want to convert your shares to cash). If, for example, you're in the 25% tax bracket while working and the 15% tax bracket (0% capital gains) while retired, you can see that the capital loss harvesting outperforms by even more than in the scenario above. Eliminate the capital gains tax and it becomes $3,125 against $2,500.

[rmendpara]

I'm wondering about using Betterment for their tax-loss harvesting services.  I think it would end up costing under $100/year.

Would I end up saving a significant amount of money on taxes each year?  (We are talking over $200 USD).

I'm doing a very boring, set it and forget it, EFT/IndexFund strategy with $0 in comissions through Schwab.

Could anyone give me a rough range of $$ saved each year? 

Does it matter how much I'm contributing to the account on a yearly basis?

I'm pretty new to this specifically but am a quick learner.

Appreciate all your help!!

Thanks!
-Denny

Do you plan to continue adding to and growing the account? I ask because 25k isn't going to allow much in the way of savings, in a 15% tax bracket, that's a max benefit of $450 in taxes deferred, where I believe the fees on the account are 0.25% or $62.50 per year, so a net benefit of $387.50 after fees.

This can compound and grow quite nicely over a long period of time, but again, you can do this yourself as well for free.

It's like any service. You can wash your own bathroom, and cook your own food, but for $63/yr (for a $25k balance), do you think it's worthwhile to pay someone else to do it? That's for you to decide.

[pdxmonkey]

I use wealthfront and they do automatic tax-loss harvesting for me. They charge a 0.25% annual fee after the first $20k I have invested. They manage your first $10k free or $15k if you get invited via a referral. They manage another $5k free for each person you refer. They have a minimum investment of only $500 so you can try it out without much risk. I can of course....give you a referral link if you like.

If you have $100k or more they will do direct indexing for you so that you own individual stocks directly and your only expense is their 0.25% fee on anything over whatever your managed free amount is.

[Interest Compound]

WiseBanyan doesn't charge a fee to invest with them, their fee for TLH is capped at $20 a month no matter how much you have invested, and they're giving away the first 6 months free. They are currently the best option in this space.

[seattlecyclone]

WiseBanyan doesn't charge a fee to invest with them, their fee for TLH is capped at $20 a month no matter how much you have invested, and they're giving away the first 6 months free. They are currently the best option in this space.

It's not clear to me that WiseBanyan's low fees will be even remotely sustainable once their venture capital funding runs out. Holding assets and trading does have a cost that they will need to recoup through some sort of charge to you. Consider any of their rates to be promotional specials. When you also consider the risk that they'll go out of business because so many more people are using Wealthfront and Betterment, I would think twice before putting my money there.

[Interest Compound]

WiseBanyan doesn't charge a fee to invest with them, their fee for TLH is capped at $20 a month no matter how much you have invested, and they're giving away the first 6 months free. They are currently the best option in this space.

It's not clear to me that WiseBanyan's low fees will be even remotely sustainable once their venture capital funding runs out. Holding assets and trading does have a cost that they will need to recoup through some sort of charge to you. Consider any of their rates to be promotional specials. When you also consider the risk that they'll go out of business because so many more people are using Wealthfront and Betterment, I would think twice before putting my money there.

Agreed. I wouldn't invest with any of these tech startups. None of them are sustainable, and it's not getting any better:

[pdxmonkey]

If you have 3 billion under management .25% is $7.5 million a year. Wealthfront isn't going to get crazy rich off that, but it's enough they could be profitable if they spent less on being in growth mode. Clearly they're generating less than 7.5 million if they are managing some of that money free. And I expect them to keep growing. They appeal mainly to a tech-savvy demographic so their market share is likely to grow over time as a percentage of the population as there are fewer people who don't understand tech in later generations. Plus the assets of the customers they have already captured are likely to grow as their client base enters "peak earning years".

[Vilgan]

I think companies like Betterment and Wealthfront are fine for your average novice investor. Of course, someone like that could also just use Vanguard or Fidelity and put it all in a target date fund. The actual usefulness of TLH is marginal, but all the robo advisor companies preach it because its something they can point to. "We prevent you from doing dumb things" is much harder to advertise.

I would never pay 25 basis points for the service, but am glad it is out there. There are many more WAY WORSE options that people get tricked into constantly and its nice to have Betterment/Wealthfront as an option. Are they better than a savvy investor using Vanguard ETFs on their own? Hell no. But they are definitely a lot better than your average scummy retail investment bank/firm that steers you into funds with 2% expense ratios.

[Interest Compound]

If you have 3 billion under management .25% is $7.5 million a year. Wealthfront isn't going to get crazy rich off that, but it's enough they could be profitable if they spent less on being in growth mode. Clearly they're generating less than 7.5 million if they are managing some of that money free. And I expect them to keep growing. They appeal mainly to a tech-savvy demographic so their market share is likely to grow over time as a percentage of the population as there are fewer people who don't understand tech in later generations. Plus the assets of the customers they have already captured are likely to grow as their client base enters "peak earning years".

They can't rely on just being profitable, and they can't simply stop spending so much money on marketing. They need exponential growth. Their venture-capital backers, who have poured over $100m (each) into both Betterment and Wealthfront, demand it. And for good reason. The only reason new people to the forum keep talking about Betterment and Wealthfront, but not Vanguard LifeStrategy/TargetRetirement (which do everything people want in a robo-advisor), or WiseBanyan (who do everything for free besides Tax Loss Harvesting which is capped at $20 a month), is because of their heavy marketing push. Exponential growth the only way the VC investors can get their money back in a reasonable (to them) amount of time.

WiseBanyan doesn't seem to be going down that path. Neither is Vanguard. As a result, their fees are significantly lower for the same product. So who is really paying for all those ads? (you are)

Betterment and Wealthfront need to change things, and fast, or according to the Economist, they might not be around too much longer:

"If AUM growth does not pick up, both firms will have to raise prices, expand their offerings or put themselves up for sale." ~The Economist

http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not