Rebalancing: Rebalancing is intended to sell the winners and buy the losers. However, with TLH, the intent is to sell the losers. Seems like this could pose a conflict between asset allocation and tax efficiency. This is especially true since you wouldn’t be able to rebalance and bring the losing asset up to its target percentage or you would violate the wash sale rule. In fairness, you could sell an investment at a loss and then rebuy enough of a substitute security to rebalance the portfolio or you could simply rebalance your original securities after the wash-sale period. But this comes with the risk of having a potentially less than ideal security or portfolio during the wash-sale period.
Low Tax Bracket: DO NOT TLH when in the 15 percent or less tax bracket because any gains would be taxed at 0 percent anyway! You would unnecessarily lower the cost basis, which would result in a larger gains tax in the future. A better strategy would be to harvest the gains instead.
Although TLH is sold by many as a way to increase alpha, I believe the jury is still out on that. As you can see there are numerous risks present reflecting that TLH is not always a slam dunk.
Brad Tinnon, CFP, is the owner of Best Wealth Management.