Note: Wealthfront’s Stock-level Tax-Loss Harvesting is now called US Direct Indexing.
Many investors would like to migrate the management of their portfolio to a low-cost automated investment service but don’t make the leap out of fear over the taxes they’ll have to pay when they liquidate their current portfolio. At Wealthfront, we’re always seeking new services that we can automate with software and deliver to the masses, especially services previously only available from sophisticated wealth managers to their ultra-wealthy clients. And minimizing taxes that result from changing investment strategies is already one of our strengths.
Today, Wealthfront is pleased to announce multiple improvements to our brokerage account transfer process. While not a formal product name we are referring to the improved process as Tax-Minimized Brokerage Account Transfer. Investors now have more options when moving assets to Wealthfront, giving them the ability to intelligently minimize taxes as they migrate their investments to their recommended long-term portfolio.
Making Brokerage Account Transfers Better
Like all major brokerages, Wealthfront has always supported the electronic transfer of securities from existing brokerage accounts through the industry-standard Automated Customer Account Transfer Service (ACATS). The primary benefit to our clients in offering electronic account transfers was our willingness to sell all their existing holdings for zero commissions. This often represented a significant savings over the commissions our clients would have incurred had they sold their holdings at their previous brokerage firm and then transferred the resulting proceeds.
With the launch of tax-minimized brokerage account transfers, we now offer benefits well beyond commission savings:
- Incorporate Your Existing Investments. If you transfer ETFs or stocks that match the securities utilized in our basic investment service or a Stock-level Tax-Loss Harvesting portfolio then we will automatically incorporate them into your portfolio, up to the appropriate amount for your recommended allocation, thereby reducing the number of securities that must be sold and capital gain tax you might incur.
- Wait Until Your Capital Gains Become Long-Term. We now hold your transferred securities until they qualify for long-term capital gains treatment. Our software monitors your account every day and sells securities only once they reach the one-year threshold required to qualify for the much lower long-term capital gains tax rate. To provide perspective, the average Wealthfront Tax-Loss Harvesting client, for example, has a combined marginal state and federal long-term tax rate of 24.7% versus a combined marginal state and federal short-term tax rate of 42.7% (per our whitepaper). Thus, the savings from this capability can be quite substantial.
- Constant Monitoring To Minimize Realized Taxes. Our software evaluates changes to your transferred securities daily to look for opportunities to accelerate the migration of your assets to your diversified Wealthfront portfolio every day. For example, if one of your transferred stocks flips from having a short-term gain to a short-term loss, Wealthfront will take advantage of that movement to sell that stock and intelligently apply the proceeds to your low-cost, diversified portfolio.
- Accelerated Migration through Tax-Loss Harvesting and Stock-level Tax-Loss Harvesting. Short-term capital losses from Wealthfront’s daily tax-loss harvesting and Stock-level Tax-Loss Harvesting services are automatically used to accelerate the sale of transferred securities that might have an offsetting short-term capital gain.
Sizing The Tax Savings
Every individual brokerage account will vary, but we estimate that by intelligently automating the liquidation and reinvestment of existing stocks and ETFs, clients can realize significant benefits.
Making Brokerage Account Transfers Easier
It’s now easier than ever to initiate a brokerage account transfer to Wealthfront. Instead of having to pull or look up your brokerage statements and account numbers, most clients will now be able to simply supply a brokerage account username and password to schedule an account transfer. Everything else is handled by us electronically. You don’t even have to inform your old brokerage firm that a transfer is in progress. We’re here to support your decision to change the way you want your money managed.
2015: Make Those New Year’s Resolutions Count
In just three short years, Wealthfront has grown to manage over $1.8 Billion in client assets.
Today’s launch of tax-minimized brokerage account transfers is another example of the power of software to help bring personalized, sophisticated investment features to individual investors.
There has never been a better time to transfer your existing brokerage account to Wealthfront. If you’re already a Wealthfront client with a taxable account, you can start the transfer process here.
If you’re not a client yet, Join us.
Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information. This blog is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority. When Wealthfront replaces investments with “similar” investments as part of the tax-loss harvesting strategy, it is a reference to investments that are expected, but are not guaranteed, to perform similarly and that might lower an investor’s tax bill while maintaining a similar expected risk and return on the investor’s portfolio. Wealthfront assumes no responsibility to any investor for the tax consequences of any transaction. Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that Wealthfront trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any. Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes. Wealthfront only monitors for tax-loss harvesting for accounts within Wealthfront. The client is responsible for monitoring their and their spouse’s accounts outside of Wealthfront to ensure that transactions in the same security or a substantially similar security do not create a “wash sale.” A wash sale is the sale at a loss and purchase of the same security or substantially similar security within 30 days of each other. If a wash sale transaction occurs, the IRS may disallow or defer the loss for current tax reporting purposes. More specifically, the wash sale period for any sale at a loss consists of 61 calendar days: the day of the sale, the 30 days before the sale, and the 30 days after the sale. The wash sale rule postpones losses on a sale, if replacement shares are bought around the same time. The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term). Except as set forth below, Wealthfront will monitor only a client’s (or client’s spouse’s) Wealthfront accounts to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions outside of Wealthfront accounts may affect whether a loss is successfully harvested and, if so, whether that loss is usable by the client in the most efficient manner. A client may also request that Wealthfront monitor the client’s spouse’s accounts or their IRA accounts at Wealthfront to avoid the wash sale disallowance rule. A client may request spousal monitoring online or by calling Wealthfront at 844-995-8437. If Wealthfront is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to trade a security will block the other account(s) from trading in that same security for 30 days.
About the author(s)
Elliot Shmukler, Wealthfront's VP of Product and Growth, is an accomplished Silicon Valley “growth hacker,” having led the strategy and execution behind LinkedIn’s growth from 20M to more than 200M members. He joined Wealthfront from LinkedIn, where, as Sr. Director of Product Management, he also oversaw much of the consumer product experience, including Profile, Search, Endorsements and People You May Know. Previous to LinkedIn, Elliot held technical and leadership roles at eBay, About.com, Sombasa Media and Microsoft. Elliot holds an MBA from Stanford Graduate School of Business, where he was an Arjay Miller scholar, and holds a BA magna cum laude in Computer Science from Harvard University. View all posts by Elliot Shmukler