Turn Market Volatility Into a Win: Tax Loss Harvesting in Retirement

Why Tax Loss Harvesting Matters in Retirement

If you’re newly retired—or planning to be—you’ve probably noticed how market volatility hits differently when you’re no longer drawing a paycheck. The ups and downs can feel unsettling, especially when your focus has shifted from growing your wealth to preserving it.

But here’s the silver lining: even in unpredictable markets, there are smart strategies that can improve your long-term financial picture. One of the most overlooked tools for retirees is tax loss harvesting—a tactic that can help you lower your tax bill and boost after-tax returns.

In this article, we’ll explain how tax loss harvesting in retirement works, why it still matters even when you’re not working, and why partnering with a trusted financial advisor can make all the difference.

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What Is Tax Loss Harvesting?

Tax loss harvesting is the practice of selling an investment that has dropped below your original purchase price to realize a loss for tax purposes. This loss can then be used to offset gains from other investments or reduce your taxable income.

For example, if you purchased a mutual fund for $10,000 and it’s now worth $7,500, selling it realizes a $2,500 capital loss. That loss can be used to offset realized gains, and up to $3,000 of it can even be used against ordinary income.

Importantly, you don’t have to stay out of the market. You can reinvest the proceeds into a similar (but not identical) investment to maintain your portfolio’s exposure.

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Why Tax Loss Harvesting Matters in Retirement

It’s a common misconception that tax loss harvesting is only useful when you’re working or actively trading. But the truth is, tax loss harvesting in retirement can still provide real benefits.

Here’s how it can work in your favor:

• Offset capital gains: You may be selling assets to fund retirement or receiving capital gain distributions from mutual funds.
• Lower taxable income: Up to $3,000 in capital losses each year can be used to reduce your ordinary income.
• Carry forward unused losses: Losses you don’t use this year can be applied to future tax years—giving you a long-term tax benefit.
• Improve after-tax returns: Reducing taxes lets you keep more of your investment earnings.

When done consistently, these savings can compound to support your income and lifestyle throughout retirement.

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How to Avoid Common Pitfalls

While the concept of tax loss harvesting is straightforward, there are technical rules to navigate:

Watch out for the Wash Sale Rule:

The IRS disallows a loss deduction if you buy the same—or “substantially identical”—investment within 30 days before or after the sale. That means you can’t sell a losing ETF and buy it right back the next day.

Stay invested with a similar (but not identical) fund:

For example, if you sell an S&P 500 index fund, you might swap into a total market ETF or a large-cap value fund. This keeps your portfolio exposed to similar growth potential without triggering a wash sale.

Keep detailed records:

Tracking cost basis, trade dates, and tax lots can get complicated quickly, especially across multiple accounts or custodians.

A financial advisor can help you manage all of this efficiently—ensuring the strategy is executed cleanly and aligned with your broader plan.

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A Real-World Example of Tax Loss Harvesting in Retirement

Let’s look at how this could play out:

Carol, age 68, recently retired and began drawing from her taxable investment account. In 2024, she sold some long-term holdings to cover living expenses, realizing $15,000 in capital gains.

Her advisor spotted an opportunity to harvest $18,000 in losses by selling underperforming ETFs during a market dip. The result?

• Carol offset 100% of her capital gains, avoiding tax on the $15,000.
• She used an additional $3,000 to reduce her ordinary income.

All of this happened without compromising her investment strategy or taking on unnecessary risk.

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When This Strategy Might Not Make Sense

While tax loss harvesting in retirement can be powerful, it’s not always the right move.

Here are a few situations where caution is warranted:

• You’re in a very low-income year, and might benefit more from harvesting gains at the 0% capital gains rate.
• The investment you’re selling is likely to rebound quickly, and being out of it—even temporarily—could cost you.
• Your tax situation is already very simple, and the added complexity may not be worth the marginal benefit.

This is where having a seasoned advisor can help you assess the trade-offs and apply the right strategy for your personal situation.

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How a Financial Advisor Can Help You Harvest Smarter

Tax loss harvesting is most effective when it’s part of a bigger, coordinated plan—something an experienced advisor can help you develop and manage.

An advisor can:

• Monitor your portfolio for loss harvesting opportunities throughout the year—not just at year-end.
• Help you avoid wash sale violations.
• Coordinate TLH with your withdrawal strategy, required minimum distributions (RMDs), Social Security, and Medicare thresholds.
• Track your carryforward losses and ensure they’re properly reported each year.

When done thoughtfully, this strategy can support tax-efficient withdrawals and long-term sustainability in retirement.

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Final Thoughts on Using Tax Loss Harvesting in Retirement

Retirement doesn’t mean your financial strategy stops evolving. In fact, this chapter often calls for even more intentional planning to protect what you’ve built.

With the right guidance, tax loss harvesting in retirement can help you reduce taxes, smooth out returns, and make the most of market volatility without adding stress or risk.

If you’re wondering whether this strategy fits into your retirement plan—or you’re simply looking for a steady hand to guide you—we’re here to help.

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