This year, tax-loss harvesting has a bushel of opportunities
October 13, 2022
October 13, 2022
Your clients may have experienced significant losses this year as both stocks and bonds ran head-on into inflation and rising rates. An astute tax-loss harvesting strategy can help mitigate these losses and allow you to put concrete numbers around the value you provide to your clients.
In most years, tax-loss harvesting focuses on stocks, but this year, fixed income is in the picture because bonds experienced historic losses. As a result, you have an expanded opportunity to assess entire portfolios and:
If your assessment calls for realizing losses across a broad swath of client holdings—or you see an opportunity to consolidate investments—this may be the time to consider strategic model portfolios.
Traditional tax season has barely begun, but we believe much of the bond market pain is behind us, and it's possible that the market will reverse course, so you may want to start harvesting losses now. As always, your overall investment strategy should drive these decisions. Tax losses are just one aspect of that strategy.
Despite this year's heavy losses, some actively managed funds may still distribute large amounts of capital gains. In some instances, if a fund is distributing a large capital gain, it may make sense to sell the fund to avoid the distribution. To decide whether selling to avoid a gain is a smart strategy, be sure to take unintentional taxes or penalties you may trigger into account.
Capital losses can offset any gains and up to $3,000 in yearly income. If capital losses exceed those amounts, they can be carried forward to offset up to $3,000 in annual income, indefinitely, until they are gone.
ETFs can be smart choices when considering tax-loss harvesting decisions. In addition to considering timing, keep in mind that if you want to maintain current allocations, you can still sell an investment and then buy an exchange-traded fund (ETF) that is highly correlated to the original, whether as an individual holding or as an underlying vehicle in a strategic model portfolio. Compared to mutual funds, ETFs provide greater liquidity, which can help avoid triggering the wash-sale rule. Mutual funds also may charge fees for short-term trading.
Discussing these strategies can help clients see the value you are bringing to their portfolios. After all, who doesn't love a lower tax bill? You can share the savings that your tax-loss harvesting recommendations will generate as part of a broader discussion about client portfolios and goals.
Vanguard offers a range of fixed income ETFs and model portfolios that can help you set your clients up for success in 2023 and beyond.
For assistance with available tax strategies, please contact your sales executive. Ask about our free portfolio analytics tool, which can provide detailed, highly customizable comparisons of your existing portfolios to those you may be considering.
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