TD Ameritrade Investment Management LLC (*TDAIM) has introduced a tax-loss harvesting service to clients who are invested in one of TDAIM's ETF managed portfolios in taxable accounts.
Traditionally, tax-loss harvesting has been thought of as a complex strategy reserved for the most sophisticated investors managing their own portfolios, or wealthy investors working with a high-priced financial advisor. Now, this service is available to clients who have taxable accounts invested in TD Ameritrade Investment Management's Essential Portfolios and Selective Portfolios investing in ETFs at no additional cost.
Tax-loss harvesting looks to sell an investment that’s lost value to generate a tax loss and purchase a new investment in its place. This strategy provides an opportunity to potentially reduce your tax bill all while staying fully invested and working toward your long-term investment goals. Sound complicated? Executing on this strategy is something that's automated and done at no extra cost to TD Ameritrade Investment Management clients with taxable accounts who are invested in a managed ETF portfolio.
How it Works
When you choose to enroll in our tax-loss harvesting service, TD Ameritrade Investment Management reviews your portfolio on a daily basis to look for tax-loss harvesting opportunities, which means you can realize losses throughout the year that might not necessarily be available at year-end. This may further help you to offset capital gains.
If you don’t have any capital gains or if you have more losses than gains, you can use the losses to offset up to $3,000 of other taxable income per year. After using your losses to offset capital gains and income, you can use any remaining losses to offset gains or income in later years.
One Potential Scenario
To better understand how tax-loss harvesting works, imagine a scenario in which someone invests $100,000, putting $60,000 in “ETF A” and $40,000 in “ETF B.”
At the end of one year, ETF A has declined by $7,000 and is now worth $53,000. But ETF B has risen by $10,000 and is now worth $50,000.
Without tax-loss harvesting, the client has a realized gain of $10,000 from ETF B, and has a potential tax bill of $1,500 (assuming he or she sells the shares and pays the 15% capital gains tax on the profit).
On the other hand, with tax-loss harvesting, TD Ameritrade’s service has been monitoring the two ETFs daily all year, selling ETF A to offset gains from ETF B. At the end of the year, instead of paying a $1,500 tax, the investor only has a potential tax bill of $450, for a potential tax savings of $1,050.
With the investor’s tax liability reduced by $1,050, that savings becomes money that can be invested back in the portfolio, used to maximize IRA contributions, pay off debt, or spend as one pleases. See the example in figure 1.
Beware of the Wash Sale Rule
Investors should educate themselves about the IRS’ wash sale rule, which prohibits you from claiming a tax loss if you repurchase the same security (or a substantially similar security) either 30 days before or 30 days after selling a security for a loss. To evaluate whether you violated the wash sale rule, the IRS reviews the trading activity for all of your accounts. In other words, the IRS looks at trades you place in other accounts at TD Ameritrade, at other brokerage firms, and in IRA or Roth IRA accounts, as well as transactions your spouse made and transactions by a business entity you control to determine if you violated the wash sale rule.
TD Ameritrade Investment Management's tax-loss harvesting service only scans your TDAIM portfolio on an individual account level (not all of your portfolios collectively) to reduce the chance of violating the wash sale rule in that particular account, and TDAIM does not have any transparency into your trading activity in brokerage accounts that you may have at TD Ameritrade or at other financial institutions. Therefore, a trade that TDAIM places in one account may inadvertently create a wash sale in another account. You should be aware of investments in all your investment accounts to determine if you run the risk of violating the wash sale rule.
Other Key Considerations
TD Ameritrade Investment Management does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances as to whether the TDAIM tax-loss harvesting feature is appropriate for you. This feature generally would be more beneficial to investors in higher tax brackets and high-tax states.
TDAIM goes through a rigorous due diligence process to select securities to replace those sold for tax-loss harvesting purposes. We seek replacement securities that meet TDAIM’s high standards and keep your portfolio in line with its target allocation.
How To Enroll
Once you enroll, TD Ameritrade Investment Management manages the process so you don't have to. At any point, you can turn off the feature if you no longer desire it.
For more information about TD Ameritrade Investment Management's tax-loss harvesting service, contact a Portfolios Specialist at 800-665-1978.
Learn more by watching the short video below: