April 5

5 Best Robo-Advisors With Tax-Loss Harvesting

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Tax-loss harvesting is a beautiful thing. At its most simple, it’s an investment strategy where you sell an investment at a loss with the goal of reducing your capital gains tax bill. This is possible to do on your own, with a financial advisor, or with a robo-advisor.

Automated tax-loss harvesting with the help of a robo-advisor is one of the easiest ways to take advantage of this money-smart, completely legal investing strategy.

Here, we’ll talk about some of the best robo-advisors that offer tax-loss harvesting and give you tips for picking the right automated investment account.

Best Robo-Advisors With Tax-Loss Harvesting at a Glance

Wealthfront — Best for Goals-Based Investing

Wealthfront Logo

Pros:

  • Low management fee
  • $500 account minimum
  • Daily tax-loss harvesting
  • Highly customizable portfolios
  • Wide variety of investment types and asset categories

Cons:

  • Customer service falls short with no live chat option and phone support limited to weekday business hours

Best For: Beginner and intermediate investors who will take advantage of goal-planning tools and progress-tracking features

Not Ideal For: Investors who want to hold fractional shares in an automated account

Fees: 0.25% advisory fee

Wealthfront does a lot of things right as a robo-advisor and stands out from the rest of the pack for its rigorous approach to figuring out and aligning with your financial goals. It’s also one of the best for investors who want to customize their asset allocation or even create a portfolio from scratch. But you don’t have to do this, as the curated portfolios are terrific. Choose the Classic Portfolio, Socially Responsible portfolio, or Direct Indexing portfolio.

If you’re looking for a robo-advisor that will help you meet your goals while offering advanced benefits like tax-loss harvesting, Wealthfront could be a good fit. This is an excellent choice whether you’re investing for the first time or have a few years behind you.

Read our full review.

Betterment — Best for Beginners

Betterment Logo

Pros:

  • Low annual management fee
  • No account minimum to get started
  • 12 unique portfolio options to choose from
  • Wide variety of investment types and asset categories (including crypto and fractional shares)

Cons:

  • Third-party fees for crypto investing
  • Must make a monthly deposit of $250 or more or have a balance of at least $20,000 to switch to annual rather than monthly pricing

Best For: Beginners and investors who want to have less hands-on involvement

Not Ideal For: DIY investors who want to choose and manage their investments themselves

Fees: 0.25% annual management fee for most portfolios (or $4 a month), 1% for crypto portfolios (plus trading expenses)

Betterment is a solid robo-advisor all around, but we think beginners and investors who prefer to just sit back and leave their portfolios alone should appreciate it most. This robo-advisor makes it easy to get set up, customize your investing, and then relax. And with 12 different portfolios to pick from including stand-out options like social impact and climate impact portfolios, four different types of crypto portfolios, and many more traditional ones, you can feel like your investments are aligned with your priorities.

Don’t choose Betterment if you want full control over your investments, but do choose this robo-advisor if you want to let automation do the heavy-lifting.

Read our full review.

Empower — Best for Net Worth Tracking

Personal Capital is now Empower

Pros:

  • Access to human advisors
  • Wealth management tools and features
  • Offers individual securities

Cons:

  • Higher management fee than many other robo advisors
  • Very high $100,000 account minimum for wealth management

Best For: Investors with multiple retirement investment accounts who want complete wealth management support including human advisory services

Not Ideal For: Brand-new investors who have not started saving for retirement

Fees: 0.49% to 0.89% annual management fee

If you’ve started focusing on growing your net worth and you want a platform with financial planning features, Empower could be the robo-advisor for you. This robo-advisor emphasizes retirement investing and strategizing. And the Empower platform is more comprehensive than the average robo-advisor with tools for planning, budgeting, advising, and more. Plus, you can get human advising, which is less common for automated accounts.

Although beginner-friendly, Empower may not be the best option for those who have not started saving for retirement because many of its built-in tools — including a Retirement Planner, Fee Analyzer, Savings Planner, etc. — link with these accounts. To take advantage of Empower, you want to sync as many accounts as possible.

Read our article: “I’ve Used Empower for 9 Years: What I Love & What Could Improve

>>> Find out more: Net Worth Trackers: 7 Best Apps & Tracking Services

Schwab Intelligent Portfolios — Best Fee-Free

Charles Schwab wide logo

Pros:

  • No annual management fees
  • Optional human advisory services (for a fee)

Cons:

  • High $5,000 account minimum
  • Limited investment types with no socially responsible portfolio option

Best For: Investors who want human advising and those looking to save on their investing

Not Ideal For: Investors looking for a highly-customizable robo-advisor, investors with less money to invest

Fees: No annual management fees, $300 setup fee and $30 a month after that for unlimited access to a certified financial planner (optional)

Schwab Intelligent Portfolios doesn’t charge management fees, making it one of few robo-advisors that can be actually free. You can also pay for human advisory services from a CFP.

But there are some downsides to this inexpensive platform. First, a taxable investment account needs to have a balance of at least $50,000 to qualify for automated tax-loss harvesting with Schwab Intelligent Portfolios. This is higher than most robo-advisors. Also, there are only three different investment strategies available with Schwab — Global, U.S.-focused, and Income Focused — making this option more limited than others in terms of diversification too.

Read our full review.

Axos Invest — Best for Self-Directed Trading

Pros:

  • Low annual management fees
  • $500 account minimum
  • Over 30 different asset classes

Cons:

  • No fractional shares or bonds

Best For: Investors who want to take the reigns while customizing their portfolios to choose the assets they want

Not Ideal For: New investors who would prefer to have their portfolio built for them

Fees: 0.24% advisory fee

Axos Bank offers great Managed Portfolios for investors who want tax-loss harvesting at an even lower price point than some of its cheapest competitors, Betterment and Wealthfront. With a management fee of 0.24% and more than 30 different asset classes, plus the ability to choose those asset classes for yourself and their allocations, this option is well worth it.

In the background, Axos monitors your portfolio and sells your investments at losses while replacing them with similar investments to reduce your tax bill. And this platform comes with additional benefits like the option to exclude ETFs to avoid triggering the wash sale rule. There are no additional fees for tax-loss harvesting — this is included in your management fee.

Read our full review.

How To Choose a Robo-Advisor for Tax-Loss Harvesting

There are a lot of things to consider when choosing a robo-advisor. To help you get started, here are some of the most important features to pay attention to.

Fees

No robo-advisor is truly free. Though many of them have far fewer fees than the average financial advisor and brokerage account, they all charge various fees including annual fees and sometimes monthly fees. Look into account management fees while comparing your options.

>>> Find out more: The Actual Cost of Robo Advisors Fees — What Are the Annual Fees?

Investment Options

The point of a robo-advisor is that you don’t have to manually pick your investments and rebalance your portfolio, but this works best when paired with a variety of investment options. Choose a platform that offers a combination of assets for better diversification.

If you’re okay with just investing in ETFs, stocks, and bonds, most robo-advisors will work. But if you’re interested in other assets like REITs and crypto, you have fewer choices.

Portfolio Types

Your precise asset allocation is going to be determined by your risk tolerance and how you answer setup questions when creating your account, but one of the biggest differences between robo-advisors is in their portfolios. No two platforms are exactly the same.

Think about your ideal investment portfolio when choosing a robo-advisor. Does it include a well-diversified mix of traditional investments? Stocks in socially responsible or sustainable companies? Shares of cutting-edge assets like digital currency or tokens? See which preset portfolios are available before signing up to invest.

Management

Most robo-advisors allow you to be completely hands-off with your investing and will do all of the rebalancing and reinvesting for you. Some investors like this while others want more control.

If you want to maintain some level of involvement, choose a robo-advisor that allows for self-direction. If you want to be involved as little as possible, choose one with great customization and automated features.

Minimums

All robo-advisors have different minimum deposit and balance requirements to keep an account. Choose one based on how much cash you have to invest. You’ll see minimums of $0 for some while others require you to invest $10,000 or more to get started.

Returns

It’s always smart to look into a robo-advisor’s historic returns before signing up. Although you can’t tell for sure how your portfolio may perform by looking at performance data, this is a good way to easily compare platforms. 

Advising

Some robo-advisors come with professional advisory services built into the cost or the option to purchase these. If this is important to you, go for a robo-advisor with more wealth management features.

Generally, companies either offer a robo-advisor alone (or mostly alone, like Betterment) or comprehensive investing services that can include a robo-advisor (like Schwab).

>>> Find out more: Understanding Financial Advisor Fees

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a tax-efficient investing strategy that involves selling off assets at a loss with the purpose of reducing your current tax burden. By selling some investments at a loss rather than hanging on to them, you can offset your taxable gains from other investments and decrease your overall tax liability.

Investors may eventually buy back the same assets, replace them with similar options, or move on to other opportunities.

With tax-loss harvesting, you may be able to reduce your taxable income and lower your bill. Sometimes, this means a smaller capital gain to pay taxes on or even a net loss, depending on the rest of your portfolio’s performance.

You can carry forward losses to an upcoming tax year if you exceed the maximum allowable net loss in any given year. In 2023, this is $3,000.

Note: Tax-loss harvesting defers taxes. You’ll still need to pay taxes on any investments that lead to capital gains in the future.

Example

Say you have $20,000 invested in one ETF (we’ll call it ETF A) and $15,000 invested in another (ETF B). ETF A has depreciated in value and is now worth $18,000 while ETF B has appreciated in value and is now worth $20,000.

ETF A: $20,000 —> $18,000 (-$2,000)
ETF B: $15,000 —> $20,000 (+$5,000)

If you were to only sell ETF B, you’d pay taxes on a realized capital gain of $5,000. But if you were to sell both ETFs, the $2,000 capital loss could help offset the $5,000 gain and you’d only pay taxes on a $3,000 capital gain. 

Long- and Short-Term Gains

You can offset long-term capital gains with long-term capital losses and short-term capital gains with short-term capital losses. Short-term gains result from sales of assets you held for less than a year and long-term gains result from sales of assets you held for at least a year.

Short-term capital gains are taxed at the same rate as your ordinary income and long-term gains are taxed at between 0% and 20%.

>>> Find out more: What Are the Capital Gains Tax Brackets?

Which Investments Qualify?

Tax-loss harvesting only works with taxable accounts. This means tax-advantaged investment accounts such as 401(k)s and IRAs aren’t eligible. This makes sense if you think about it because these accounts already carry tax benefits — investments into a 401(k) reduce your taxable income and funds in an IRA grow tax-deferred.

Taxable accounts that can be eligible for tax-loss harvesting include brokerage accounts and robo-advisor investment accounts. You can apply tax-loss harvesting strategies to:

  • ETFs
  • Stocks
  • Mutual funds
  • Crypto

Limitations of Tax-Loss Harvesting

There will be times when tax-loss harvesting just doesn’t work or make a lot of sense. And there’s also a limit on how much you can save using this strategy.

For example, tax-loss harvesting doesn’t make sense if you’re going to spend more money executing the trades than you can possibly save. If you can’t cut your tax bill by enough to easily make up for trading fees, don’t do it.

It also isn’t a good strategy for investors who have reason to believe they’ll earn a higher income next year. If you get bumped into a higher tax bracket after using tax-loss harvesting, you could actually end up paying more taxes on your capital gains in the future. Yikes.

Also, you can only claim up to $3,000 per year in capital losses as a single individual or $1,500 per person if you’re married.

Alternatives

There are other ways to reduce your capital gains tax burden besides harvesting losses. You can also decrease your tax liability by investing more for retirement, holding onto investments to defer taxes, and choosing dividend stocks to collect earnings without having to sell.

>>> Find out more: How to Offset Capital Gains Tax on Your Investments

Wash Sale Rule

You might be wondering: Can you buy an investment back after you’ve sold it at a loss to offset capital gains? The answer is yes. But you have to be aware of the wash sale rule.

The wash sale rule is a rule created by the IRS to prevent investors from being shady about cutting their tax bills by “gaming the system.” Basically, you’re not supposed to sell an investment to reduce the capital gains taxes you owe and then turn around and buy almost the exact same investment right away. This is referred to as a wash sale and it’s frowned upon.

A wash sale occurs when you sell an investment for a loss and purchase the same or a “substantially identical” investment within 30 days of the sale, before or after.

If you trigger the wash sale rule, you can’t use the loss that triggered it to offset your gains.

So how do you avoid breaking this rule (and forfeiting the tax benefits)? Just wait long enough to replace investments. As long as you’re outside of that 30-day window, you’re fine. The best robo-advisors use safeguards to avoid wash sales.

Tax-loss harvesting itself is permitted by the IRS, but there is definitely a right way and a wrong way to do it. Do it right and you can save some money; no harm, no foul. Do it wrong and you won’t get the tax savings.

Financial Advisors vs. Robo-Advisors vs. Neither: What’s the Best Option?

You don’t need a robo-advisor to use tax-loss harvesting investment strategies. There are ways to do this on your own and many traditional financial advisors assist with this.

But it’s a lot easier and cheaper to have an algorithm to do it for you, and many robo-advisors have the capacity to do this more regularly than a human would.

A traditional financial advisor would likely tell you to wait until the end of the year or close to it to start tax-loss harvesting. This is because this is a good opportunity to rebalance your portfolio and you’ll have a clear picture of your wins and losses for the tax year.

But robo-advisors generally apply tax-loss harvesting techniques daily or at least on a much more regular basis. It’s easier and faster for an algorithm to find opportunities to harvest losses than for a person, and these platforms use automatic rebalancing to continually adjust your portfolio.

>>> Find out more: Robo Advisor vs. Financial Advisor

Bottom Line

Tax-loss harvesting can be a fantastic way to reduce your tax bill, but it can be a bit tricky and time-consuming to pull off on your own. Recruiting a robo-advisor to do this work for you is a worthwhile decision for most investors, especially since these platforms offer many other benefits too like lower fees, great diversification, and low-maintenance investing.

Check out one of these robo-advisors to start saving on your taxable investment accounts with regular tax-loss harvesting.

InvestorJunkie receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. InvestorJunkie is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.

Read More:

Click on the link to read the whole article: https://wealthysimple.com/inv-fd/fd-i-j/5-best-robo-advisors-with-tax-loss-harvesting/


Tags

capital gains, Investing, robo advisors, tax loss harvesting


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