Tax season is here, lasting until April 15, and American taxpayers are curious as how to save more on their investments. Goldman Sachs Asset Management Managing Director Aron Kershner explains the fundamentals of tax loss harvesting and how to file separately managed accounts (SMAs).
"You sell a security at a loss. Those losses can be used to offset realized gains that are incurred in other parts of the investor's portfolio that might be sold for a profit," Kershner says. "So the net effect is that this allows investors to keep more money invested, growing and compounding with the market over time. It's a core strategy we see investors deploying, not just this time of year, but typically year-round."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
AKIKO FUJITA: Well, the good news is spring is coming. The bad news is we are in the thick of tax season. Nearly 130 million tax returns are being filed this season. And now is the time to take advantage of some tax loss harvesting techniques to reduce money owed.
Let's break down what you can do to maximize your money with Aron Kershner, Goldman Sachs Managing Director. It's good to talk to you today. A lot of people just taking notes here as we go right into the thick of things. But let's first talk about tax loss harvesting. How do you offset some of those capital gains? Walk me through how you define it, and what the strategy is bottom line.
ARON KERSHNER: Yeah, good to be with you. So very simply, tax loss harvesting is a strategy that is designed to let investors keep more of their investment and return. So how it works is you sell a security at a loss. Those losses can be used to offset realized gains that are incurred in other parts of the investor's portfolio that might be sold for a profit.
So the net effect is that this allows investors to keep more money invested, growing and compounding with the market over time. And it's kind of a core strategy that we see investors deploying, not just this time of year but typically year round.
RACHELLE AKUFFO: And Aron, when you think about the amount of wealth that has been accumulated over the past decade, and especially now as we're in a sort of a holding pattern with interest rates and inflation, what's the best way to take advantage of that as you're trying to reallocate your portfolio?
ARON KERSHNER: Yeah, that's exactly right. We've witnessed just tremendous wealth creation over the last decade with incredible market appreciation as well. And what we're-- we're fortunate that we get to work with both financial advisors and investors. And what we're hearing from both groups is that tax focus is going to be increasingly important as they look across the investment strategies in their portfolio.
And so what we're seeing is that separately managed accounts can be a really effective tool for investors to meet their needs, to meet their goals, whether it's tax management related, risk management, or even more. So SMAs, we're seeing, is a really effective tool to help clients address these types of issues.
AKIKO FUJITA: OK, so let's walk through that specifically. How are you advising clients to use SMAs?
ARON KERSHNER: So one of the big benefits of separately managed accounts is that you can do tax loss harvesting at the security level. So if you consider a year like last year, the broad market's up over 25%, but not every security is up 25%.
So a separately managed account where you own the underlying positions allows you to take advantage of dispersion in the market and sell individual companies that might be at a loss from their purchase price versus just owning the broad market that might have appreciated. So individual security tax loss harvesting is one big benefit.
The other big benefit of separately managed accounts is that you can fund them with assets in kind. And so this is a big advantage to any investor that has equity positions in their portfolio. Markets are generally up significantly over the past number of years. And investors might be sitting on appreciated positions and unrealized gains.
So the benefit of the separately managed account is that you can move these positions in kind and work around them and diversify around them and manage the tax consequence. This is one of the most common ways that we're helping investors is by doing those tax sensitive portfolio transitions.
RACHELLE AKUFFO: So Aron, when you're trying to decide where you get the biggest tax benefit, whether it's through SMAs or ETFs or another route of doing it, what should be on that checklist so that you know which is the best path for you?
ARON KERSHNER: Yeah, it's a fair question. I think it's always going to be an investor by investor decision. ETFs can be thought of as tax efficient because they're generally not distributing gains to investors. So unless the investor decides to liquidate their shares, which they may hold at a gain, their only tax impact might be from any earned dividends, for example.
Separately managed accounts can go one step further by engaging in tax loss harvesting to help reduce an investor's tax bill, depending on if they have or expect capital gains on the forward. So there's different considerations for different investors. And these are some of the conversations that we're having with many of the advisors we work with too.
RACHELLE AKUFFO: So Aron, for people who are seeing that tax deadline coming up here, and they're thinking maybe this is something for me, but obviously, if this is their first time doing it, perhaps might make a mistake. What is the most costly mistake you tend to see people make when they're trying to take advantage of tax harvesting?
ARON KERSHNER: Well, one important consideration is after you've tax loss harvested and sold a security at a loss, do you remain in cash or do you want to get additional equity exposure or exposure of the asset that you sold? And so this is something that we spend a lot of time working with clients on. And generally, our goal is if we're trying to deliver equity type allocations, then you generally would not want to stay in cash. And so you'd want to think about those types of decisions if you're investing in any tax loss harvesting approach.
RACHELLE AKUFFO: Well, certainly something for people to keep on their radars. Appreciate you joining us, Aron Kershner, Goldman Sachs Managing Director. Thank you so much.
