Weekend Reading: Tax Loss Selling Edition

Many of my clients and blog readers are looking to change their investing strategy to a simple indexing approach using a single asset allocation ETF. This can make a lot of sense if you want to reduce fees, improve diversification, and simplify your portfolio. Indeed, investing complexity has been solved with all-in-one ETF products.

Making this transition is fairly straightforward in tax-advantaged accounts such as RRSPs, TFSAs, RESPs, and LIRAs. If you’re already using a discount brokerage account you can simply sell off your existing holdings and then immediately buy the appropriate asset allocation ETF. Done.

The process is a bit more work for those moving from a managed mutual fund account. You’ll need to open a discount brokerage account (I’d recommend your big bank’s brokerage arm or an online broker like Questrade), open the appropriate account types, and then transfer your existing account over “in cash”, meaning your existing firm will sell all of your holdings and send the proceeds to your new brokerage account in cash. The process can take two weeks or more, but once the cash has landed in your account you can go ahead and buy your asset allocation ETF.

For those with non-registered (taxable) accounts, we have the added complication of taxes to consider. When you sell your existing holdings inside a taxable account, it triggers a taxable event where you will incur either a capital gain or a capital loss.

Sometimes you can get around this by transferring your existing assets “in kind” rather than “in cash”. But if the desired outcome is to simplify your portfolio with an all-in-one ETF then you’re eventually going to have to sell the existing holdings.

This was problematic when stocks were up big over the past few years. I’d work with clients to assess the current capital gain situation and we’d determine a plan to sell off individual parts over a few years to spread out the tax hit.

But here we are now in 2022 and both stocks and bonds have suffered double-digit losses. It’s time to take another look at your taxable account and see if it makes sense to speed up that transition.

Whether your taxable account is filled with individual stocks, mutual funds, or ETFs, assess each holding’s current market value and compare it to the book cost or original price paid. You may find some positions under water, others breaking even, and some still performing well. 

Time to break out your calculator. Add up all the total losses from individual holdings that are below your original cost. Add up all the total gains from individual holdings that are above your original cost. 

Let’s say your entire non-registered portfolio is in an overall loss position. It’s perfectly reasonable to sell the entire portfolio and immediately purchase your chosen asset allocation ETF. The sales will trigger capital losses, which can be used to offset any capital gains incurred that tax year. You can also carry capital losses back into the previous three tax years and/or carry them forward indefinitely.

This approach is also onside with something called the superficial loss rule, which states that you can’t claim the capital loss if you buy an identical security within 30 days of your sale transaction.

And, if you’re already happily managing an ETF portfolio, you can still engage in more traditional tax loss selling by identifying non-identical ETFs to pair with your existing ETFs so you can harvest a capital loss, immediately buy another ETF, and still stay onside with the superficial loss rules. For that, Justin Bender has you covered:

One silver-lining of a down market is it may provide an opportune time to reorganize your taxable investments and move to a low cost indexing solution more quickly and more tax efficiently than if we were still in a raging bull market.

Have you done any tax loss selling this year?

This Week’s Recap:

There’s finally some activity at the site of our new house after weeks of waiting for trusses to be delivered. We should see a lot of progress over the next few months before winter arrives. 

An early 2023 completion date means we need to start preparing our existing house to be put up for sale. We’re reasonably good at keeping the clutter out, but the house will definitely need some touch ups before it’s ready for prospective buyers to view.

In case you missed it, I looked at some sustainable investing solutions for DIY investors.

I also took a fun look back at my own investing multiverse of madness and the different choices I could have made when I started index investing.

Many thanks to Rob Carrick for including my post on the retirement risk zone in his latest Carrick on Money newsletter (subs).

Weekend Reading:

The Belle Curve blog explains why retirement is the biggest life event that no one talks about.

Jon Chevreau ponders whether it makes sense to retire when we’re still in a pandemic.

Is retirement possible for those who start saving and investing after 40? Yes, but you don’t have the luxury of making mistakes (subs).

This Morningstar article looks at the ‘Witch of Wall Street’ and the difference between wealth and well being:

“Although Hetty had objectively more money than almost everyone else in the world, she still believed she did not have enough. She believed it so strongly that she spent her life, and ruined her relationships, in pursuit of more.”

Moshe Milevsky and Guardian Capital unveiled a new retirement solution called a modern Tontine.

Retirement expert Fred Vettese has long advocated for deferring CPP to 70 while taking OAS benefits at 65. His rationale was more about psychology than math. It’s hard enough, he reasoned, to persuade people to delay their CPP to 70. The benefit for delaying OAS is also smaller than it is for CPP.

But Mr. Vettese didn’t expect the higher and more persistent inflation that we’re experiencing right now.

“If you believe that higher inflation is either (a) here to stay or (b) at least more likely to rear its ugly head in the future, then I strongly advise deferring both CPP and OAS pensions: pensions from these programs are fully protected from inflation, something that only the federal government can credibly offer.”

Keep in mind the usual caveats: if you have reason to believe you have a shorter than average life expectancy, or you simply don’t have enough personal savings to tap into while you wait for CPP and OAS, then it’s perfectly rational to take your benefits at 65.

Finally, looking for some personal finance book recommendations? Investment manager Markus Muhs has you covered with this impressive list.

Have a great weekend, everyone!