Important Tax Loss Harvesting Limitations and Disclosures

The Institutional Intelligent Portfolios®  program offers an optional tax-loss harvesting strategy that clients may request to employ on any taxable account; however, the account must meet the minimum balance requirement of $50,000 for the tax-loss harvesting strategy to become active on the account. There is also a lower minimum balance requirement to maintain a tax-loss harvesting strategy. For any accounts falling below this minimum balance, the tax-loss harvesting strategy will become inactive until such time as the minimum balance requirement is met. These minimums are designed to limit, but cannot always prevent, scenarios where tax-loss harvesting sales are made and a single share of the replacement fund is too expensive to purchase. As a result, a portion of the proceeds from the sale of the fund could remain in cash, rather than being used to purchase a replacement fund.

The Rebalancing Algorithms¹ are designed to conduct a daily review of client accounts for tax-loss harvesting opportunities. When the tax-loss harvesting threshold is met, the Rebalancing Algorithms are designed to initiate a tax-loss harvesting trade order for accounts in the Institutional Intelligent Portfolios®  program ("the Program") unless there are currently restrictions within the asset class, such as to avoid wash sales². During this process, certain funds in the client's account are sold at a loss to offset potential capital gains (although the type and amount of capital gains are not monitored). If the tax-loss harvesting sale causes the asset class to become underweight, the Rebalancing Algorithms can recommend a buy order to replace the funds sold for tax-loss harvesting purposes with the fund(s) that your advisor reasonably believes are not substantially similar based upon different fund indices used by each fund.

When your advisor sells a fund to harvest a tax loss, and purchases another fund to replace it, your advisor will generally be unable to sell the replacement fund for 30 days if it contains lots held at a loss, even if it could sell other lots in the same position at a gain and not cause a wash sale. If an account needs to be rebalanced in that 30-day period, your advisor will generally not be able to sell the replacement fund as part of that rebalancing if it contains lots held at a loss. As a result, the account may not be allocated according to the chosen investment strategy until the 30-day period has expired, which could affect its performance.

If a client has two or more Program accounts that are being monitored together to avoid the wash sale disallowance rule, and the accounts hold different funds in the same asset class, if the Rebalancing Algorithms recommend selling funds in that asset class to harvest tax losses, the Rebalancing Algorithms will choose to do so in the earliest-enrolled account and skip the other account(s), and therefore will not prioritize selling the fund that will generate the greatest tax loss.

The performance of the replacement funds may be better or worse than the performance of the funds that are sold for tax-loss harvesting purposes. The utilization of losses harvested through tax loss harvesting 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.

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 the Program and type of investments (e.g., taxable or non-taxable) or holding period (e.g., short-term or long-term). The tax-loss harvesting strategy is not designed to ensure that it will reduce, defer, or eliminate the tax liability generated by a client's investment portfolio in any given tax year. The Rebalancing Algorithms only monitor accounts enrolled in the Program to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions in accounts not enrolled in the Program 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 wash sale is the sale at a loss of a security (such as an ETF or MF) and the purchase of the same or a substantially similar security within 30 calendar days either before or after that sale. If a wash sale occurs, the IRS may disallow or defer the loss for current tax reporting purposes. In an effort to avoid wash sales, in certain circumstances, the Rebalancing Algorithms will prevent rebalancing and tax loss harvesting transactions from occurring. In those cases, the Rebalancing Algorithms could be unable to rebalance towards the target allocation for 30 or more days, which can impact performance. This can also result in not utilizing all tax loss harvesting opportunities.

Your advisor will seek to avoid wash sales in any Institutional Intelligent Portfolios®  account(s) associated with the same primary account holder (with the exception of certain types of accounts including, custodial, trust accounts, and minor inherited IRAs).). If your advisor is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to sell a fund at a loss will block the other account(s) from buying in that same fund for 30 days. Similarly, the first account to buy a fund will block the other taxable accounts from selling that same fund at a loss for 30 days.

Although the Rebalancing Algorithms seek to avoid wash sales, they are not designed to and cannot avoid all wash sales. For instance, in the event that securities need to be sold in order to enable withdrawals, those sales will take place even if they could result in wash sales. If a client sells fund shares at a loss and uses the proceeds to fund their Institutional Intelligent Portfolios®  account or other accounts, your advisor may purchase the same fund shares for their Institutional Intelligent Portfolios®  account within 30 days, thereby creating a wash sale. Accounts outside Institutional Intelligent Portfolios® , including Schwab Intelligent Portfolios® , are not monitored for the purpose of wash sales, and clients are responsible for monitoring their and their spouse's other accounts (at Schwab or with another firm) to ensure that transactions in the same fund or a substantially similar security do not create a wash sale.

You should consult with your professional tax advisors or check on the IRS website at www.irs.gov about the consequences of tax-loss harvesting in light of your particular circumstances and its impact on your tax return. Neither the tax-loss harvesting strategy for the Program, nor any discussion herein, is intended as tax advice, and Schwab does not represent that any particular tax consequences will be obtained.