Tax Loss Harvesting
Andrew wrote in, “Hey Brad – I love the newsletter! My 1% this week was doing some tax-loss harvesting with the market being down. I hadn’t ever done it before, so I read up on it a bunch and traded my VTI losses of $2.6K and then bought VOO. At my 20% effective tax rate, that saves me about $500 at tax time. After a painful tax year, I am happy to find $500 in tax savings!”
I can’t give financial or tax advice here in the newsletter, but tax loss harvesting is something I’m considering with the market down substantially.
I found this ‘Complete Guide to Tax-Loss Harvesting with ETFs’ on Investopedia that gives a great overview of the concept.
I know Vanguard makes it quite easy to do ‘specific identification’ when I go to sell mutual funds, and I strongly suspect all the major platforms make it easy to do this with funds and ETFs.
You can sell and lock in the tax loss but the key is that you can’t immediately turn around and buy the same security right away. As the article states:
“The wash-sale rule dictates when a tax loss can be harvested. Specifically, when you sell a security at a loss, you cannot purchase one that is substantially identical to replace it within 30 days before the sale and 30 days after it’s complete. If you attempt to include the loss on your tax filing, the Internal Revenue Service (IRS) will disallow it, and you won’t receive any tax benefit from the sale.”
The key then becomes finding out what to buy that isn’t “substantially identical” because ideally you don’t want your money out of the market for 30 days waiting around for that identical security.
This is where you need to do your own research, but like Andrew, I plan to sell the “Total Stock Market” fund/ETF and purchase the S&P 500 fund, which I believe are not ‘substantially identical’ and therefore would allow the tax loss I harvested to be deducted or offset against my capital gains.
The Simple StartUp Summer Challenge
Great news: Rob Phelan just announced the return of The Simple StartUp Summer Challenge group and it is open for registration. This is a hybrid course running 6/22 – 8/3 with 2x weekly live webinars, email access to Rob, plus a copy of The Simple StartUp workbook and all the online course content.
The Simple StartUp Summer Challenge group is a six-week program to help aspiring 10-18 year old entrepreneurs figure out a business idea, and then turn it into a profitable venture. Rob Phelan is the host and he will guide your child through all the steps to getting started through video lessons, live webinars twice a week, and a thriving exclusive online community of current and past Simple StartUp participants.
The time commitment each week is flexible and all the lessons can be completed at your own speed.
How to Learn a Language
I found this great Twitter thread from Jack Raines on how to best learn a foreign language and wanted to link it up here in the FI Weekly. As I’ve mentioned a few times, I’m trying to learn Japanese, and while I love the Pimsleur app, the progress has been much slower than I hoped.
As Jack said, “No one knows how to actually learn a foreign language. I have been aggressively studying Spanish over the next month before I fly to Spain. Wanted to share a breakdown of what I’ve been doing, and how it differs from school.”
My biggest takeaway was the website Italki where you can pay a fairly nominal rate to spend an hour speaking with a native speaker of the language you’re studying. This will supercharge the speed you learn the language!
ChooseFI Community Taking Action This Week
- Travis said, “My improvement in the past week was that I got a raise starting with my April paycheck last Friday. With that raise we were able to increase my wife’s 401k contributions. We are now on track to max all of our tax-advantaged accounts this year, for the first time ever. (Two 401k’s, two IRAs, and a family HSA). This is a huge milestone that I have been looking forward to for years. Now thanks to your email I am considering maxing ‘I Bonds’ this year too. Thank you guys for breaking me out of my drift state so I could start making improvements again!”
- Jennie said, “Very excited to share this week’s 1% better is MUCH better than expected! Backstory: About 6 months ago my director found that some on my team were making less than me as an assistant nurse manager. I subsequently applied for a staff position which would be far less stress but actually pay more. My director wasn’t having it and negotiated a raise for me of about $6/hr – a huge and unexpected jump! I put the entire amount toward my 401k. This past Friday we got word that all the nurses at my facility were getting another market pay increase. Mine was another 11% ($5/hr)!! Since we’ve been downsizing at home with now 2 out of 3 kids living on their own, we don’t “need” the extra pay so again 100% of the raise is going to 401k which will max it out for the FIRST TIME EVER!! Next year I can start making catch up contributions so it’s my goal to be able to max those too. Thanks for the inspiration!
- Mike said, “My 1% better is more like 100+% better.. but not for me.. for my sister! I used all the knowledge I’ve gained over the years listening to the ChooseFI show and all the other personal finance blogs/podcasts, and I got my sister to open up a Vanguard Roth IRA and brokerage account. Not only that, but at the time it was opened, she was able to max out the 2021 Roth IRA contribution limit with the cash she had been storing, purchase VTSAX, and also contribute enough in her brokerage account to purchase VTSAX in that account as well! This is huge and now she is more understanding about how investments work, what they’re used for, why it’s important to have an emergency fund, and how to put everything else after the emergency fund into investments. She was amazed I knew how to do this, and I really have to thank you and Jonathan and the ChooseFI community for all the lessons and resources. It is complicated for people who don’t know how to this, but now she knows what she is doing and is gonna be the start of ensuring she is financial independent at a very young age. YAY!”
- Austin said, “My 1% better this week is that I am getting the chance for a short term position with my job where they will be sending me to different areas of the country. With that I’m going to be able to save 4-6 months of rent/utilities costs by putting all my things into to storage. Not to mention that this will be great for my own career development! Glad I was in a position to say yes!”
- Alyssa said, “My husband and I refocused on financial independence in January, and have been trying to optimize our finances. Recently I took $13.5K from our somewhat overinflated emergency fund and paid off the remaining balance on my student loan. Then I set up the $2000 per month I used to pay on the loan to be automatically deducted from our paychecks to go into a tax deferred account, set to invest in VTSAX. Feels great to decrease our cash position, finally finish that huge debt (started as $100K), and automate even more retirement savings. Our savings rate is now 51%!! Thanks for all the great content you provide to help us on this journey!!”
- Bruce said, “My 1% better is something I did not do, which is leaving our investments alone for another day when the market continues to be somewhat unsatisfactory at the moment. We are still investing on a monthly basis and intend to let dollar cost averaging work for us. Your podcast and this newsletter really help to stay focused on preparing for retirement in about 9 years, especially as our “on-paper” loses continue to increase. Thanks for all of your work at ChooseFI. Cheers!”