Tax Loss Harvesting

What Is Tax-Loss Harvesting?

You intentionally sell an investment in taxable accounts at a loss in order to:

  1. Offset realized capital gains

  2. Reduce ordinary income (up to annual limits)

  3. Carry unused losses forward indefinitely

You then usually reinvest immediately into a similar (but not “substantially identical”) investment, so your portfolio remains invested.

TLH Matters in Retirement

In accumulation years, TLH is often nice-to-have. In retirement, it becomes more strategic because losses can offset:

  • portfolio rebalancing gains,

  • home-sale related gains (if applicable),

  • concentrated stock diversification,

  • future taxable withdrawals,

  • capital gain harvesting,

  • and potentially reduce IRMAA exposure indirectly.

Most Important Years for TLH in Your Plan

2027–2036

This is likely your prime TLH window because you will likely have:

  • lower earned income,

  • active taxable withdrawals,

  • Roth conversions,

  • and still meaningful taxable investments.

These years are ideal for:

  • harvesting losses during volatility,

  • offsetting capital gains,

  • and controlling AGI.

Especially Important During Early Retirement Bear Markets

You specifically asked about:

equities down 25% for 3 years early in retirement.

That environment is precisely where TLH becomes highly valuable.

Example:

  • market drops,

  • taxable account declines,

  • you harvest losses,

  • later markets recover,

  • future gains can be offset.

This improves after-tax recovery efficiency.

Assets Most Suitable for TLH are broad Equity ETFs / Index Funds.

Examples include:

  • total market funds,

  • S&P 500 funds,

  • international index funds.

These are ideal because:

  • temporary volatility is common,

  • easy replacement funds exist,

  • low transaction friction.

Tax-loss harvesting (TLH) can be a meaningful secondary optimization tool in one’s plan — not as valuable as Roth conversion strategy, but still potentially worth tens or even hundreds of thousands of dollars over a multi-decade retirement.

TLH should be viewed as a volatility-driven tax-management tool that complements withdrawal sequencing and Roth conversion planning.

It becomes especially valuable because:

  • you will likely have ongoing taxable brokerage exposure,

  • you may realize gains strategically,

  • and early retirement sequence risk increases the probability of temporary market declines.

Important Principle

Tax-loss harvesting only applies to taxable brokerage accounts.

It does NOT apply inside: IRAs, Roth IRAs, 401(k), 403(b), HSAs, 529s.

Michael Wei