9. Tax-Loss Harvesting

For retirees with non-retirement investment accounts (like a standard brokerage account), tax-loss harvesting is a sophisticated but very effective strategy for managing your tax bill, especially in a volatile market.

What is Tax-Loss Harvesting?

The core idea is to intentionally sell investments that have lost value. By selling a losing position, you “harvest” a capital loss. This capital loss can then be used to offset capital gains you may have realized from selling winning investments. This reduces your net capital gain and, therefore, the amount of tax you owe.

For example, if you sold Stock A for a $5,000 gain and sold Stock B for a $4,000 loss in the same year, you can use the loss to offset the gain. You would only owe tax on a net capital gain of $1,000.

Offsetting Ordinary Income

What if your losses are greater than your gains? The tax code allows you to use up to $3,000 in net capital losses to reduce your ordinary income each year. This could be income from a pension, IRA withdrawal, or part-time job. If your net loss is more than $3,000, the remainder can be carried forward to future tax years.

Beware the Wash-Sale Rule

There is a major pitfall to avoid: the “wash-sale rule.” This rule prevents you from claiming a capital loss on a security if you buy the same or a “substantially identical” security within 30 days before or 30 days after the sale. So, you cannot sell a stock to get the tax loss and then immediately buy it back. Many investors work around this by buying a similar, but not identical, investment, like a different company’s stock in the same industry or a different S&P 500 index fund.