Robo-advisors have democratized sophisticated investment strategies, and one of their most powerful features for taxable accounts is automated Tax-Loss Harvesting (TLH). TLH is a strategy where an investment portfolio’s manager sells securities that have dropped in value (a loss) to offset capital gains realized from the sale of profitable investments. This lowers an investor’s current tax bill, saving them real money. The leading robo-advisors have turned this complex, manual task into a seamless, automated process.
Understanding the TLH Advantage
For high-net-worth investors or those with significant assets in taxable brokerage accounts, the tax savings from TLH can often outweigh the fees charged by the robo-advisor.
- How it Works: The robo-advisor monitors your portfolio continuously. If a security drops in value, it is sold, and the loss is realized. Immediately, the proceeds are used to buy a highly correlated but different security to maintain your asset allocation and market exposure. This is crucial to avoid violating the IRS wash sale rule.
- Goal: To maximize the usable tax loss (up to $\$3,000$ annually against ordinary income, with the remainder carried forward to offset future gains) without changing the risk profile of your portfolio.
Top Robo-Advisors for Automated Tax-Loss Harvesting
When choosing a robo-advisor for TLH, consider the management fee, the minimum account balance required to unlock the feature, and the sophistication of the strategy.
1. Betterment
- The TLH Pioneer: Betterment was one of the first to offer automated, daily TLH, which they call Tax-Coordinated Portfolio management.
- Minimum Requirement: The TLH feature is available on all their standard investing accounts, regardless of balance.
- Strategy: Betterment’s TLH algorithm is highly aggressive, scanning for opportunities daily. They use a wide variety of replacement ETFs to minimize the risk of a wash sale violation. Their system also automatically directs new deposits to under-allocated assets, a feature they call Tax-Efficient Rebalancing.
- Fee: A competitive $0.25\%$ annual fee on the basic Digital plan.
2. Wealthfront
- Sophisticated System: Wealthfront is often regarded as having the most advanced TLH offering, especially for larger portfolios. They call their service Tax-Loss Harvesting.
- Minimum Requirement: Starts harvesting at just $\$500$.
- Strategy: Wealthfront goes beyond simple TLH with Stock-Level Tax-Loss Harvesting (for accounts over $\$100k$), which individually analyzes and harvests losses on the stocks within a US-based ETF. For high-net-worth clients (over $\$500k$), they offer Risk Parity and Smart Beta strategies, further optimizing tax efficiency.
- Fee: $0.25\%$ annual fee.
3. Schwab Intelligent Portfolios Premium
- Comprehensive Advice: While Schwab’s basic robo-advisor is free, the Premium tier includes access to financial advisors and more sophisticated features, including TLH.
- Minimum Requirement: A high barrier of $\$25,000$ to access TLH and the advice component.
- Strategy: Schwab employs a more traditional TLH approach, monitoring accounts and realizing losses periodically. Their main competitive advantage is the integration of human advice with the automated tools.
- Fee: A monthly advisory fee of $\$30$ plus a one-time $\$300$ planning fee.
Key Takeaway for Millennials
For younger investors with taxable accounts, starting early with a TLH-enabled robo-advisor like Betterment or Wealthfront is a smart move. Although the realized tax savings may be small in the early years, the losses can be banked and carried forward for decades, reducing the tax burden substantially when the portfolio eventually generates large capital gains.
