Robo-advisors have been steadily gaining in popularity in the investment world over the past years. This is not only due to their simplicity and set-and-forget way of investing, but also because they offer some enticing features that can actually help save you money, and thus yield higher returns.
One of these features is tax-loss harvesting. But what actually is tax-loss harvesting and what are some robo-advisors with tax-loss harvesting? Well, I am writing this post to answer all of the above.
The most well-known robo-advisors with tax-loss harvesting are Betterment, Wealthfront and Acorns. Each of these robo-advisor provides unique advantages and disadvantages, however, overall Wealthfront offers investors the most features at the lowest fees.
In this article, we’ll discuss what tax-loss harvesting actually is and why you should care about this feature when picking a robo-advisor. In the second section, we’ll have a look at some of the most popular robo-advisors with tax-loss harvesting in more detail.
I will also compare these robo-advisors with tax-loss harvesting to semi-automatic investment platforms such as M1 Finance and Vanguard Personal Advisor Services.
So, let’s dig right in!
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What is tax-loss harvesting?
Simply put, tax-loss harvesting is the process of selling off shares that currently are yielding a negative return and then immediately rebuying them in order to sustain a paper loss which leads to a lower capital gains tax burden.
The amount of capital gains tax you will be is based on the actual capital profits you made that year. Such a taxable event is only triggered when selling a security (stock, bond, fund, etc.). Thus, by strategically selling securities that are currently in the red you can reduce your overall profits from capital that you might have from other investments.
Of course the process of selling and rebuying those securities at exactly the right time is tedious if not impossible to calculate manually. Furthermore, it would also be time-consuming and complicate your investing process unnecessarily.
This is where robo-advisors with tax-loss harvesting come into play. With robo-advisors this entire process can be automated, meaning you don’t have to manually sell and rebuy those shares or even calculate when the ideal time would be to do so.
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Why robo-advisors with tax-loss harvesting?
On of the main reasons why you should let robo-advisors handle your tax-loss harvesting instead of doing it manually are that robo-advisors can simply do this better and faster.
Algorithms can calculate when the best time would be to sell and rebuy based on every investor’s individual portfolio. And on top of that, they can this all within a split second and constantly monitor changes to your portfolio value.
In order to even come close to this level of efficiency, you would either need to code your own algorithm to optimize your tax-loss harvesting or monitor your portfolio every day for the best opportunities to harvest tax-losses, neither of which is very feasible.
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The best robo-advisors with tax-loss harvesting
|Vanguard Personal Advisor Services||0.30%||$50,000|
In the table above I have selected the best robo-advisors with tax-harvesting. I made this selection mainly based on the features that each robo-advisor offers and their corresponding fees.
M1 Finance and Vanguard Personal Advisor Services are technically not true robo-advisors but rather semi-automated investment platforms. As such I will discuss them in a separate section in this post.
In terms of overall features and fees, Wealthfront is my absolute favorite robo-advisor with tax-loss harvesting. However, Betterment is a close second. Acorns is a serious contender in this field as well, but I would consider them more suitable for beginner investors taking their first steps in investing.
Wealthfront offers a ton of features for passive investors at a low annual fee of 0.25% and an account minimum of $500. This makes this Wealthfront accessible and attainable for every investor planning for retirement.
In addition to their investing tools Wealthfront now also offers a high-interest cash account that offers significantly higher APYs than the national average. This makes it even easier to link your day-to-day finance activities with your investing.
Wealthfront has also recently introduced their borrow feature which lets you borrow up to 30% of your portfolio value at low interest rates starting at 2.5%. However, this feature is only available at a portfolio value upward of $25,000.
And – of course – Wealthfront also offers tax-loss harvesting as part of their Passive Plus suite rule-based investing strategy.
All in all, the above features combined with the low annual fee make Wealthfront a very enticing pick for the set-it-and-forget-it type investor.
Betterment is my #2 pick for robo-advisors that also include tax-loss harvesting.
Overall, Betterment shares a lot of similar features with Wealthfront as mentioned above, so I’ll just highlight some essential differences here.
Currently, their high-yield cash account offers an even higher yield (0.40%) than that of Wealthfront (0.35%). Betterment also offers a free FDIC insured checking account for daily spending.
One feature that Betterment lacks is the ability to borrow against your own portfolio. There have been rumors that they may add this feature soon but up until now, Wealthfront has the slight edge here.
On the basic level, Wealthfront and Betterment charge the same fee, 0.25%. However, once you exceed $10,000 with Betterment the fee jumps up to 0.40% for certain accounts. On the other hand, there is no minimum account balance with Betterment.
In conclusion, Betterment might be more suitable for novice investors or if you’d simply like to give robo-advisors a try without committing a significant amount of capital.
Acorns is an overall fantastic platform for investing spare change and buy fractional shares of your favorite companies.
Acorns makes it incredibly easy to integrate your daily finances and investing, offering a separate checking, saving, and investment account. This makes investing – particularly smaller amounts – effort- and frictionless.
Acorns lacks some of the essential features that both Weathfront and Betterment offer but is geared towards convenience and ease-of-use (which it excels at). Overall, it’s a fantastic micro-investing platform to take your first steps in the world of investing and financial planning.
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Tax-loss harvesting without robo-advisors
One question that remains, however, is whether the additional fees you are paying for a robo-advisor is worth the taxes you would actually pay otherwise.
For instance, if you are investing for the long-term and generally do not plan to sell any securities before retirement, there are no taxable events triggered and tax-loss harvesting simply does not yield you any additional benefit.
In other cases, where you may infrequently buy and rebuy securities to rebalance your portfolio and can make sense to do so manually at strategic times to reduce your capital gains tax burden.
So, let’s also look into some other options that may be more appropriate for the long-term investor aiming for financial freedom.
Vanguard Personal Advisor Services
As one of the most trusted financial companies out there Vanguard also offers their own version of robo-advisors with a human touch.
Vanguard Personal Advisor Services offer individual investors the chance to have their portfolio managed by a professional financial advisor that manages your portfolio in line with your investment goals.
However, one huge downside is that the minimum account balance you need to make use of this service is $50,000 which already excludes a lot of novice investors. Furthermore, Vanguard Personal Advisor Services also lacks some essential features that all of the above robo-advisors with tax-loss harvesting offer.
This service is well-suited for investors who already have their brokerage account with Vanguard and prefer a more individual approach to portfolio management.
M1 Finance has become my go-to broker of the past few months. Essentially, M1 Finance is a middle way between a traditional brokerage account and a completely automatically managed robo-advisor account.
You’ll be able to invest in fractional shares, auto-rebalance your portfolio, and even borrow against your portfolio up to 35% at interest rates as low as 2% APY. On the other hand, you still have the option to create your own ETF portfolio and set your exact allocations accordingly.
With M1 Finance you’ll get the best of both worlds: the features and technology that make robo-advisors so enticing plus the flexibility and individuality of traditional brokerages and index funds.
Robo-advisors have been steadily gaining in popularity and attracted – most of all – millennials to the world of investing.
The best ones, like Wealthfront, Betterment, and Acorns, offer a ton of great features for a low annual fee anywhere between 0.25-0.40%. But paying that fee might not necessarily be worth it.
For the more, individualistic investor Vanguard Personal Advisor Services might present a welcome alternative to robo-advisors with tax-loss harvesting. If you are a more seasoned, enterprising investor who likes to create your own ETF portfolio while still enjoying the many benefits innovative technology can add to your investing strategy, M1 Finance is an excellent place to go.
There is something for everyone.
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.