The Benefits of Tax-Loss Harvesting in Retirement
- Taylor Kelly
- 4 days ago
- 5 min read
When most people think about investing, they focus on how to make gains. But sometimes, losses can be just as valuable—if you know how to use them wisely. This is where tax-loss harvesting comes in. It’s a strategic way to turn investment losses into potential tax savings, helping you keep more of what you earn.
For individuals planning for or already living in retirement, tax efficiency becomes increasingly important. Every dollar saved in taxes is another dollar that can be used to support your lifestyle, healthcare needs, or legacy goals. Understanding how tax-loss harvesting works—and when it makes sense—can help retirees manage their portfolios more effectively and preserve wealth over time.
What Is Tax-Loss Harvesting?
At its core, tax-loss harvesting involves selling an investment that has declined in value to realize a capital loss. That loss can then be used to offset capital gains from other investments—or, in some cases, even reduce ordinary taxable income.
Here’s a simple example:Imagine you purchased a mutual fund for $50,000 that’s now worth $40,000. If you sell it, you realize a $10,000 capital loss. You could then use that loss to offset $10,000 of capital gains you’ve realized elsewhere in your portfolio.
If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, with any remaining losses carried forward to future tax years.
In other words, while investment losses aren’t pleasant, tax-loss harvesting helps turn them into a potential advantage—especially for retirees who rely on their portfolio for income.
Why It’s Relevant for Retirees
Retirement often changes the way people think about investing and taxes. You may have shifted from earning a salary to drawing income from a combination of Social Security, pensions, and investment accounts. But that doesn’t mean you’re done paying taxes—far from it.
Tax-loss harvesting can be particularly relevant in retirement for a few reasons:
Taxable accounts still generate gains. Even if you’re no longer contributing to investment accounts, you might still receive capital gains distributions or realize gains when selling securities.
Withdrawal strategies can trigger tax implications. Selling assets to fund living expenses can lead to realized gains, which could push you into a higher tax bracket.
Roth conversions and Required Minimum Distributions (RMDs) can add to your taxable income. By harvesting losses, you may be able to offset some of these effects.
Essentially, this strategy helps retirees fine-tune their tax situation year by year, potentially reducing their lifetime tax burden.
Key Benefits of Tax-Loss Harvesting
1. Reducing Current-Year Tax Liability
The most immediate benefit is lowering your tax bill in the year you realize the losses. By offsetting capital gains, you can reduce the taxable income you owe for the current year—potentially saving thousands of dollars.
2. Smoothing Out Future Tax Exposure
Unused losses can be carried forward indefinitely, offering flexibility in managing future taxes. This means that even if you have a low-gain year now, you can “bank” those losses to offset gains in the future.
3. Improving Portfolio Efficiency
Tax-loss harvesting isn’t just about taxes—it can also be an opportunity to rebalance your portfolio. Selling a losing position gives you the chance to reinvest in assets that better align with your long-term strategy, risk tolerance, and income needs.
4. Enhancing After-Tax Returns
Ultimately, what matters most is what you keep after taxes. By integrating tax-loss harvesting into your strategy, you can help increase your after-tax returns without taking on additional investment risk.
Important Risks and Considerations
While the benefits are compelling, tax-loss harvesting isn’t a one-size-fits-all strategy. There are several key factors to keep in mind:
1. The Wash-Sale Rule
The IRS prohibits claiming a loss if you buy a “substantially identical” investment within 30 days before or after the sale that generated the loss. This is known as the wash-sale rule. Violating it means you lose the ability to claim that tax deduction, so timing and selection of replacement investments are critical.
2. Market Timing Risk
Selling a losing investment means you’re out of the market for that particular asset. If the market rebounds quickly, you could miss potential gains. It’s important to reinvest strategically to maintain your desired market exposure.
3. Tax Bracket and Income Considerations
Tax-loss harvesting is most effective when you have taxable gains to offset. If your income is lower in retirement, the benefits may be smaller—but that also presents planning opportunities. For example, harvesting losses in years with higher income can be more valuable.
4. Coordination with Other Tax Strategies
Tax-loss harvesting works best as part of a broader tax and income plan. It should be coordinated with strategies like Roth conversions, charitable giving, or RMD planning to ensure overall tax efficiency.
Short-Term vs. Long-Term Financial Impact
In the short term, tax-loss harvesting can provide immediate relief by lowering your taxable income for the current year. This could free up additional cash flow—money you can reinvest or use for living expenses.
In the long term, consistent tax-loss harvesting can have a compounding effect. By strategically managing gains and losses year after year, retirees can potentially reduce cumulative taxes paid over their lifetime. It can also smooth out portfolio volatility and help maintain a more balanced investment allocation over time.
That said, tax-loss harvesting doesn’t create “free money.” The real value lies in deferring taxes, improving efficiency, and aligning your investments with your goals—all of which require thoughtful planning.
The Value of Professional Guidance
While the concept of tax-loss harvesting may seem straightforward, its successful implementation is complex. Tax laws change, investment markets fluctuate, and personal circumstances evolve.
A knowledgeable financial advisor can help you:
Identify the right opportunities to harvest losses without disrupting your investment plan.
Navigate the wash-sale rule and select appropriate replacement securities.
Coordinate tax-loss harvesting with your withdrawal strategy, RMDs, and other tax-sensitive actions.
Work alongside your CPA or tax preparer to ensure your strategy fits seamlessly with your overall tax plan.
Having professional guidance ensures that tax-loss harvesting is done strategically—not reactively—and aligns with your broader financial goals.
Actionable Takeaways
If you’re considering tax-loss harvesting as part of your retirement strategy, here are a few steps to get started:
Review your taxable accounts. Identify investments that may have unrealized losses.
Consult with your advisor or CPA. Confirm whether harvesting those losses makes sense for your current and future tax situation.
Avoid wash-sale pitfalls. Plan reinvestments carefully to maintain your desired exposure without violating IRS rules.
Think long-term. Tax-loss harvesting should support your broader retirement goals—not just short-term tax savings.
If you’d like personalized guidance on how this strategy could fit into your retirement plan, you can schedule a complimentary phone call with our team at OpenAir Advisers.
Final Thoughts
Tax-loss harvesting can be a powerful way to enhance tax efficiency, manage risk, and preserve wealth in retirement. When used correctly—and in coordination with a thoughtful investment and income plan—it helps retirees make the most of every dollar earned and invested.
Whether you’re newly retired or already enjoying your golden years, it’s never too late to review your portfolio for opportunities to save on taxes and strengthen your long-term financial outlook.
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