In a year where the stock market is performing strongly, investors are looking for strategies to efficiently rebalance their portfolios and also save on future taxes. One such strategy, tax-gain harvesting, involves strategically selling profitable assets from your brokerage account during lower-income years. These low-income years could include the early years of retirement or periods of unemployment.
The capital gains brackets come into play when dealing with long-term capital gains, which refers to profitable assets owned for over a year. On the other hand, short-term investments held for one year or less are subject to regular income taxes. For individuals, the 0% capital gains rate can be particularly advantageous, especially for married couples filing jointly. In 2024, a married couple could qualify for the 0% rate with a taxable income of up to $94,050.
Benefits of Tax-Gain Harvesting
Tax-gain harvesting offers several benefits, including the ability to rebalance your brokerage assets without triggering gains. Additionally, this strategy allows you to reset your “basis” or original purchase price by selling a profitable asset and then immediately repurchasing it. Unlike selling assets at a loss, where the wash sale rule comes into play, tax-gain harvesting does not have the same restrictions on repurchasing identical assets.
According to experts, the ideal time for tax-gain harvesting is typically in October or November, once investors have a clearer picture of their taxable income for the year. It is important to leave some buffer room to avoid hitting the 15% capital gain bracket, especially since harvesting gains increases your taxable income. This strategy is particularly attractive in lower-income years, such as early retirement, where required minimum distributions have not yet started.
Considerations for Younger Retirees
While tax-gain harvesting can be beneficial for most individuals, younger retirees with marketplace health insurance should be cautious. Higher income from harvesting gains could jeopardize premium tax credits, so it’s important to weigh the potential benefits against the potential drawbacks. Consulting with a financial planner or tax professional can help you determine whether tax-gain harvesting is the right strategy for your specific financial situation.
Overall, tax-gain harvesting can be a valuable tool in your financial planning arsenal, allowing you to optimize your portfolio and minimize future tax liabilities. By strategically selling profitable assets during lower-income years, you can take advantage of the 0% capital gains rate and potentially reduce your tax burden in the long run. It’s important to carefully consider the implications of this strategy and consult with experts to ensure it aligns with your overall financial goals.