The short answer
Tax-loss harvesting means selling an investment that has lost value in a taxable account to realize a loss, which you can use to offset capital gains and a limited amount of ordinary income, reducing your tax bill. For retirees with taxable brokerage accounts, it can be a useful way to manage taxes, especially in down markets. But it only applies to taxable accounts, not IRAs or 401(k)s, and there are rules like the wash-sale rule that limit repurchasing the same investment. This is educational information, not tax advice.
So tax-loss harvesting sells losing investments in a taxable account to offset gains and some income, within specific rules.
How it works
When you sell an investment for less than you paid, the realized loss first offsets your capital gains, and any excess can offset a limited amount of ordinary income per year, with further losses carried forward to future years. To keep your investment strategy intact, you can reinvest in a similar but not substantially identical asset, avoiding the wash-sale rule that disallows the loss if you rebuy the same security too soon. Our guide to capital gains in retirement covers the gains this can offset.
The mechanics are offset gains first, then a limited amount of ordinary income, while respecting the wash-sale rule.
Limits and cautions
Tax-loss harvesting only works in taxable accounts, since losses in tax-deferred accounts are not deductible. The wash-sale rule prevents claiming a loss if you buy the same or a substantially identical security within a set window around the sale. And you should not let tax considerations drive you to abandon a sound investment plan. Because the rules are specific, work with a tax professional. Our retirement income guide covers coordinating it.
The takeaway: tax-loss harvesting can offset gains and some income for retirees with taxable accounts, but mind the wash-sale rule and do not let taxes override sound investing.
Frequently Asked Questions
What is tax-loss harvesting?
Selling an investment at a loss in a taxable account to offset capital gains and a limited amount of ordinary income, reducing your tax bill, with excess losses carried forward to future years.
Does tax-loss harvesting work in an IRA?
No. It only applies to taxable accounts, since losses in tax-deferred accounts like IRAs and 401(k)s are not deductible.
What is the wash-sale rule?
A rule that disallows a claimed loss if you buy the same or a substantially identical security within a set window around the sale. Reinvesting in a similar but not identical asset avoids it.
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