Rebalancing - In Taxable Account

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renue74
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Rebalancing - In Taxable Account

Post by renue74 » Tue Sep 19, 2017 7:59 am

Our AA is 65/35 and for a while, we've been closer to 70/30. (Age 43 and 47)

I'm curious...when folks rebalance, I assume they try to do it in tax deferred accounts before touching their taxable accounts?

We've pretty much used all our tax deferred space (403b and SIMPLE IRA) for Total Bond Fund and even some of our Roth. So the only place we can rebalance would be taxable.

What is the best practice?

aristotelian
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Re: Rebalancing - In Taxable Account

Post by aristotelian » Tue Sep 19, 2017 8:32 am

I think you answered your own question. Is there any opportunity for tax loss harvesting?

renue74
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Re: Rebalancing - In Taxable Account

Post by renue74 » Tue Sep 19, 2017 8:34 am

No TLH. Like most others here, I took advantage of TLH in early 2016. I have nothing but long term gains now.

goingup
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Re: Rebalancing - In Taxable Account

Post by goingup » Tue Sep 19, 2017 8:46 am

Add bonds to taxable. We use intermediate term muni bond fund. Also, I'd rather not put bonds in our Roths and use equity funds there.

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welderwannabe
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Re: Rebalancing - In Taxable Account

Post by welderwannabe » Tue Sep 19, 2017 9:36 am

You still adding to taxable? If so you can rebalance slowly by moving all your new taxable contributions into a bond fund. That is what I try to do in taxable, unless it gets so out of whack due to a major market runup that I start to sweat.
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renue74
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Re: Rebalancing - In Taxable Account

Post by renue74 » Tue Sep 19, 2017 9:43 am

welderwannabe wrote:
Tue Sep 19, 2017 9:36 am
You still adding to taxable? If so you can rebalance slowly by moving all your new taxable contributions into a bond fund. That is what I try to do in taxable, unless it gets so out of whack due to a major market runup that I start to sweat.
That's what I try to do. I have Vanguard Short-Term Investment-Grade Bond Fund in my taxable account and contribute to that monthly to try to rebalance....but this year, I've consistently stayed in the 70/30 AA...even with the new contributions to taxable..

livesoft
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Re: Rebalancing - In Taxable Account

Post by livesoft » Tue Sep 19, 2017 9:49 am

Your taxable holdings probably pay out about 2% a year in dividends. Those dividends can probably be invested in a tax-exempt muni bond fund. Also last year in December, lots of folks were tax-loss harvesting their muni-bond funds.

If you give away 1% of your portfolio every year to charity, then the 2% of dividends + 1% to charity help reduce your exposure to equities by 3% annually. Then there might also be other withdrawals.
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ruralavalon
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Re: Rebalancing - In Taxable Account

Post by ruralavalon » Tue Sep 19, 2017 9:54 am

renue74 wrote:
Tue Sep 19, 2017 7:59 am
Our AA is 65/35 and for a while, we've been closer to 70/30. (Age 43 and 47)

I'm curious...when folks rebalance, I assume they try to do it in tax deferred accounts before touching their taxable accounts?

We've pretty much used all our tax deferred space (403b and SIMPLE IRA) for Total Bond Fund and even some of our Roth. So the only place we can rebalance would be taxable.

What is the best practice?
What funds do you have in your taxable account?

What annual contributions are you making to each account.

The better practice is to rebalance by exchanging between funds inside the tax-advantaged accounts.

Another good practice is to rebalance by the way you invest your new contributions in the accounts, so if you are making large annual contributions to the taxable account then put the contributions into the funds in the taxable account which are below the desired allocation.

As livesoft points out you can also rebalance by the way you do withdrawals from the taxable account.
Last edited by ruralavalon on Tue Sep 19, 2017 9:57 am, edited 1 time in total.
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panhead
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Re: Rebalancing - In Taxable Account

Post by panhead » Tue Sep 19, 2017 9:55 am

renue74 wrote:
Tue Sep 19, 2017 7:59 am
Our AA is 65/35 and for a while, we've been closer to 70/30. (Age 43 and 47)

I'm curious...when folks rebalance, I assume they try to do it in tax deferred accounts before touching their taxable accounts?

We've pretty much used all our tax deferred space (403b and SIMPLE IRA) for Total Bond Fund and even some of our Roth. So the only place we can rebalance would be taxable.

What is the best practice?
I'm in the same boat. I assume what you are asking is what to do when you have a stock run-up in taxable which has thrown off your AA, have no opportunities to TLH or carryover losses, and are holding no equities in tax advantaged accounts as these are filled with bonds. What I do is the following:

1) All dividends and interest in taxable do not get reinvested, I buy whatever is low at the time with them, probably bonds (maybe munis).
2) All future taxable purchases target whatever is lagging (again, probably bonds, maybe munis)
3) Obviously all ongoing purchases in employer retirement plans target the lagging asset class (again, probably bonds)
4) If that is not enough, and the AA has gotten really out of whack, I will look at what I need to sell and what kind of tax hit I'm going to take.

#4 is obviously the hard one. If you have an IPS you can set your bands as loose or tight as you wish. I look at what I have coming in for the next few months as far as bonuses, ESPP shares, 401k purchases, etc and see how they can be deployed to keep me within to my rebalancing bands. I set pretty loose rebalancing bands and am usually able to keep the portfolio within the bands with new contributions. If it gets outside those bands, I will carefully choose what to sell and plan for the tax hit. Someone here once quoted to me, "Don't let the tax tail wag the investment dog"

Hope that helps, I'll be monitoring this thread!

Z

Mike Scott
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Re: Rebalancing - In Taxable Account

Post by Mike Scott » Tue Sep 19, 2017 9:59 am

Is this a role for something like Vanguard's tax managed balanced fund?

renue74
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Re: Rebalancing - In Taxable Account

Post by renue74 » Tue Sep 19, 2017 10:44 am

This is what I do so far, but my portfolio is growing faster than I make regular investments.

1.) Turned off all reinvestments. Any dividend, etc. $ get's manually invested in my VFSUX bond fund in taxable.
2.) All SIMPLE and 403b investments (monthly) get invest in Total Bond Fund.
3.) Any new $ added to taxable is added to the VFSUX bond fund.

I'm in the 25% bracket...so tax free funds may not be the best option.

I will have to look at livesoft's suggestion.

livesoft
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Re: Rebalancing - In Taxable Account

Post by livesoft » Tue Sep 19, 2017 10:59 am

Mike Scott wrote:
Tue Sep 19, 2017 9:59 am
Is this a role for something like Vanguard's tax managed balanced fund?
I personally don't think so. I want to manage taxes myself which means separate asset classes in separate funds, Cost Basis Method set to Specific Identification, manually reinvesting distributions, tax-loss harvesting, and a Donor-Advised Fund. Plus a few other things like gifting to children.
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WhiteMaxima
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Re: Rebalancing - In Taxable Account

Post by WhiteMaxima » Tue Sep 19, 2017 11:34 am

Just leave it there as is. Reinvest the dividend to a tax managed fund or an tax efficient ETF. Vanguard and turbo-tax program will figure out your tax owed each year. Since you are not selling the fund, there would be complicity of capital gain tax.

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Earl Lemongrab
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Re: Rebalancing - In Taxable Account

Post by Earl Lemongrab » Tue Sep 19, 2017 5:57 pm

Since the end of the 2009 bear market, I've pretty much done all rebalancing by directing new funds to the lagging sectors.
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