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Tax-loss Harvesting, Taxable Account, and Retirement Accounts

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  • Tax-loss Harvesting, Taxable Account, and Retirement Accounts

    After aggressively paying off student loans in December, I have been able to divert some funds toward my taxable account with the hopes of tax loss harvesting in the future. As of now, the account only holds two Vanguard ETFs (VOO, VEU); however, my 403b contains many of the funds (Vanguard TSM, TISM, REIT, Total Bond Market, TIPS) that could be interpreted as tracking the same/similar indices and generate a wash sale. I have considered opening an account with fun money at Wealthfront or Betterment , but both also use assets that could conflict with my 403b (contributions are monthly, so there is no 30 day period where the similar fund is not purchased).

    Is the effect of tax loss harvesting significant enough for a taxable account that I should convert the 403b funds to a target date fund? .

  • #2
    VOO and VEU are not substantially identical to Vanguard TSM and TISM by even conservative interpretations.


    • #3
      Yes you should look up the specific index ie: S&P500 or CRSP US Total Market etc for each fund.


      • #4
        The IRS issued Revenue Ruling 2008-5 almost ten years ago. That for the first time include IRA accounts and only IRA accounts explicitly in wash sale considerations. In those subsequent 10 years they have had ample opportunity to extend this to other tax-advantaged accounts. Thy have not done so or even indicated an intention to do so.

        While there are those who take the position that this must include all accounts including all tax-advantaged accounts. I do not. There are significant differences in how the assets in the trust of a qualified plan are treated compare to those of an IRA.

        The account owner of an IRA has full control on what precise date to buy securities. Also, they typically have available to them all the securities offered by their custodian. If their custodian doesn't offer the investment they want, they can change providers anytime they want. This is the exact same freedom they have in taxable investments. Hence the IRA inclusion is wash sale rules.

        The account owner of a qualified plan does not have control over the precise date securities are purchased on their behalf. They may elect to make employee deferrals every pay period, but the employer and/or administrator have full control of the actual purchase date. Further, they have no control of when employer contributions are made or when bonuses are paid. Finally, the investments available to them are limited to those investment options selected by the plan. The have no ability to change these options or the provide of the investments. Only the employer has that control.

        Now before your say it. Yes, brokerage windows do alleviate some but not all of the limitations presented. However, very few plans offer brokerage windows and even less participants avail themselves of the extra-cost option.

        I feel comfortable with taking the position that there are no wash sales caused by transactions in qualified plans. Even if the IRS were to take such a position, it is very likely that like Revenue Ruling 2008-5, it would only apply prospectively.