Tax Loss Harvesting Strategies for Retirees

[medelste]

Let's say you are retired and not producing any new earned income and so are not contributing to your savings (your taxable investment account specifically) and so are not buying any new mutual fund or ETF shares at a new cost basis. Over time, the lots you bought years ago have (hopefully) appreciated and you may not have any new lots to sell at a loss to offset any new gains when it comes time to sell.

Is there a strategy to generate some losses so you can offset gains? I couldn't find mention of any strategies on the interwebs so was trying to come up with one. Would there be value in it? Could you think of a more streamlined way to achieve the same result?

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Let's say you have a taxable portfolio of the following stock funds/ETFs that are all comprised of long-term gains, and that matches your target asset allocation.

$100k Domestic Large Cap (DLC)
$100k Domestic Small/Mid Cap (DSC)
$100k International Developed (ID)
$100k International Emerging Markets (IEM)

Let's say on January 1st, you sell $10k of DLC and use that to buy $10k of DSC.
On January 15th, you sell $10k of DSC (being careful to sell a different lot than the one you just bought to avoid a short-term sale) and buy $10k of ID.
On February 1st, you sell $10k of ID (different lot) and buy $10k of IEM.
And on February 15th, you sell $10k of IEM (different lot) to buy $10k of DLC.

Throughout those 6 weeks, you are only slightly off your target asset allocation, and at the end you are back to where you started, $100k in each fund/ETF (assuming no market movement to keep it simple). But unlike where you were 6 weeks earlier, you've got a fresh $10k lot in each fund that has a chance to generate a loss should that asset type fall out of favor and that fund fall in price. You can repeat immediately or in 6 months or some other time frame and get two $10k lots that you monitor. Rinse, repeat again in another 6 months. And when it comes time to sell some of these funds to generate cash for retirement spending, you've given yourself a chance to sell some lots in some funds for losses to offset capital gains in those funds that have generated gains.

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Does a strategy like this already exist, likely devised in a much more efficient way than I've laid it out? Do you not think it's worth the effort? Please share your thoughts!

 

[RunningBum]

You'd have to generate taxable gains in order to start back at even so you'll have your chance to generate losses. I think that's your downfall.

What is it you're trying to offset with the losses? Are you selling shares for income flow, or something else? I'm not really understanding the goal here.

 

[medelste]

You'd have to generate taxable gains in order to start back at even so you'll have your chance to generate losses. I think that's your downfall.

True, each of those $10k sales would generate gains. That could be a painful first tax year! I had a couple cocktails before writing this, I knew there was a flaw I wasn't seeing, haha.

What is it you're trying to offset with the losses? Are you selling shares for income flow, or something else? I'm not really understanding the goal here.

Yes, I guess I'd call it "selling shares for income flow", or whatever living expenses you'd like to address. The goal would be, when it comes time to sell some funds, say, 20 years into retirement, you are not looking at 75% gains in every lot where it's difficult to manage you tax situation. Instead, you'd have 75% gains in some lots, 10% gains in other lots, and 10% losses in still other lots.

 

[LOL!]

My strategy was to realize all my losses in 2009 and nurse them along by not using them up. Still have a ways to go even now 11 years later.

 

[RunningBum]

I'd have to put this in a spreadsheet to see if there's really an advantage. It seems to me that when it comes time to sell for income, you just pick the funds with the smallest long term gains.

You've also got no guarantee any of these would drop, and stay down, so even with this strategy it may not give you a loser. Don't intentionally pick something that will lose money, since you'd be losing 100% of whatever those losses are just to save 15% on the same amount of gains. That's an 85% net loss.

If you have any space for 0% capital gains, it can make a lot of sense to sell and reset the basis. That space can also be used for Roth conversions, or for ACA subsidies, but one way or another, don't let it go unused.

Other than that, I don't think it really helps to pay 15% cap gains now just to try to limit your 15% gains later. I guess it doesn't hurt either, but if you were to die, your heirs would get a stepped up basis so it'd be better to leave them with the high unrealized gains that would disappear for them.

 

[mrfeh]

Other than that, I don't think it really helps to pay 15% cap gains now just to try to limit your 15% gains later.

+1

There is no free lunch.

 

[HI Bill]

1) Do you have losses to harvest? I can't imagine so after last year's returns...I certainly don't. You're creating lots in anticipation of losses. Not a strategy I'd consider worthwhile.
2) I do tax loss harvesting when I have losses, and only once every so many years. At $3K per year in carry over losses, a little can go a long way, in terms of duration. I typically repurchase a similar ETF (where the wash rule doesn't apply, but the fund is similarly depressed), so that my losses are paper losses only, and they have a chance to recover.
3) I'd focus on 'resetting' the basis to match the 0% tax bracket on LTGSs, if possible (currently, taxable income is <$80K for MFJ), rather than trying to implement a premptive loss strategy.

If I'm off base anywhere here, please let me know.

 

[Gotadimple]

My strategy was to realize all my losses in 2009 and nurse them along by not using them up. Still have a ways to go even now 11 years later.

Easily done with a big pullback (like in 2009). Sorry, I couldn't resist.