If you want to take advantage of tax-loss harvesting, look into robo advisors like Schwab, Betterment, Wealthfront, Personal Capital, and SigFig.
ByBecca Stanek
Updated Jul 6, 2023
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Tax-loss harvesting can benefit your portfolio but it isn't necessarily easy to DIY. That's where a robo advisor can come in handy. Many robo advisors out there automate tax-loss harvesting through algorithms, doing the hard work for you by identifying losing investments to sell to offset capital gains or taxable income, and then using that money to buy a comparable asset to maintain your portfolio's desired asset allocation.
Read on to learn about some of the best robo advisors for tax-loss harvesting, including details on which accounts are eligible for the feature and how exactly it works.
| Wealthfront | Schwab Intelligent Portfolios | Betterment | SigFig | |
|---|---|---|---|---|---|
Minimum investment | $500 | $5,000 | $0 | $100,000 | $2,000 |
Fees | 0.25% | 0% | 0.25% | 0.89% | 0%-0.25% |
Accounts eligible for tax-loss harvesting | Any taxable accounts | Taxable accounts of clients with $50,000+ in invested assets who have enrolled for the service | Any taxable accounts | Taxable accounts of clients with $100,000+ in invested assets | Any taxable accounts of clients who sign up for a managed account |
Wealthfront offers tax-loss harvesting on any taxable accounts, with no additional minimum investment needed to access the feature aside from the robo-advisor's base account minimum of $500. Tax-loss harvesting is not offered for retirement accounts like 401(k) plans or IRAs (this is par for the course, as it won't work with these accounts), nor does the robo-advisor recommend it for 529 plans.
With Wealthfront, tax-loss harvesting is done by selling any exchange-traded fund (ETF) that has declined in value at a loss and then replacing it with another highly correlated ETF. While the selected ETFs have highly correlated returns and comparable volatility and expense ratios to the ETFs being sold, they track different indices so as to avoid triggering the wash-sale rule (an IRS rule that prohibits selling an investment at a loss and then repurchasing it within 30 days for tax purposes).
The platform's tax-loss harvesting approach results in the portfolio's risk and return profile remaining the same. Plus, losses can offset any typical investment income or gains, which can result in tax savings that can then be reinvested and compounded over time.
Schwab Intelligent Portfolios does offer tax-loss harvesting, but only to those with invested assets of at least $50,000 in their account, which is a much higher minimum than the $5,000 required to open an account. Additionally, clients who are interested in receiving this service must enroll to access it.
Like many robo-advisors, Schwab's tax-loss harvesting aims to lower taxable income and offset capital gains by selling any ETF that's fallen a certain amount below the original price paid for it and then replacing it with another ETF that is within the same asset class. Schwab Intelligent Portfolios automates this service, with its algorithm monitoring portfolios on a daily basis to look for possible tax-loss harvesting opportunities.
Betterment's automated Tax Loss Harvesting+™ is available to any of its clients, with no additional minimum needed to access the feature. The robo-advisor's algorithm checks regularly for harvesting opportunities in an effort to offset investment income and gains while maintaining the portfolio's asset allocation and anticipated returns.
Beyond the basics, Betterment notes that its Tax Loss Harvesting+™ tool offers a number of extras, such as protecting not just harvested losses but also any customer-realized losses, as well as ensuring IRA deposits won't ruin harvesting by causing a wash sale. Plus, Betterment advertises no extra trading costs to harvest losses and no short-term capital gains tax.
Personal Capital offers tax-loss harvesting and other tax-optimization tactics across the board — though you'll need to meet the robo advisor's steep $100,000 to get started. Unlike many robo advisors, which focus on ETFs, Personal Capital provides tax-loss harvesting at a stock level, selling depreciated stocks at a loss and replacing them with an alternate security.
However, potential clients should be aware that aside from its steep minimum, Personal Capital also charges a comparatively high annual fee of 0.89%. That being said, not everything is automated with Personal Capital like it is with many robo advisors — clients will get access to a live financial advisor (with a dedicated advisor assigned for some client tiers).
Any clients who meet SigFig's $2,000 minimum investment requirement to open a managed account will have access to tax-loss harvesting through the platform. For accounts in which tax-loss harvesting is activated, SigFig can choose to sell losses to offset any gains in an attempt to lower the client's tax liability.
The platform's tax-loss harvesting algorithm scans portfolios by asset class. It will initiate a swap when it has identified that it will provide enough realizable losses, and when losses are at a level at which they can cover any trading costs. The algorithm is designed to avoid triggering the wash-sale rule.
Tax-loss harvesting is a technique to help investors minimize the taxes they may owe on any capital gains or taxable income. This is done through selling an investment that has dropped in value since it was purchased. That loss is then used to lower capital gains tax and offset up to $3,000 in taxable non-investment income.
From there, the funds that were recouped from selling the investment are used to purchase another asset that is similar but not identical, thus allowing you to maintain your target asset allocation and risk and return profile.
As you can see from the lineup above, the answer is yes. Many robo advisors do offer tax-loss harvesting, but keep in mind that not all do. If tax-loss harvesting is an important feature for you, make sure the robo advisor you choose offers it.
Robo advisors have an algorithm that automatically sweeps portfolios on a periodic basis to look for tax-loss harvesting opportunities. When an asset is sold for a higher price than it was purchased (in other words, a realized gain is made), the platform can select a losing investment to sell off.
Robo advisors' algorithms also typically have parameters in place to do this in such a way that avoids triggering the wash-sale rule, an IRS regulation that prevents an investor from repurchasing an investment that is "substantially identical" to one that was sold within 30 days.
The key difference between tax-loss harvesting with a robo advisor versus a financial advisor is that in one scenario an algorithm does it, while in the other, a human does. Traditional financial advisors typically can't do tax-loss harvesting on a routine basis because of how time-consuming and labor-intensive it can be. Plus, it may be harder for a human advisor to see all of the possible tax-loss harvesting opportunities that an algorithm may be able to spot.
However, a financial advisor does have the advantage of being able to take a more holistic view of your financial situation than a robot could. Also keep in mind that a robo advisor's capability and performance may vary depending on the algorithm used.
It depends. Tax-loss harvesting may be helpful if you are investing in a taxable account, and the IRS allows you to offset capital gains with losses and to reduce up to $3,000 from your ordinary income. It also may be worthwhile if you are planning to leave money to heirs or donate to charity. In these circumstances, tax-loss harvesting could help to offset capital gains.
On the other hand, tax-loss harvesting might not be worth it if you're in a lower tax bracket, or expect your future tax bracket to be higher than your current one. It also might not be the right move if you plan to withdraw a large portion of your taxable assets within the next year or if there's any risk of triggering the wash sale rule.