Learn how to use your robo-advisor to save money on taxes with tax-loss harvesting (TLH) in your robo-advisor account. Tax-loss harvesting is a tax-planning strategy to minimize your tax bill. If you have taxable gains in your investment brokerage account as well as losses, you can sell the losing securities and use those losses to offset the taxable gains. 

The top robo-advisors automate the tax-loss harvesting process, which saves you time and money. The best low- or no-fee robo advisors expertly manage your investment portfolio while enabling you to keep more of your money insteaܫd of turning it over to Uncle Sam. We’ll explain the tax-loss harvesting rules and pitfalls to avoid and present the best rob🐼o-advisors with tax-loss harvesting. 

Understanding Tax-Loss Harvesting

Tax-loss harvesting is an investment tactic to legally cut taxes to increase your 澳洲幸运5开奖号码历史查询:after-tax income. In a taxable account, investors sell securities that are worth less than their purchase price. This creates a taxable loss, which can be used to offset taxable gains owed from selli💟ng profitable investments. Some robo-advisors harvest your tax losses for you, while others do not offer this service. 

How Does Tax-Loss Harvesting Work?

Sell an investment that is worth less than its purchase price. Calculate the total amount of the loss, and determine whether it is a short-term loss (for inves🔯tments owned for less than one year), or a long-term loss. 

• 澳洲幸运5开奖号码历史查询:Short-term losses must offset short-term gains initially.
• Long-term losses must offset long-term gains initially.

After all short-term gains are offset by short-term losses and long-term gains are offset by long-term losses, any additional losses may be used to offset ordinary income, up to $3,000 for single filers and married couples filing jointly or $1,500 for married individuals filing separately. Any losses that remain can be carried over and used in future years.

There is a caveat to tax-loss harvesting, called the 澳洲幸运5开奖号码历史查询:wash-sale rule. The IRS mandates that for investors to benefit from the tax benefits of tax-loss harvesting, they must avoid buying the same stock, fund, or substantially identical security that was sold within a 30-day window. An example of a wash-sale violation is when a trader sells their 澳洲幸运5开奖号码历史查询:Class A shares of Nike and then turns around to purchase Class B shares of Nike within a 30-day window. To avoid losing the tax-loss harvesting benefit and remain invested in similar securities, when replacing the sold asset, p꧙urchase one that is somewhat distinct. For example, if you sell Procter and Gamble at a loss, you might buy a consumer products sector fund to replace the P&G stock. You k🍨eep a comparable asset mix while avoiding running afoul of the wash-sale rule. 

How to Harvest Tax Losses With a Robo-Advisor

A robo-advisor manages your investments for low or no fees and can automate tax-loss harvesting to ensure your portfolio is optimized for the best returns. Invest with a robo-advisor that offers tax-loss harvesting in a taxable, 𝔍non-retirement account, and with the click of a button, the digital investment manager takes care of the details. 

Although you can manage your own investments and sell losing positions to offset capital gains, it is time-consu🌱ming and requires a degree of investing and tax e𒐪xpertise. 

Below are the steps to follow: 

1. Understand your need for tax-loss harvesting: If you have a taxable investment account with a robo-advisor, then you will owe taxes on any 澳洲幸运5开奖号码历史查询:net capital gain from the sale of a fund or individual asset. To minimize or eliminate the tax burden, you can select a robo-advisor that offers tax-loss harvesting to offset the gains by selling losing positions. Tax-loss harvesting benefits most investors with a taxable investment account.
2. Choose a robo-advisor: Not all robo-advisors offer tax-loss harvesting, and some, such as 澳洲幸运5开奖号码历史查询:Schwab Intelligent Portfolios, require a minimum investment amount to be eligible for TLH. At Schwab Intelligent Portfolios, the account must be worth at least $50,000 to activate tax-loss harvesting. If you’re seeking robo-advisory management for a non-retirement (taxable) account, determine whether the provider offers tax-loss harvesting. Robo-advisors such as 澳洲幸运5开奖号码历史查询:Betterment offer affordable services with tax-loss harvesting features that investors should consider for their portfolios.  
3. Open the correct robo-advisor account: Individual or joint taxable investment brokerage accounts are frequently available at robo-advisors and can benefit from tax-loss harvesting. Most trust accounts also benefit from tax-loss harvesting. There is no advantage to tax-loss harvesting in a traditional or Roth IRA, as gains and losses in retirement accounts are not taxable. 
4. Activate the tax-loss harvest feature: Tax-loss harvesting will either be automatic or manually activated. If tax-loss harvesting is automatic, then all taxable robo-advisor accounts receive TLH. For the optional TLH, there will be a button to indicate that you prefer tax-loss harvesting. Check the FAQ to find out how to implement the service. 
5. Monitor your portfolio: Whether you invest on your own or with a robo-advisor, it is wise to review your portfolio several times per year. Make sure that your asset allocation, or a mix of stocks and bonds, is in line with your initial preferences. Validate that any transfers have occurred. Ensure that your balance and returns are in line with the movements of the portfolio benchmarks. For example, your S&P 500 ETF should have similar returns to the S&P 500 benchmark.

Robo-Advisors That Offer Tax-Loss Harvesting

Considering the complex nature of tax-loss harvesting, most investors will benefit from a robo-advisor that can help optimize the tax efficiency of their investments. The൲𝄹 best robo-advisors will provide tax-loss harvesting at no additional charge; below are a few robo-advisors for investors to consider.  

Wealthfront

Tax-loss harvesting is automatic with 澳洲幸运5开奖号码历史查询:Wealthfront, one of the oldest robo-advisors. When you open a taxable investment account with Wealthfront, you’re automatically enrolled in the tax-loss harvesting program. Wealthfront shares the results of its TLH and claims that on most accounts, the benefits from tax-loss harvesting more than offset the low 0.25% investment management fee. 

Betterment

Tax-loss harvesting is also automatic at Betterment, another legacy robo-advisor. All proceeds from TLH are reinvested into the investment portfolio to compound investment returns and growth. With no minimum investment required, and $10 to begin investing, new investors can benefit from professional investment management and higher after-tax returns. 

Schwab Intelligent Portfolios

Schwab requires a $5,000 minimum to invest in the fee-free digital portfolio and $25,000 for the Premium service (with unlimited financial advisor access). Investors with accounts valued at more than $50,000 of investable assets can activate the tax-loss harvesting feature.

Wells Fargo Intuitive Investor

Account holders can activate tax-loss harvesting for all Intuitive Investor taxable accounts. In “manage settings” and from the “I would like to” drop-down men✤u, the feature can be turned on or off at will.

Vanguard Digital Advisor

Tax-loss harvesting is available at both 澳洲幸运5开奖号码历史查询:Vanguard Digital Advisor and 澳洲幸运5开奖号码历史查询:Vanguard Personal Advisor (with financial advisor access). 𝓀To activate TLH at each program, you’ll need to request ꦓactivation. With the Personal Advisor option, you’ll first discuss the option with your financial advisor. Once approved for tax-loss harvesting, investors will need to sign documents to authorize Vanguard to start harvesting for taxes. 

Pros & Cons of Tax-Loss Harvesting 

Tax-loss harvesting has a number of adv🎶antages and disadvantages that investo🌟rs need to understand. Learn how these could influence your decision to choose a robo-advisor with tax-loss harvesting for your taxable investment account.

Pros

• Tax-loss harvesting offers the potential for investors to reduce their tax obligation on the capital gains they have acquired within their investments.
• Reinvesting the profits from tax-loss harvesting can result in higher compounded long-term investment returns. 
• 澳洲幸运5开奖号码历史查询:Tax-loss harvesting enables investors to profit from market volatility by selling losing positions when markets fall and reinvesting the profits in similar assets at lower prices, yielding higher long-term returns. 

Cons

• High payments to an investment manager can offset gains from tax-loss harvesting. 
• Tax-loss harvesting benefits depend upon current tax rates in contrast with future tax rates, which are unknown. 
• For individuals, maintaining your own tax-loss harvesting requires a degree of investment management expertise and oversight.

The Bottom Line

Research has demonstrated that consistent tax-loss harvesting, if performed well, can increase long-term investment returns. Since the process requires a degree of expertise and time, leaving the tax-loss harvesting to a robo-advisor might be a sound reason to invest with a low-fee robo-advisor such as 澳洲幸运5开奖号码历史查询:Wealthfront or Betterment. Wealthfront claims that tax-loss harvesting more than offsets the low investment management fee. 

While tax-loss harvesting with a robo-advisor in a 澳洲幸运5开奖号码历史查询:brokerage or non-retirement account is typically a wise move, self-directed investors might have more difficulty with the process. Individual investors need to regularly monitor their investments to uncover harvestable tax losses. Next, finding suitable replacements for the sold assets and avoiding the 澳洲幸运5开奖号码历史查询:wash-sale rule requires expertise. Finally, the risk of selling an asset after a short-term decline, only to watch the value soar going forward, might negate the short-term benefit from the tax-loss harvesting. Consult your accountant before embarking on a 🌺tax-loss harvest🤪ing program.