Lump sum into Wealthfront to offset large capital gains?

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friskies
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Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

I will be receiving about $125k in capital gains in the next years due to selling a business last year. My plan is to lump sum what I already received of the sale - about $500k after taxes - into Wealthfront. Seems scary with almost all indexes at all time highs, but the idea is that if the market tanks, I can reduce my tax burden with tax loss harvesting.

I do realize the 0.25% fee is substantial at $500k ($1,250 per year) but I hope to generate enough tax losses to offset that fee. After I stop receiving the yearly payments I plan to move away from Wealthfront because I won't have the large capital gains to offset the tax losses with any more. And yes, I will be disabling Wealthfront's direct indexing to avoid being locked in when I want to move away from Wealthfront.

What do you think of this strategy?
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retired@50
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by retired@50 »

If it were me, I'd learn how to TLH myself and save the $1,250 fee.

Start here: https://www.bogleheads.org/wiki/Tax_loss_harvesting

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riverant
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by riverant »

You can TLH yourself. It just means selling lots at a loss and then buying a similar but different security

I’ll add that if you truly think the market will tank, buying high just to lose money and avoid taxes doesn’t seem optimal. Since the market is usually near all time highs, I don’t buy this sort of market timing and rather prefer dumping all my money in ASAP. In my opinion, you’ll achieve the best result, but for the wrong reasons.
Last edited by riverant on Sat Jun 12, 2021 10:46 am, edited 1 time in total.
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by Gill »

Puzzled. You plan to make this investment with the hope that you will have capital losses to offset your capital gain? Why do you need Wealthfront to do this for you. Invest on your own with the hope you will have more gains, not losses.
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friskies
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Moving from Schwab Intelligent Portfolios to Wealthfront personalized investment account

Post by friskies »

[Thread merged into here --admin LadyGeek]

With the new Wealthfront personalized investment account what stops me from moving from Schwab Intelligent Portfolios (SIP) - using in-kind transfer - keeping the same positions? The reason would be to get rid of SIP's cash drag and to consolidate my portfolios. I assume all assets in SIP will be available in Wealthfront and Wealthfront will only sell and replace when there is a tax los harvesting opportunity. And yes, I will be disabling direct indexing. Is there anything I am not considering?
wootwoot
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by wootwoot »

With 500k you can use direct indexing. Wealthfront should find many more opportunities for TLH with direct indexing, offsetting the fee.
luckyducky99
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by luckyducky99 »

I agree with others that this is kind of silly.

If things go down, you can tax loss harvest yourself, it's not hard. But really you should prefer stocks to go up. More money minus some taxes will turn out to be more than less money minus less taxes.

Also consider the problem of lock-in. If you go to WF and use their security-level TLH product, you will have to keep paying the fee unless you move your assets out of WF, but if you do leave WF you will have a whole messload of individual stocks that will be a huge hassle to manage.
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David Jay
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Re: Moving from Schwab Intelligent Portfolios to Wealthfront personalized investment account

Post by David Jay »

friskies wrote: Sat Jun 12, 2021 10:47 amWealthfront will only sell and replace when there is a tax loss harvesting opportunity.
Are you confident that this is the case? That doesn't sound like what I recall ("recall" being what it is at my age...). I thought they would move holdings into their preferred portfolio.
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livesoft
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by livesoft »

Lump-sum investing makes it trivial to do tax-loss harvesting yourself. You would have only a single lot to look at. You could even have your brokerage text or e-mail you an alert for some predetermined loss. It would take one single transaction to do the TLH deed.

I can see how high income folks contributing bi-weekly or monthly to a taxable account a large amount might be intimidated by looking for the occasional red number in their portfolio and would use a crutch like Wealthfront.

So I think for you to use Wealthfront in the circumstances you describe would be idiotic.

If you tell me what you buy and when you buy it -- either here or in a PM --, then I will set up an alert and send you a PM when you should tax loss harvest. I want you to get the point that setting up the alert is much much much more trivial than opening a Wealthfront account.

Added: I bought Total US Stock Market Index way back before March 2009 and did a single TLH into Large-cap Index in 2009. It has NEVER been at a lower price since and never needed any more TLH exchanges. Just think if Wealthfront existed then and I did what you are suggesting: I would have wasted $1250 the first year and wasted increasing amounts for next 11 years and more going forward.
Last edited by livesoft on Sat Jun 12, 2021 12:05 pm, edited 1 time in total.
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bradinsky
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by bradinsky »

OP,
Certainly not promoting Schwab Intelligent Portfolios, but accounts over $50K are eligible for TLH. You must enroll for that service. Your switch would save a little because of the cash drag, but probably no more than 8 basis points. I read a review somewhere that estimated the cash drag at SIP was equivalent to about a .33% fee. You'd be much better served as a DIY investor. Good luck!

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friskies
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

livesoft wrote: Sat Jun 12, 2021 11:00 am If you tell me what you buy and when you buy it -- either here or in a PM --, then I will set up an alert and send you a PM when you should tax loss harvest. I want you to get the point that setting up the alert is much much much more trivial than opening a Wealthfront account.
I agree tax-loss harvesting doesn't seem hard in theory, but in practice, eg. where do I find pairs for funds to swap with? Let's take a random fund in my SIP account: PRF. What would you swap this with? And when would you sell? At -5%, -10%? What if you sell at -10% and it dips another 10%? Seems like you would be trying to time the market with TLH. Additionally, I now have to monitor my account on a daily base, unless I set alerts for each fund when it dips -5%, -10% etc.
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by LadyGeek »

friskies - In order to provide appropriate advice, it's best to keep all the info in one spot. I merged your update back into the original thread.

If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to the original thread.)
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friskies
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

TJat wrote: Sat Jun 12, 2021 10:42 am You can TLH yourself. It just means selling lots at a loss and then buying a similar but different security
I’ll add that if you truly think the market will tank, buying high just to lose money and avoid taxes doesn’t seem optimal. Since the market is usually near all time highs, I don’t buy this sort of market timing and rather prefer dumping all my money in ASAP. In my opinion, you’ll achieve the best result, but for the wrong reasons.
I am not trying to time the market because I would lump sum ASAP. Fact that I can potentially tax-loss harvest makes it all the more efficient.
livesoft
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by livesoft »

friskies wrote: Sat Jun 12, 2021 11:57 am
livesoft wrote: Sat Jun 12, 2021 11:00 am If you tell me what you buy and when you buy it -- either here or in a PM --, then I will set up an alert and send you a PM when you should tax loss harvest. I want you to get the point that setting up the alert is much much much more trivial than opening a Wealthfront account.
I agree tax-loss harvesting doesn't seem hard in theory, but in practice, eg. where do I find pairs for funds to swap with? Let's take a random fund in my SIP account: PRF. What would you swap this with? And when would you sell? At -5%, -10%? What if you sell at -10% and it dips another 10%? Seems like you would be trying to time the market with TLH. Additionally, I now have to monitor my account on a daily base, unless I set alerts for each fund when it dips -5%, -10% etc.
I think you have a severe misconception of the process.

First, one does NOT need to monitor on a daily basis because if there was no need to TLH yesterday only a big market down movement would mean one should look. There is probably no need to look unless one sees a headline with "Worst" in the title. You can practice now before even buying anything.

Second, PRF appears to be just a large-cap US index fund. As such any other large-cap US index fund that follows a slightly difference index will work. Examples might be VIGAX, VTSAX, VLCAX, VTI, ITOT, and on and on. My recommendation is to pick up a TLH partner BEFORE ever investing in any ticker symbol in a taxable account for the first time. That way, you don't have to look around when you want to TLH.

Third, All equities are reasonably correlated, so it would be unusual for one broad market index fund such as PRF to behave differently than other index funds in your portfolio. Thus, since one is not going to have more than about 5 different equity funds in one's portfolio, setting up alerts is trivial. One can set up a relative-change alert. For instance, if an equity ETF ticker symbol drops by more than 2.5% since its previous close works for me.

Fourth, if the replacement fund dips, then TLH it. It is market timing only if you do not buy replacement shares all the way down to the bottom.
Added: I bought Total US Stock Market Index way back before March 2009 and did a single TLH into Large-cap Index in 2009. It has NEVER been at a lower price since and never needed any more TLH exchanges. Just think if Wealthfront existed then and I did what you are suggesting: I would have wasted $1250 the first year and wasted increasing amounts for next 11 years and more going forward.
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friskies
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

Thanks for the insights. What about liquidity? When you sell it take a couple of days until the trade has been settled so you cannot immediately buy something else because of lack of cash during those days. Doesn't that introduce risk?
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by livesoft »

friskies wrote: Sat Jun 12, 2021 12:30 pm Thanks for the insights. What about liquidity? When you sell it take a couple of days until the trade has been settled so you cannot immediately buy something else because of lack of cash during those days. Doesn't that introduce risk?
This is false. As long as the sale proceeds stay within the same account, the money is IMMEDIATELY available to buy something else. One does NOT have to wait for settlement --- unless one is free-riding. Look up free riding because you will not be doing that anyways.
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afan
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by afan »

The big capital gain you realized appears to have nothing to do with the TLH plan, or am I missing something?

If the gain took place this year, then you would need to realize losses this year to reduce the taxes. But if you put the proceeds with a manager who will TLH for you, your basis would be the 500k you gave them. You would need losses of this much to eliminate the taxes.

If a manager TLH's on your behalf after the close of this year, you don't get those taxes back.

If your goal is simply avoiding capital gains taxes in the future, then don't sell. Or TLH. But you don't need to pay anyone to do it.
As others have pointed out, you can TLH yourself. For free.
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by investorpeter »

This seems like another example of the "tax loss harvesting" tail wagging the "long-term investing" dog. To hope for capital losses so you can take advantage of tax-loss harvesting is not the right way to think about this. Even to think about tax loss harvesting as "making lemonade out of lemons" situation is not entirely accurate because you are lowering your cost basis, so you are increasing the amount of capital gain tax you will pay in the future. And if I had to guess, I would guess over the next several years the capital gains tax rate is going up before it goes down.

It seems to me that TLH is being marketed as a gimmick to entice people into signing up for "smart portfolio" products. TLH can be useful up to $3000 for reducing income, or in the situation where you already have a large capital gain locked in, and an existing capital loss available to harvest. But for most long-term investors invested in index funds, the value of TLH will decrease significantly over time because over the long-term, your older lots will have appreciated significantly so will not have any losses to harvest, and these lots will constitute the majority of the value of your portfolio. If you are still contributing over time, you can tax loss harvest some of those newer lots, but those lots represent a smaller and smaller proportion of your portfolio.

Personally, I wouldn't consider TLH as a reason to transfer my funds to Wealthfront or similar service. During the first few years, it may seem like there is a lot of TLH occurring in your portfolio that is saving you money, but it is questionable whether it actually is, and over time, all of that harvesting will just become noise relative to the overall size of your portfolio.

Having said that, it is worth familiarizing yourself with the idea of TLH, and to have an alternative substitute in mind when the situation arises, but its not something that is worth paying 0.25% for. The 0.25% is taken out of your total portfolio, while the TLH only benefits your recent lots.
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by livesoft »

investorpeter wrote: Sat Jun 12, 2021 2:39 pm.... Even to think about tax loss harvesting as "making lemonade out of lemons" situation is not entirely accurate because you are lowering your cost basis, so you are increasing the amount of capital gain tax you will pay in the future.
Well, one can avoid your scenario of increasing the capital gains tax in a few ways:
1. Die.
2. Give appreciated shares held long term to your Donor Advised Fund or other charity of your choice.
3. Give appreciated shares to anyone and let them pay any capital gains taxes
4. Have taxable income low enough that one has a 0% long-term capital gains tax rate
5. Offset gains with harvested losses and especially carryover losses until the previous 1 to 4 happen.
Having said that, it is worth familiarizing yourself with the idea of TLH, and to have an alternative substitute in mind when the situation arises, but its not something that is worth paying 0.25% for. The 0.25% is taken out of your total portfolio, while the TLH only benefits your recent lots.
Yep. :sharebeer
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123
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by 123 »

Should you be considering "Direct Indexing" with Wealthfront you should be aware that you could end up holding hundreds of individual stocks (and potentially multiple lots of many) and that it may be a significant tax preparation burden to hold it as well as to get out of it. Yes the transaction data will likely be available as a download/import but the person preparing the return likely needs to confirm that everything worked as expected. That might add (considerable) extra expense if you use an outside tax preparer.

Also note that if you, or a spouse, hold securities outside of Wealthfront you need to consider, review, and evaluate the impact of your other securities (including automatic reinvestments) on potential instances of the "wash sale" rule.
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by placeholder »

livesoft wrote: Sat Jun 12, 2021 12:16 pm Second, PRF appears to be just a large-cap US index fund. As such any other large-cap US index fund that follows a slightly difference index will work. Examples might be VIGAX, VTSAX, VLCAX, VTI, ITOT, and on and on. My recommendation is to pick up a TLH partner BEFORE ever investing in any ticker symbol in a taxable account for the first time. That way, you don't have to look around when you want to TLH.
It's a fundamentals index not cap weighted but using a regular index would certainly be safe in my opinion although the equivalence might not be where the op wants.
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friskies
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

123 wrote: Sat Jun 12, 2021 3:35 pm Should you be considering "Direct Indexing" with Wealthfront you should be aware that you could end up holding hundreds of individual stocks (and potentially multiple lots of many)
Yes, I definitely will be switching off Direct Indexing.
124 wrote: Sat Jun 12, 2021 3:35 pm if you, or a spouse, hold securities outside of Wealthfront you need to consider, review, and evaluate the impact of your other securities (including automatic reinvestments) on potential instances of the "wash sale" rule.
For that reason all IRAs will go into a single target date fund + will add spouse to Wealthfront.
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friskies
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

afan wrote: Sat Jun 12, 2021 2:18 pmThe big capital gain you realized appears to have nothing to do with the TLH plan, or am I missing something?
I sold a business, received a lump sum of 500k + additional yearly pay-outs of 125k.
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friskies
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by friskies »

investorpeter wrote: Sat Jun 12, 2021 2:39 pmTLH can be useful up to $3000 for reducing income, or in the situation where you already have a large capital gain locked in, and an existing capital loss available to harvest.
As stated above in my original post I will be receiving 125k capital gains per year in the future. So I can deduct up to that amount in TLH.
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Re: Lump sum into Wealthfront to offset large capital gains?

Post by wetgear »

I think you might be a little too focused on a small part of your portfolio strategy. While TLH can be beneficial it won't offset what you are paying in fees. You noted one fund you hold and it has an unnecessarily high ER for what it provides, if the rest of your portfolio has similar fees and you add a management fee on top of that you are wasting considerably more money each year than you could save with TLH. Before getting laser focused on TLH try to sort out your overall strategy as there is more money to be made/saved there. If you need help you can post a portfolio review request here (use the format listed at the top of this forum).
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