“How is it possible that I made money and lost money at the same time?” 

A client asked us that in a planning meeting not long ago. She had been using a strategy called direct indexing with tax loss harvesting for a little over a year. Her portfolio was up about 10% for the year. At the same time, we had captured somewhere around $10,000 to $12,000 in realized losses on her behalf. Those losses offset capital gains, and the part she couldn’t use against gains went on her tax return to lower her overall tax bill. 

She made money. She “lost” money. And she kept more of what she earned. 

If you have a taxable brokerage account and you’ve ever winced at a capital gains bill, this article is for you. Murs Tariq, CFP® and Nick Hymanson, CFP® from our team will walk through what direct indexing is, what tax loss harvesting is, why the two work so well together, and who should (and shouldn’t) consider it. 

The Problem Hiding in Your Brokerage Account 

Most retirees we meet have money in three kinds of accounts: IRAs and 401(k)s, Roth accounts, and a regular brokerage account (what the industry calls a “non-qualified” account). 

The brokerage account is often the money that built up over the years. Extra cash got invested. A stock you bought on a hunch took off. An inheritance landed there.  

Here’s the catch. Unlike an IRA, a brokerage account is taxed along the way. Every time you sell something at a gain, you may owe capital gains tax. Dividends and interest show up on your tax return every year. And if you own mutual funds, you can get hit with capital gains distributions in December even if you never sold a share. 

We hear the same frustration over and over: “I didn’t sell anything. Why do I owe taxes?” 

Over time, these taxes quietly drag on your returns. Every dollar paid to the IRS is a dollar that stops compounding for your retirement. 

How We Got Here: From Stocks to Funds and Back Again 

It helps to know a little history. 

Investing used to mean buying individual stocks. People watched the ticker, picked companies, and managed their own positions. It was time-consuming and hard to diversify. 

Then mutual funds made it simple. One purchase gave you dozens or hundreds of companies. Later, exchange-traded funds (ETFs) did the same thing more efficiently. Today, millions of investors own the S&P 500 through a single ETF like SPY. 

Convenience won. But convenience came with a hidden cost in taxable accounts: you own the fund, not the stocks inside it. That matters more than most people realize. 

Now, thanks to better technology, we’ve come full circle. In the right situation, owning the individual stocks again can make a lot of sense. That’s where direct indexing comes in. 

What Is Direct Indexing? 

Instead of buying one fund that holds 500 stocks, direct indexing means buying a basket of individual stocks, typically 50 to 100, chosen to closely track an index like the S&P 500. 

Think of it as opening up the fund and owning the pieces yourself. 

The goal isn’t to pick winners or beat the market. The goal is to mirror the index. If the S&P 500 is up 10%, a well-built direct indexing portfolio should land very close to that 10%. 

Twenty or thirty years ago, this was only available to ultra-high-net-worth families with a dedicated portfolio manager. Tracking an index with dozens of individual stocks took a lot of work. Today, software handles the heavy lifting, which is why the strategy is now available to many more investors. 

So why bother owning 50 to 100 positions when one ETF does the job? Because of the second half of the strategy. 

What Is Tax Loss Harvesting? 

Tax loss harvesting means selling an investment that’s down in value to “realize” the loss, then using that loss to reduce your taxes. 

You may have heard people say, “It’s not a loss until you sell.” That’s true. Tax loss harvesting flips the idea around: sometimes selling at a loss on purpose is the smart move. 

Here’s how realized losses can help: 

1. They offset capital gains. Sell one stock for a $10,000 gain and another for a $10,000 loss, and the taxable gain can drop to zero. 

2. They can reduce ordinary income. If your losses exceed your gains, up to $3,000 per year ($1,500 if married filing separately) can offset ordinary income. 

3. They carry forward. Unused losses roll into future tax years, ready to offset gains later. 

After selling a loser, we reinvest in a similar, but not substantially identical, stock. That keeps the portfolio tracking the index. It also respects the IRS wash-sale rule, which disallows the loss if you buy the same or a substantially identical security within 30 days before or after the sale. 

Many investors only think about harvesting losses in December. We look for opportunities throughout the year, because market dips don’t wait for the calendar. 

Why the Two Work Better Together 

Even in a great year for the market, not every stock goes up. In strong years like 2023 and 2024, the S&P 500 was led by a handful of big technology names. Plenty of companies inside the index finished the year down. 

If you own the index through one ETF, you can’t touch those losers. The fund is up, so your only position is at a gain. You’re stuck: either wait for it to fall or eventually pay the tax. 

But if you own the individual stocks, you have options. We like to call it a playground of 50 to 100 positions. On any given day, some are up and some are down. We can harvest the losses from the down ones while the portfolio as a whole keeps tracking the index. 

You get the market’s return and a growing bank of tax losses. That’s how our client made money and “lost” money at the same time. 

What This Looks Like in Real Life 

So how can this theory show up in a retirement plan? 

Tax-smart withdrawals. A client calls and says, “We need $20,000 for a trip. What’s the tax hit?” Because we’ve been banking losses, the answer is often: little or nothing. Those harvested losses offset the gains from what we sell. Flexible, low-tax access to cash is a big deal in retirement, when vacations, family needs and surprises come up. 

Unwinding a concentrated stock position. Many people hold a big position in a former employer’s stock or a stock like Apple or NVIDIA that ran away from them. They know it’s risky to have so much in one company, but selling means a large capital gains bill. Harvested losses let us trim that position gradually without the full tax hit. 

Selling real estate or a business. Rental properties have climbed in value, and years of depreciation add to the taxable gain when you sell. Losses banked in the years leading up to the sale can offset that gain directly.  

The sooner losses start accumulating, the more flexibility you have later. We cover these scenarios in depth in our companion post on reducing capital gains taxes. 

The Honest Trade-Offs 

We tell clients there are no perfect investment strategies, only trade-offs. Here are the ones that come with this one. 

• It’s not a risk-managed strategy. Direct indexing tracks the index. When the market drops, your portfolio drops too. If you need downside protection, that has to come from other parts of your plan. 

• It only works in taxable accounts. IRAs and Roth accounts don’t generate taxable gains or deductible losses, so harvesting does nothing there. 

• It needs enough money. To buy 50 to 100 stocks in meaningful amounts, we generally look for at least $250,000 in a brokerage account. 

• Tracking isn’t perfect. A basket of individual stocks will follow the index closely, but not exactly. 

• Harvesting lowers your cost basis. Replacement stocks are bought at lower prices, so some tax is deferred rather than erased. For many retirees, deferral still has real value, and assets held until death may receive a step-up in basis under current law. 

Understanding these trade-offs is what turns a good strategy into the right strategy for you. 

Is Direct Indexing Right for You? 

Think of this the way you’d think about a Roth conversion. Should everyone do it? No. Should everyone at least look at it? Absolutely. 

This strategy may be worth exploring if: 

• You have $250,000 or more in a taxable brokerage account. 

• You own a stock or fund with large unrealized gains. 

• Your mutual funds send you surprise capital gains distributions each year. 

• You plan to sell real estate or a business in the next few years. 

• You want more control over the taxes on your retirement withdrawals. 

The Bottom Line 

As Nick Hymanson, CFP® often tells clients, you can’t avoid all losses if you’re invested in the stock market. Dips will happen. We’re not trying to create losses; we know they’re coming. 

So why not put them to work? 

Direct indexing with tax loss harvesting turns the market’s normal ups and downs into tax savings, while your money still tracks the index you’d own anyway. For the right retiree, that can mean more money compounding and fewer surprises at tax time. 

Let’s Talk About Your Brokerage Account 

If you’re wondering whether this fits your situation, we’d be happy to talk it through. Visit the contact page at pomwealth.net to reach our team. We’ll walk you through our evaluation process and send you a free copy of our book, The Peace of Mind Pathway.  

Want the full conversation? Listen to Murs Tariq and Nick Hymanson break down the strategy on the Secure Your Retirement Podcast. 

Disclosures: This material is for educational purposes only and is not intended as tax, legal or investment advice. Consult a qualified tax professional regarding your specific situation. Past performance does not guarantee future results. Investing involves risk, including possible loss of principal. Tax loss harvesting does not eliminate taxes and may defer them. Examples, including client results and named companies, are hypothetical or illustrative only and are not recommendations to buy or sell any security.