By: Revanche

Investing Observation: lump sum and tax harvesting

December 2, 2019

Dollar cost VERSUS lump sum

For traditional retirement savings, I’ve always been a dollar cost averaging investor. I fully believe in automating my savings and investing.

I do NOT believe in automating my bills because I don’t trust those companies any further than I can throw them. Look away and they’re tacking on extra unauthorized charges! And even the decent companies can make mistakes. And I can make mistakes that need to be rectified before the bill is closed out. So no automated bill pay for me but I am all over automating the money that goes back into our pockets!

Sadly, despite my honed and stellar money skills, I’ve never once had enough disposable income to max out an employer sponsored 401K plan. Not even close, not even within shouting distance of halfway close. Worse, my employer hasn’t offered a retirement plan for years and probably won’t for years. Finally accepting this reality, in the summer of 2018 I buckled down on making up for lost time.

For the first six months, I spread out the transactions.

After 13 transactions, I decided to give lump sum investing a try. It’s viscerally satisfying, I get nervous about regular contributions when I’m trying to keep our cash buffer healthy in case of market crashes *cough* hoarder! *cough* market timer! *cough*.  I’m also curious about how that would work since I’ve never done it before.

There are also two practical, non-emotional, components to this. I could be contributing monthly but I don’t want to have to account for these withdrawals in my monthly cash flow. For later, not that I’ve done a lot of thinking about this, I want to reduce the number of lots we have to sell off.

I switched to hoarding cash to make a few big deposits in the year the way I do for our IRAs to keep things simpler.

Here’s what I noticed:

For our IRAs, I love it. This was somewhat accidental but I’ve fallen into the habit of saving cash the year before. In the first week of January, barring any complications, I max out both IRAs. Done and done. I only think about it again the rest of the year when I’m pulling together the next year’s contributions.

For our brokerage: In the first six months I became hyperaware of price movement. It shouldn’t matter but I was. In the run up to making a big quarterly deposit, I keep checking the price: VTSAX, VTBLX, VTIAX. I couldn’t shut off my urge to find the best deal! I lost all perspective. That’s annoying.

I really wished that I could just set a buy price and forget it.

After a full year, my hyperawareness calmed down a bit but not because I came to my senses. It was because I decided that with the recession still looming, my gut wants to hold on to the cash and buy in a really significant dip to make our cash go further. My VTSAX purchases have ranged from one delightful low of $59/share up to $71/share and I’d like a lot more of the lower share price thanks.

Tax efficiency: gain and loss harvesting

I’ve been feeling guilty over not engaging more fully in making our portfolio tax efficient. One of the ways I felt like I should be addressing our portfolio is using tax loss and tax gain harvesting. At the risk of sounding immodest, I had no use for tax loss harvesting because in our individual stocks portfolio, all of our stocks were winners between 2008-2017. Since, I buy and hold, the minor ups and downs of the stocks were of little interest to me. I’m only interested in the long term prospects!

I finally made a bad buy in 2017. I bought GE at $30 per share, realized that I didn’t have faith in the company over the long term, and decided that I’d rather lock in the loss than ride it out. That was my first tax loss harvesting and it was clumsily done. I exercised the sale at the end of 2017 so the sale didn’t even register until 2018! Whoops.

My lot sold at $17.59 per share and I used that loss to offset our taxes in 2018. The stock is sitting around $8-9 per share right now and maybe it’ll come up 4-5 years from now but I only buy and hold companies that I fundamentally believe in, so I’m ok with locking in that loss when I did. Who knows. I’m not a stock wizard, I’ve only done as well as I have because we’ve had an incredible bull market, but I’ve got to have some kind of rational blueprint for buying and selling.

That brings us to tax gain harvesting. I’ve vaguely had this sense that I was failing at advanced investing because I have never felt comfortable with the concept and harvesting but after chatting about it with money blogger friends a bit and doing more digging, it does actually seem like it’s not a tool we need right now.

If I’m understanding this correctly:

• Only long term capital gains tax would apply since I hold shares forever.
• We are married filing jointly, so our LTCG tax in 2019 is 15%.
• We’ve also been subject to the net investment income tax (a 3.8% surtax that applies to income from investments) in the past, when we sold property.
• In 2019, our LTCG tax only drops to 0% if our income drops below $78,750.

At the moment, I don’t see any benefit to our harvesting gains because we’d be paying the 15% capital gains tax and possibly an additional 3.8% surtax depending on the timing just for the privilege of resetting our basis. That’s really expensive for no real gain. I don’t expect to sell these stocks for income until we’re not making W-2 income, so even if we are still in the 15% cap gains bracket, we’d certainly be making less income than we are now. Holding off means we can avoid the additional surtax. Though we would arguably be more able to foot the tax bill now, it’s not necessary and we would assume

:: How do you invest? Are you using tax harvesting in any meaningful way?

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