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VIDEO: Tax Loss Harvesting for Railroaders



Transcript:

If you want to turn your lemons into lemonade from your stock losses, watch this video. Welcome everyone to the Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors. And today we're going to talk about an exciting topic, tax loss harvesting. Basically, what we're talking about is we have some losers in our portfolios, how can we turn those around and take advantage of those when it comes to paying taxes? So I'm going to walk through the steps here. And this is only inside of taxable accounts. This has nothing to do with IRAs or 401Ks, because there's no capital gains features taxes inside those retirement accounts. So this is taxable accounts. So why do we want to do this? So through tax loss harvesting, you can increase your return on your taxable accounts. Some [inaudible] set up where around 1% a year on your return in your portfolio. So that's very significant.

So when can we do it? When do you want to do tax loss harvesting? And people say, "Oh, year end tax losses." No, it's done year round. So take example here in 2020, if you're watching this video. The S&P 500 was down 34% at one point. Now it's down about 10%. So there was an opportunity there to do some tax loss harvesting and take advantage of that. So it's a year round process. It just isn't an end of year exercise. So how do we do it?right? You have an asset in your portfolio, a security, you sell the loser and you replace the loser with something that is like the instrument that you just sold. Not exactly the same, because you're going to have IRS issues. They're not going to allow that. So you cannot sell the Vanguard S&P 500 and replace it with the BlackRock S&P 500 fund, just to give you an example. Just because you switch funds it's still the same asset. They're tracking the same index.

 And also, it's important, there's a 32 day wash rule so you can't say, "Oh, I sold my stock," and then next week I'm going to re-buy the stock, or the next day I'm going to buy the stock. That's not allowed. You have to wait 30 days. So that's why you replace it with something that kind of looks like it but isn't it. So you have the 30 day wash rule. So let's go through an example, right, see if I can walk you through this. So let's say you have the S&P 500 ETFs, and there will say their Vanguard ETFs. And the market's down. I said it was down 34%. So it's going down and you say, "Well, I have this in taxable account. I'm going to sell the S&P 500 ETF VOO in Vanguard. But what I'm going to do is I'm going to buy the Russell 3000. The S&P 500 is the 500 largest capitalized stocks in the country. And the Russell 3000 is the 3000 of the largest capitalized stocks. So they track each other, but they are not exactly the same because this is 3000 stocks, that's only 500 stocks.

 All right, so I'm going to sell the Vanguard 500 index and I'm going to buy the Russell 3000 VTAHR and complete that transaction. So that will be a tax harvesting event there. You can also do that with some of your railroad stock also. You could sell one class one railroad and by another class one railroad, if you wanted to do that, and hold it for 30 days, and then you can flip it back around. That's something also to think about. Some of these railroads, because basically a lot of it's the same business, they track together gains, especially over short term they'll track. Over the years, they'll definitely separate, but you might just be looking to cover that 30 day window with covering your exposure. So that's basically tax loss harvesting. It requires due diligence. You've got to stay on top of it. You've got to take advantage of identifying when the markets are down, identify the asset that you want to replace it with.

But it's there for everybody. Reduce those long term capital gains. It's very, very helpful. And speaking of the helpful, I hope you found this video helpful. Please subscribe to my YouTube channel. I appreciate that. Also, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.