Every missed opportunity and feeling of regret create a series of internal promises not to follow that same path again. Then, we get busy, and bad habits recur.
When it comes to your money, we often hear:
- If only I’d paid closer attention.
- If only I hadn’t waited until the last minute.
- If only I hadn’t sold at the wrong time.
These “if only” moments stem from a reactive approach to money, particularly when managing gains and losses.
One strategy that often gets overlooked is the power of year-round tax-loss harvesting, which aims to optimize your portfolio and minimize your tax burden. While many investors focus on this tactic at the end of the year, there are benefits to being proactive.
Understanding Tax-Loss Harvesting
Let’s start with the basics. Tax-loss harvesting involves selling investments that have decreased in value to realize a capital loss. These losses can then be used to offset capital gains, potentially reducing your overall tax liability. For example, if you have $5,000 in capital gains, you can use $5,000 in capital losses to neutralize them.
If your capital losses exceed your gains, you can deduct up to $3,000 against your ordinary income. Any remaining losses can be carried forward to future tax years, providing a long-term tax benefit.
A Proactive Approach
A continuous, year-round approach to tax-loss harvesting offers several advantages:
- Flexibility: You can capture losses as they occur, providing greater flexibility in managing your portfolio.
- Strategic Rebalancing: You can integrate tax-loss harvesting, as well as strategically selling investments that have gained, with your regular portfolio rebalancing, so your asset allocation remains aligned with long-term goals.
- Effective Tax Planning Strategies: Spreading out tax-loss harvesting throughout the year can make tax planning more manageable and predictable.
- Reduced Emotional Impact: By consistently monitoring your portfolio, you can make more informed decisions based on market conditions rather than reacting to year-end pressure.
Beware of the Wash-Sale Rule
It’s important to be mindful of the wash-sale rule, which prohibits you from claiming a loss if you repurchase the same stock or a very similar fund within 30 days before or after the sale.
To effectively implement a year-round tax-loss harvesting strategy, we can work with you to review your portfolio, identify opportunities, and develop a tailored plan.
And Remember…
Don’t only focus on losses. When the market is up, consider adjusting your portfolio to reflect your risk tolerance and financial goals.
By adopting a year-round approach to tax-loss harvesting, you can potentially avoid those “if only” regrets and better navigate the complexities of the market.
Do you have questions about this strategy? Simply reach out, we always appreciate hearing from you.