Tax Loss Harvesting 101
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There’s no doubt about it. Robo Advisors are becoming increasingly popular among investors of all shapes, sizes and age groups. But even still, they are a relatively new entry in the financial landscape.
There are still a lot of people who are not familiar with the ins and outs of Robo Advisors (or automated investing services), and that’s why our goal here at BestRoboAdvisors.org is not only to publish the best Robo Advisor reviews – we’re here to explain one of the most wonderful and sought-after features that investors like you should be aware of: tax loss harvesting.
Want to know how tax loss harvesting will help you manage your taxable accounts and keep more money in your pockets? Read on where we discuss:
- What is tax loss harvesting?
- How widely available is it?
- Which are the best Robo-advisors that offer the service?
What is Tax Loss Harvesting?
Tax loss harvesting is the process of selling a security at a loss in order to offset a capital gains tax liability. This liability is usually associated with a different security (that has increased in value), producing a short-term capital gain (which is taxed at a higher federal tax rate than long-term gains). Watch the video below to get a better idea of what this process is all about:
In the world of Robo Advisors, the service recognizes the best time to sell your investment (that has decreased in value) in order to offset the tax liability of a different investment (which has risen in value).
Once the investment is sold, it is automatically replaced by a similar investment to harvest the tax loss, while still retaining the original asset allocation of your investment account. This allocation was previously calculated by the Robo Advisor to determine the most profitable route.
The Best Robo-Advisors for Tax Loss Harvesting
Although tax loss harvesting is a common feature on a majority of Robo Advisors, the following are two examples that make the service readily available to a wide array of investors.
Wealthfront includes tax loss harvesting as part of its service for all accounts that meet the minimum balance of $500. The service also offers a more optimized version of tax loss harvesting called ‘Direct Indexing’, which is offered to accounts that are worth more than $100,000. This feature enables the Wealthfront Robo Advisor to buy and sell individual securities (rather than indexes) in order to further optimize the tax efficiency of your investments.
FutureAdvisor offers a free advisory service (for investors with balances of any size or amount) and a more comprehensive premium service if your balance is more than $10,000. If you opt for the FutureAdvisor Premium service, you will get to enjoy tax loss harvesting as a standard feature. Although some investors might find the $10,000 threshold to be quite steep, it is important to note that this amount is considerably lower than what other Robo Advisors impose upon investors.
How Widely Available is Tax Loss Harvesting?
Although there are a lot of discussions on the benefits of tax loss harvesting, we believe that this service makes a real difference to a wide majority of investors. This is why tax loss harvesting is now offered by a vast majority of Robo Advisors on the market, but keep in mind that it is not necessarily available for each and every investor with an account.
In many cases, the tax planning feature of the Robo Advisor will only come into action for certain account balances that reach a certain threshold. This particular threshold will differ from one service to the next. For example, there are Robo Advisors that provide tax loss harvesting on paid accounts only, but this service is also offered by Robo Advisors with low or zero management fees.
The service is totally impressive, but you should keep in mind that tax loss harvesting is only beneficial to investors with taxable accounts and not IRAs or other tax-exempt investments.