The Power of Tax Loss Harvesting: Turning Taxes into Wealth
Have you heard of tax loss harvesting, also known as TLH? It’s a clever strategy where you sell an investment at a loss, then quickly replace it with a similar one. The main goal? Offsetting taxes owed on capital gains or income. While it may sound complicated, the key takeaway is this: TLH can transform your taxable investing into tax-deferred investing. And that can work wonders for building wealth.
Tax me now or tax me later
Imagine taking a dollar you would’ve paid in taxes today and wisely investing it. Chances are, that dollar will grow significantly over time, even after factoring in future tax liabilities. Think of tax-deferred investing as getting a nearly interest-free loan from Uncle Sam to invest. This is why accounts like traditional 401(k)s and IRAs come with restrictions—they’re designed for retirement savings. But with TLH, you can open a new door to tax-deferred investing and enjoy its benefits.
Who Benefits Most from TLH
While TLH offers value for most investors, it can be especially rewarding for certain groups:
The high-income earner
If you’re a high earner, TLH can help you offset capital gains taxes and reduce your tax burden. By harvesting losses to offset ordinary income, you can benefit from lower long-term capital gains tax rates.
The steady saver
Regular deposits not only help you save more but also create more opportunities for tax loss harvesting. Regularly investing in new assets increases the chances of harvesting losses and maximizing tax benefits.
The tax-smart philanthropist
Contrary to popular belief, TLH doesn’t eliminate taxes altogether. However, donating shares to charity or using them for philanthropic purposes can help reset the cost basis of investments and potentially cancel out tax obligations. It’s a tax-smart way to give back while maximizing the benefits of TLH.
Your TLH Strategy Awaits
In the past, tax loss harvesting was reserved for the wealthy due to its complexity and cost. But with advancements in technology and low-cost trading options, TLH is now accessible to a wider audience. If TLH sounds right for you, consider opening a taxable account and start reaping the benefits. And if you already have a Betterment account, enable TLH to make the most of your investments.