Tax-gain harvesting is a lesser-known strategy that can provide significant benefits when it comes to rebalancing your portfolio and saving on future taxes. This tactic involves strategically selling profitable assets in your brokerage account during lower-income years, such as early retirement or periods of unemployment. This strategy can be particularly advantageous during a strong year for the stock market, as it allows investors to take advantage of gains without incurring significant taxes.
One of the key benefits of tax-gain harvesting is the ability to realize gains at a 0% tax rate. This can be particularly lucrative for married couples filing jointly, as they can qualify for the 0% capital gains rate with a taxable income of up to $94,050 in 2024. By strategically selling assets to stay below this threshold, investors can avoid paying taxes on their gains, allowing them to keep more of their investment returns.
In addition to tax savings, tax-gain harvesting also allows investors to rebalance their portfolio without triggering gains. By selling profitable assets and immediately repurchasing them, investors can reset their “basis” or original purchase price. This can be a useful strategy for adjusting the risk profile of your portfolio or reallocating assets without incurring additional taxes.
According to financial experts, the optimal time for tax-gain harvesting is typically in October or November. By waiting until later in the year, investors can more accurately project their taxable income and adjust their strategy accordingly. It’s important to leave some buffer room to avoid hitting the 15% capital gains bracket, especially if you are in a higher-income year. By carefully planning the timing of your tax-gain harvesting, you can maximize the benefits of this strategy.
Tax-gain harvesting can be particularly attractive for individuals in lower-income years, such as early retirement before required minimum distributions. However, it’s important to consider how this strategy may impact other aspects of your financial plan. For example, younger retirees with marketplace health insurance may jeopardize their premium tax credits with higher income from tax-gain harvesting. It’s essential to carefully evaluate your individual circumstances and consult with a financial advisor before implementing this strategy.
Tax-gain harvesting is a powerful tool that can help investors rebalance their portfolios, save on taxes, and optimize their financial outcomes. By strategically selling profitable assets during lower-income years and taking advantage of the 0% capital gains rate, investors can enhance their investment returns while minimizing their tax liabilities. With careful planning and consideration of the timing and implications of this strategy, investors can reap the benefits of tax-gain harvesting for long-term financial success.