As you approach retirement, the financial decisions you make today will significantly impact your quality of life for the next 20-30 years. We regularly meet with clients who are 5-10 years from retirement and facing a common concern: how to manage their tax burden during those critical early retirement years between when they stop working and when Social Security and Medicare kick in.One strategy worth considering for your taxable investment accounts is tax-loss harvesting, though it’s important to note this approach only benefits taxable accounts and provides no advantage for qualified retirement accounts like IRAs or 401(k)s.

During this transition period, you have more control over your taxable income than you’ll ever have again. This makes it an ideal time to implement strategic tax moves like loss harvesting. Yet most pre-retirees think about tax-loss harvesting as a December activity, if they think about it at all.

Our research and experience with clients in similar situations shows that June presents a much better opportunity. Rather than scrambling at year-end when your options are limited, positioning your portfolio now allows you to optimize your tax efficiency throughout your transition to retirement.

Let’s explore if this approach makes sense and how it might fit into your pre-retirement planning.

Understanding Tax-Loss Harvesting

So what exactly is tax-loss harvesting, and why should it matter to you now? Simply put, it’s the strategy of deliberately selling investments that have declined in value to realize capital losses. These losses can then offset capital gains from your profitable investments or reduce up to $3,000 of ordinary income annually (1). Even better, any unused losses carry forward indefinitely, creating a valuable tax shield for future years.

Here’s why this strategy becomes particularly powerful for pre-retirees: the current tax climate is not kind to high earners. Short-term capital gains face ordinary income tax rates up to 37%. Add the 3.8% Net Investment Income Tax that kicks in when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), and you’re looking at effective rates of 40.8% (2). Factor in state and local taxes, and you could be handing over nearly half of your short-term gains to various tax authorities.

Given these potentially significant tax savings, the question becomes: when is the best time to implement this strategy?

Why Mid-Year Timing Matters in June

Six months into the year, you have a clear picture of which investments are underperforming versus your expectations. This data driven approach allows for more strategic decision making than year end panic selling. Many investors find that incorporating loss harvesting considerations into regular portfolio reviews may help with overall tax efficiency, and June often coincides with mid-year portfolio assessments, making it a natural time to evaluate such opportunities.

For many of you, June also represents a period before major year end bonuses or planned asset sales, making it an ideal time to realize losses that can offset future gains. Rather than waiting until December when time is short and options are limited, addressing these considerations now provides more flexibility in your overall tax planning approach.

Of course, tax-loss harvesting isn’t right for everyone. Before considering this strategy, it’s worth evaluating whether your situation aligns with the circumstances where it tends to be most effective.

When Tax-Loss Harvesting Makes the Most Sense

Tax-loss harvesting is most worthwhile if you’re in higher tax brackets, have taxable investment accounts, are an active investor with frequent trades, have a diverse portfolio, and are a long term investor who can leverage tax deferral benefits.

Ask yourself these questions to assess whether this strategy might apply to your situation:

1. Are you planning to sell appreciated assets later this year? Harvesting losses now could help create an offset cushion for those future gains.
2. Are you an entrepreneur considering a business sale? Accumulated loss carryforwards might provide meaningful tax relief when that transaction occurs.
3. Are you planning to donate your portfolio to charity or leave it to heirs? This situation could be particularly well-suited for loss harvesting strategies, since the approach doesn’t require realizing capital gains.

Advanced Execution Considerations

When implementing tax-loss harvesting, the actual-cost method may offer advantages in enabling specific share selection to maximize realized losses. If you’re currently using average-cost accounting, this might be worth discussing with your advisor when considering a switch to specific identification methods.

Another important coordination issue involves managing multiple account types. As a high-net-worth investor, you often maintain taxable accounts alongside traditional IRAs, Roth IRAs, and 401(k)s. If you sell a security at a loss in your regular brokerage account and buy the same security in your IRA within 30 days, you could lose the ability to claim the tax loss and wouldn’t be able to adjust the cost basis of the repurchased security.

Finally, if your employer awards stock or stock-like bonuses, consider how loss harvesting might help prevent your portfolio from becoming too heavily concentrated in company stock. Selling for a tax loss in anticipation of new stock awards can be a strategic way to maintain better diversification.

Why Professional Guidance Matters

Tax-loss harvesting may not be appropriate for everyone. The strategy works best for those with taxable investment accounts, higher tax brackets, and diverse portfolios that provide harvesting opportunities throughout the year.

More importantly, the timing and execution of loss harvesting requires careful coordination with your overall financial plan. This includes understanding how it fits with your retirement timeline, estate planning goals, and the specific tax rules that could impact your situation. Working with experienced professionals helps ensure any tax strategies complement rather than complicate your path to retirement.

Get in Touch!

If you’re approaching retirement and wondering how to optimize your tax strategy during this critical transition period, we’re here to help. Let’s schedule a conversation to review your current plan and explore how strategic tax planning can complement your retirement timeline, thoughtfully, strategically, and with your long-term goals in mind.

Tax-loss harvesting is just one piece of a comprehensive early retirement strategy. To help you navigate all the critical decisions ahead, we’ve created a detailed Early Retirement Checklist that covers everything from healthcare considerations to income replacement strategies. [Get your free Early Retirement Checklist here] and start building confidence in your retirement timeline.

Phone: 817-717-4400

Email: gerald@lightforcefinancial.com

Contact us: https://lightforcefinancial.com/contact-us/

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website.

Past performance is not a guarantee of future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Registration with the SEC does not imply a certain level of skill or training.

Sources

1. IRS Publication 550, Investment Income and Expenses, “Capital Losses, pg.102”
2. IRS, “Net Investment Income Tax”