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How to Make Tax Loss Harvesting Work for You

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Tax loss harvesting is defined by Investopedia as “the selling of securities at a loss to offset a capital gains tax liability.” This is a common technique investors use to eke some benefit from a loss on a security that is held in a taxable account.

As simplistic as it may sound, a loss on a security — such as an individual stock, bond, mutual fund or exchange-traded fund (ETF) — means that its market value is lower than what you paid for it. Losses on securities can be deducted for tax purposes if realized in a taxable account. Securities held in a tax-deferred retirement account like an IRA or a 401(k) are not subject to taxes on any gains or losses resulting from their sale.

How tax loss harvesting works

If shares of a security are held for less than one year, any gains or losses are considered short-term for tax purposes. This means that short-term gains would be taxed at the same rate as any other regular income that you earn from salary, self-employment or other sources. If the shares are held for more than one year prior to the sale, any gains would be taxed at the long-term capital gains rate, which might be lower than your tax rate on other income.

The concept of tax loss harvesting is that the losses realized on the sale of securities during the year can be used to offset gains that are realized on the sale of other securities or other income.

Let’s say you purchased 100 shares of XYZ company stock at a cost of $20 per share. The cost of these shares is $2,000. The shares fall to $10 per share, making the total value of the shares $1,000. If you sold the shares, you would realize a loss of $1,000.

Let’s also say that you sold 200 shares of ABC company during the year at a total gain of $2,500. This gain normally would be taxed at the appropriate rate.

Using tax loss harvesting, you could net the loss of $1,000 from the sale of the XYZ shares against the $2,500 gain from the ABC shares to reduce your overall capital gains for the year to $1,500.

These are the basics;however, it’s not quite so simple in practice. It’s important to note that the examples above and throughout this article will ignore both state income taxes and the transaction costs to buy and sell the securities. Each state handles capital gains and losses differently, so the impact will vary. Transaction costs to buy a security are added to the cost basis, while transaction costs to sell serve to reduce the amount realized, and that is subject to a gain or loss.

Long-term vs. short-term gains/losses and the leftovers

The rules for offsetting gains and losses specify that gains and losses of the same type should first be used to offset each other. You’ll need to look at any gains and losses realized during the year and match short-term gains with short-term losses and do the same with long-term gains and losses.

If the losses of one type exceed the gains of that same type, the excess losses then can be applied to other capital gains.

For example, if you had $3,000 in short-term capital losses for the year but only $2,000 in short-term capital gains for the year, then the excess $1,000 in short-term losses could be applied against any long-term capital gains for the year.

Note that capital gains distributions from mutual funds or ETFs also can be offset by capital losses realized elsewhere.

To the extent that you have excess capital losses that can’t be applied against capital gains for the year, the IRS says you can deduct up to $3,000 of these losses ($1,500 if married filing separately) against other taxable income. Any excess losses above that amount can be carried forward into subsequent years.

Katie Brewer, a fee-only certified financial planner and president of her Dallas-area firm Your Richest Life, deals with this issue in virtually serving many of her (primarily) Generation X and Generation Y clients. She indicated that a number of her clients have concentrated positions in employer stock that they try to diversify by selling a portion of each year. Brewer looks for losses elsewhere in their taxable holdings, or for specific shares of the employer stock that may have declined in value, to offset some or all of the gains from the sale of the employer shares to minimize the tax hit.

What is the wash-sale rule?

The IRS defines a wash sale as occurring when a security is sold at a loss and then the same or a substantially identical security is purchased within a 30-day window before or after the sale.

As you might imagine, this can get complex rather quickly. If you sold shares of IBM stock and realized a loss, that’s pretty straightforward.

On the other hand, if you sold Vanguard’s S&P 500 mutual fund at a loss and then turned around and purchased Fidelity’s S&P 500 mutual fund within the specified the time frame, that could well be considered a violation of the “substantially identical” rule. However, if you instead purchased a mutual fund that invested in the total stock market (and a different benchmark index from the S&P 500), you likely wouldn’t be in violation.

There is one other area for caution using the IBM example. If you sold your shares in a taxable account to realize a loss and then turned around and purchased IBM shares in an IRA account (as an example), you would be considered in violation of this rule if the purchase was within the specified time frame.

If you are found to be in violation of the wash-sale rule, you will not be allowed to use the tax loss when you file your tax returns.

Manual vs. automated harvesting

What we described above typically is done manually by investors and often occurs around the end of the year. There are also a number of robo-advisors that advertise tax loss harvesting as a service they offer to clients.

For example, Betterment offers automated tax loss harvesting and touts its Tax Loss Harvesting+ strategy as one that looks for opportunities to harvest losses on a regular basis and does a better job of reducing tax exposure than other automated models. It indicates that its service includes:

  • An automated algorithm
  • No extra trading costs associated with these transactions
  • Reinvestment of every dollar that is harvested
  • No short-term capital gains
  • IRA harvest protection against the “substantially identical” rule mentioned earlier
  • Rebalancing
  • Customer protection for realized losses

Wealthfront, another major robo-advisor, offers a similar service. Schwab Intelligent Portfolios cites tax loss harvesting as an offered service, as does SigFig for users of its managed account option. Personal Capital appears to offer some form of tax loss harvesting for investors with at least $200,000 in investable assets.

Tax loss harvesting can be a great service, but it’s important to understand how a robo-advisor does this, including how it decides where to invest the money from the tax loss sales.

Bottom Line

Tax loss harvesting is a potentially valuable tool that investors should be aware of. While nobody likes to lose money on investments, losses do happen. If those losses occur in a taxable (nonretirement) account, harvesting tax losses can help minimize your tax hit on gains elsewhere.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Roger Wohlner is a writer at MagnifyMoney. You can email Roger here

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Investing, Reviews

Fidelity Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

With a whopping $6.9 trillion in assets under management, Fidelity is one of the country’s largest broker-dealers. That kind of size and power may seem like a detriment to some, but Fidelity’s focus on investor value, long-term planning, and fair and transparent pricing makes the Boston-based giant one of the industry’s more likable brands.

Fidelity offers an extensive array of investment products, including hundreds of proprietary mutual funds, index funds and exchange-traded funds (ETFs), and access to thousands of competitor fund investments. Its brokerage platform lets you trade international stocks, stock options and shares of initial public offerings. The firm also offers margin accounts and short selling capabilities for sophisticated investors. There is investing guidance available when you need it as well as 24-hour support. The best part? Lately, Fidelity has been on a mission to reduce the fees and expenses associated with being an investor.

Fidelity
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The bottom line: It’s not an overstatement to say Fidelity has something for every investor, with trading costs and account minimums that can’t be beat.

  • Full-service broker with a strong brand reputation
  • Extensive options for all investor types
  • Low or no fees and commissions on most products

Who should consider Fidelity

With much to offer, Fidelity is a great fit for many investor types. Beginner investors will appreciate the amount of guidance Fidelity offers to help you set a goal, create an investment strategy, and understand the benefits and risks of different asset classes. Once you’re ready to invest, Fidelity offers mutual funds with no minimum investment and no fees as well as no-fee brokerage accounts.

For index fund investors, Fidelity has four funds with 0% expense ratios and a roster of offerings that beat even low-fee giant Vanguard on price. Trading stocks or ETFs on the regular? Fidelity has low-cost trades, access to tons of research and a great platform for active traders. One company study found that even Fidelity’s bond prices are more competitive, saving investors an average of $14.55 per bond.

Fidelity fees and features

Current promotions

Get up to 500 free trades for two years when you fund an eligible account. The number of free trades is determined by the size of your deposit.

Stock trading fees
  • $4.95 per trade
Account minimum
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
  • Crypto-currency
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Custodial Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401k (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
Mobile appiOS, Android, Fire OS
Customer supportPhone, 24/7 live support, Chat, Email, 190 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases

Strengths of Fidelity

  • Low-cost trading. Considering its size and infrastructure, you might not expect Fidelity to offer a competitive commission rate of $4.95 per trade as well as no-commission trades on select ETFs. E-Trade and TD Ameritrade will cost you $6.95 per trade. Charles Schwab also offers $4.95 trades, but Fidelity edges ahead with lower margin rates for traders with large debt balances.
  • No-fee investing. The company made a bold move in 2018 by offering a handful of index funds with 0% expense ratios, no fees and no minimums.
  • Mutual funds. Fidelity offers more than 200 proprietary mutual funds, representing a diversity of asset classes and investment strategies. More than 100 of the firm’s funds currently have four- or five-star ratings (out of five) by Morningstar based on risk-adjusted returns. You also can access more than 10,000 competitor mutual funds, along with tools to help you screen funds according to features, ratings, returns, expenses and more.
  • Research and planning. When it comes to research, Fidelity hits the mark in multiple ways. As an asset manager, Fidelity’s global research is extensive. More than 400 analysts around the globe cover over 2,600 companies and generate tons of research. For the average investor, Fidelity offers information to help make stock trading decisions, build a fund portfolio and learn about IPOs. There are lots of tools and calculators for everyday financial planning as well.

Drawbacks of Fidelity

  • High minimums for new investor promotions. Fidelity offers between 300 and 500 free trades for two years when you open a new account with a minimum of $50,000 to $100,000. To be fair, these minimums are lower than those required for similar promotions from competitors such as Charles Schwab, E-Trade and TD Ameritrade, but it’s a hurdle for the average new investor.
  • Slow customer service. Overall, Fidelity gets fairly high marks for customer service, with its focus on investment guidance and education. But with a company this size, there are bound to be a few negative reviews. Fidelity’s tend to focus on the customer service and speed. Service representatives can be slow to respond to complaints, money transfers can take weeks, and many customer communications are sent through the mail, according to some customers’ comments.

Is Fidelity safe?

Fidelity uses sophisticated technology to safeguard client accounts and transactions. Accounts at Fidelity are encrypted with two-factor identification, requiring an extra step of replying to a text message when it comes to sensitive transactions. Voice recognition technology is used to authenticate your identity over the phone. Fidelity’s systems are under 24/7 surveillance, from security at local branches to monitoring transactions for identity theft and protecting Fidelity’s website with the industry’s strongest firewalls.

Fidelity accounts also are FDIC-insured for up to $250,000 and SIPC-insured for up to $500,000 per account.

Final thoughts

To be a successful investor, it helps to have the right tools. It also helps to understand exactly what you’re paying for so you don’t lose too much of your investment earnings to commissions and fees. Fidelity provides both to investors, which is meaningful for a company that’s been around for more than 70 years.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Phipps
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Melissa Phipps is a writer at MagnifyMoney. You can email Melissa here

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Investing, Reviews

Charles Schwab Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Charles Schwab has been known as a discount broker for decades, and its online brokerage outfit maintains that reputation. But don’t think just because you’re not paying a lot that you don’t get a lot. For a competitive trading fee, you’ll receive great customer service, solid execution, an easy-to-navigate website with a sophisticated trading platform, and a wealth of research and educational tools. It’s really hard to go wrong with this venerable broker.

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The bottom line: With competitive pricing and excellent tools, Schwab is a great choice for any level of investor.

  • Trading platforms and tools for every level of investor
  • Excellent customer service
  • Low trading fees

Who should consider Charles Schwab

Schwab is going to do right by any level of investor. Beginners should love its extensive educational resources and its responsive customer service, while advanced investors should love its sophisticated trading platform. All investors will love its competitive pricing, with the benefits of a full-service broker.

Cost-conscious investors should love Schwab not just for its trading fees but also for its research and plethora of commission-free ETFs and no-load mutual funds. Anyone looking for a complete experience at a bargain price will feel right at home here.

Charles Schwab fees and features

Current promotions

500 free trades with a qualifying net deposit of $100,000

Stock trading fees
  • $4.95 per trade
Account minimum
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $25 partial account transfer fee
  • $0 inactivity fee
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401k (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
Mobile appiOS, Android
Customer supportPhone, 24/7 live support, Chat, Email, 346 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases

Strengths of Charles Schwab

  • Competitive trading fees and no minimum: Schwab makes it easy for those with little coin to get started in the investing game. Schwab’s pricing at $4.95 per stock trade (and $4.95 plus $0.65 per contract for options) puts it right at the standard for low-cost full-service brokers. Plus, its $0 account minimum means you can get rolling with even less. That’s a solid deal for all the other extras Schwab provides, including research and a professional trading platform. Compare that pricing to Fidelity at $4.95 per trade, while TD Ameritrade, E-Trade and Merrill Edge sit higher at $6.95.
  • Extensive research and educational tools: Speaking of research, Schwab offers a lot of it. From market commentary to stock screeners, advanced charting to Schwab stock lists, the broker offers many resources that allow you to ferret out interesting stock ideas. All of that is aided by stock pages with news, press releases and SEC filings to help you with your primary research. You’ll also receive free research from Morningstar, Ned Davis, Credit Suisse, CFRA and others. It’s a wide range of well-regarded reports. Meanwhile, those just getting started will benefit from online courses and modules that get you up to speed on how to invest.
  • Customer service: Need someone on the phone at 3 a.m.? Schwab can handle that. The company offers phone service 24 hours a day, seven days a week. But if you don’t need that level of service, Schwab also offers web chat and email. Plus, while Charles Schwab is known for its discount online service, the company also has more than 340 branches around the U.S., so you can stop by for a full consultation. You really can interact in any way that works for you.
  • Low-cost funds: Schwab has done a lot over the years to make investing low-cost, and its current selection of exchange-traded funds (ETFs) and mutual funds follows that tradition. The broker offers more than 250 no-commission ETFs, and these funds have no early redemption fees. You won’t have to guess which funds are covered, either, as the broker provides an easily searchable list that helps you sort for the kind of fund you’re looking for and provides details on the expense ratio and performance.Schwab doesn’t stop there, offering around 7,300 no-load mutual funds. These funds are sold without a sales charge (otherwise known as 12b-1 fees). But Schwab makes mutual funds even more investor-friendly by offering more than 4,000 with no transaction fee. So these are all savings that can be rolled into your investments.
  • Sophisticated trading platform: Schwab’s basic trading platform is completely serviceable — offering smooth, no-frills order entry that works if you’re entering a one-off order or not trading frequently. But for advanced traders who need efficiency, Schwab also offers a more robust platform, StreetSmart Edge.StreetSmart Edge is available on the web or as a downloadable app, and it includes free streaming data, a customizable trading layout and tools. It also provides the ability to expand the platform to multiple monitors. The app provides a stream of CNBC, and an all-in-one trade ticket allows traders to enter multiple order types and securities in just one window. Real-time news and screeners allow you to hunt for profitable ideas, while real-time trading alerts let you move on an idea immediately.

Drawbacks of Charles Schwab

  • Difficulty qualifying for new account bonus: While many brokers offer a nice bonus for any new trader, with Schwab you’ll have to deposit $100,000 to get it. But then Schwab rolls out the red carpet, with 500 free stock or options trades that are good for up to two years. Still, for that kind of deposit, you can sign up for 100 free stock trades every month from Merrill Edge, though without options trades. However, there is a more modest bonus available: If you can get a friend to refer you to Schwab and you open a new account, you can pocket a $100 bonus.
  • Pricey foreign stock trades: Pricey stock trades might not be a deal breaker, but if this is a must-have for you, then you’ll be better off somewhere else. Schwab charges at least $100 or 0.75% of the principal, with no limit, on stock trades placed directly on foreign exchanges, and you won’t be able to place an online or automated phone order. It’s important to note that this pricing does not include foreign stocks traded on American exchanges. However, if you’re looking to buy a foreign stock on the over-the-counter market, you’ll need to cough up an additional $50 foreign transaction fee, though you can place these trades online or via automated phone order.

Is Charles Schwab safe?

Charles Schwab has been around since 1971 and numbers 11.5 million active client accounts. Plenty of investors trust Schwab because it’s done right by them, and they’ve entrusted the company with about $3.4 trillion in assets under management. The brokerage is a member of the Securities Investor Protection Corporation (SIPC), which protects investors’ assets up to $500,000 per account (including up to $250,000 in cash only) if the brokerage is unable to return the assets. Investors still can lose money in the market, of course, because those investments are subject to risk.

Final thoughts

For a very reasonable trading fee, investors receive the full gamut of research, customer service, trading platforms, low-cost funds and a well-organized web interface. While many brokers are trying, it’s difficult to beat the total package that Schwab offers investors, and it’s simply hard to go wrong.

Schwab ranks among the best of the full-service brokers, and its most comparable peers include Fidelity Investments, Merrill Edge and TD Ameritrade, though the latter two charge higher trading fees.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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