Which Robo-Advisors Offer Tax-Loss Harvesting?
Tax-loss harvesting is mentioned a lot in the conversation about robo-advisors, since many (though not all!) offer this feature. Robo’s such as Betterment and Personal Capital tout it as a way to increase your after tax return.
And who doesn’t want higher returns?
Often, though, tax-loss harvesting takes a backseat to other key robo-advisor features, such as low monthly fees, flexible portfolios, and impact-based investing options. Although these features are important considerations when selecting your robo-advisor, tax-loss harvesting shouldn’t be overlooked.
Understanding tax-loss harvesting, as well as whether you need it in your robo-advisor, is key to making a good investing decision.
Ultimately, if you want access to this strategy, you need to know which robo-advisors offer tax-loss harvesting.
What is Tax-Loss Harvesting?
Tax-loss harvesting is a way to minimize the tax impact of capital gains. Since robo-advisors are run by algorithms, the programs can easily identify assets with unrealized losses and sell them.
Strategically selling assets at a loss can help to offset realized gains, which minimizes the amount of taxes investors need to pay on these gains.
Robo-advisors make tax-loss harvesting easy for investors to reduce the amount of taxes they pay on their gains. A robo-advisor won’t leave your portfolio hanging, though; robos will replace the tax-harvested loss with a similar asset in order to avoid the wash sale rule, which disallows buying back the same security within 30 days of a sale.
For the accounting geeks (and DIYers) – here’s a quick tax-loss harvesting drill down.
- There are two types of losses (and gains), short term – for investments held for one year or less, and long term – for investment owned for more than a year.
- To reduce your taxes, you can sell investments with a loss, those that you paid more for than they are worth today.
- Then, and here’s where the magic happens, you can match up the losses with the same type of gains. Subtract the short term losses from the short term gains and you won’t need to pay tax on the gains.
- If the short and long term gains and losses don’t match up, then the remaining loss can be used to offset any type of gain and vice versa.
“Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one). If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income, for example. ” ~Turbo Tax
This was a rough year in the stock market. Imagine that you have $5,000 in short-term losses and only $1,000 of short-term gains. The remaining $1,000 short term loss can be deducted against your net long-term gain or other income.
If your losses exceed gains, you may deduct an additional $3,000 from your income in one year. The remainder of the losses will roll over into subsequent years. Each subsequent year, excess net capital losses can be carried over and deducted against capital gains and other kinds of income.
Tax loss harvesting is a good opportunity to unload losing positions and potentially increase net investment returns.
Yet, tax-loss harvesting is only for taxable investment accounts, not retirement accounts like IRA’s or 401(k)’s. That’s because in retirement accounts, taxes are deferred until you withdraw your funds, for traditional IRA’s and 401(k) accounts. While most Roth IRA’s, are funded with after tax contributions and withdrawals are then tax free.
Which Robo-Advisors Offer Tax-Loss Harvesting?
As we said above, not all robo-advisors offer tax-loss harvesting. That being said, many of our most highly recommended robos do! Below is a list of 7 robo-advisors that offer tax-loss harvesting at some level.
- Betterment offers tax-loss harvesting for both Digital and Premium clients. Betterment Digital has no minimum balance, with fees of 0.25% on AUM up to $2 mil, and 0.15% on assets over that mark. Investors with a higher balance can access Betterment Premium with a $100,000 minimum investment and fees of 0.40% AUM (or .30% AUM for assets over $2 mil).
- Personal Capital has various free investing and finance management tools available. Anyone can use the retirement management tools for free, but only paid users will get access to tax-loss harvesting. Paid accounts require a $100,000 minimum balance. Fees start at 0.89% AUM and gradually decrease in increments until they reach 0.49% AUM for accounts valued over $10 mil.
- Schwab only offers tax-loss harvesting for taxable accounts with values over $50,000. To open an account, investors will need a $5,000 minimum investment. One bonus to investing with Schwab? Zero account management fees for the robo-advisor! Investors who want an additional human to help manage things can expect fees of 0.28% AUM.
- Wealthfront offers tax-loss harvesting on all taxable accounts. Wealthfront also has a low minimum balance at only $500, with fees of 0.25% AUM. The first $10,000 is managed for free.
- WiseBanyan, a robo-advisor with no account management fees and a reasonable $1 minimum investment for their basic services, has an optional Tax Protection package with tax-loss harvesting for 0.25% AUM.
- Vanguard offers tax-loss harvesting on a case-by-case basis only. This robo-advisor has tax-advantaged investing strategies that might be more useful for investors; this makes Vanguard unique in terms of offerings, and may be more appropriately customizable than other robo-advisors on this list.
- TD Ameritrade Personalized Portfolios provide tax-loss harvesting services to investors using its Essential and Selective ETF Portfolios. The Essential portfolio requires a $5,000 minimum investment and charges a 0.30% AUM management fee. The Selective porfolios require a $25,000 minimum investment with fees of 0.75% AUM.
Which Robo-Advisors Offer Tax Minimization?
Some robo-advisors don’t offer tax-loss harvesting, but all robo-advisors are designed to help you make the most of your investments. For that reason, some robo-advisors, like the two listed below, offer tax minimization strategies that help you minimize losses and increase your earnings.
- Ellevest, the robo-advisor for women, offers tax minimization through tax-deferred accounts and tax-efficient municipal bonds, among other strategies. Ellevest has no minimum required balance, and fees are 0.25% AUM for Ellevest Digital or 0.50% AUM for Ellevest Premium.
- Wealthsimple, does offer tax-loss harvesting for investors who really want it, but they don’t necessarily recommend it. Instead, Wealthsimple uses its website to promote educated decisions for tax minimization and offers investors a financial planning session to help them decide what tax minimization strategy is right for them. There is no minimum initial investment, and your first $5,000 is managed for free ($15,000 for those who sign up through the Robo-Advisor Pros affiliate link). Fees are 0.50% AUM for accounts valued up to $100,000, or 0.40% for accounts over that amount.
What are the Pros and Cons of Tax-Loss Harvesting?
So far tax-loss harvesting sounds like a great way to slip under the radar and pay less in taxes, right?
Yet, there are tax-loss harvesting pros and cons you should be aware of before jumping headfirst into tax-loss harvesting as an investing strategy.
Tax-Loss Harvesting Advantages:
- You can lower your tax bill. This is the greatest benefit to tax-loss harvesting, especially when a robo-advisor can do the calculations and rebalancing for you.
- Many robo-advisors can do all the calculations for you. Not all robo-advisors will do tax-loss harvesting and others offer harvesting only for higher-paying clients, so if you’re facing a difficult decision as to whether or not to use a tax-loss harvesting strategy it might be worthwhile to pick a robo with this feature.
- Tax-loss harvesting keeps you on track with your portfolio. Although there are always dips in the market, sometimes selling, even if only momentarily, is the best option for your portfolio. Strategically cutting your losses can make your portfolio stronger.
- This can be part of a long-term strategy. After all, investing is a long-term deal. Playing up your stronger assets and minimizing losing assets is the name of the game!
Tax-Loss Harvesting Disadvantages:
- You should not re-purchase a stock or fund that you just sold. The “wash sale” rule makes this impossible. In order for tax-loss harvesting to apply, you must have owned your stock with the realized loss for over 30 days. You also need to avoid purchasing a “substantially identical” identical investment for an additional 30 days; otherwise, your realized gains are still taxable and you won’t reap the benefits of tax-loss harvesting.
- You might miss out on potential gains. There’s always the risk that the stock you sell off at a loss will suddenly grow again, so paying attention to the industries or companies you are investing in is key here—even if it’s impossible to predict with complete certainty.
- It’s a lot of work. If your robo-advisor or personal financial advisor isn’t doing the calculations for you, this process might require entirely too much juggling to make it worthwhile.
- Transaction fees still apply for all trades and sales, unless otherwise stated with your advisor (robo or human). Check the fine print to make sure all this movement in your portfolio is good for your long-term goals.
The Takeaway: Robo-Advisors and Tax-Loss Harvesting
Tax-loss harvesting can be a very good way to limit the amount of taxes you will pay on realized gains, but it is not right for everyone. In addition to being a bit complicated, tax-loss harvesting comes with a few rules (“wash sale”), and can open you up to further losses.
Even if tax-loss harvesting isn’t the right strategy for your investments, many robo-advisors offer other tax minimization strategies, like tax-deferred accounts, to help you meet your financial goals.