taxation when rebalancing??

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simpleidiot
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Joined: Wed Feb 08, 2012 11:21 pm

taxation when rebalancing??

Post by simpleidiot » Thu Nov 07, 2019 8:03 pm

As my username implies, I am an investing simpleton, but please answer me this:

Once I have my desired asset allocation that I intend to rebalance once annually, won't I get a tax hit when I sell stock or bond to achieve my desired allocation?

If yes, is the standard wisdom that any such tax hit is worth the long-term benefits of the balanced allocation?

FYI s have all my tax-advantaged accounts (Trad IRA, Roth IRA, SIMPLE IRA) in Target Retirement 2055 so that of course auto balances.

My taxable account is mostly VTSAX and some VGSLX.

Please clue me in, thank you!

Thesaints
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Re: taxation when rebalancing??

Post by Thesaints » Thu Nov 07, 2019 8:09 pm

Yes, you might incur in taxes and those taxes may very well overweight the benefits of rebalancing.

The way to do it is of course to rebalance minimizing additional taxes. For instance redirecting new contributions and dividend reinvestments.
That may make the rebalancing process slower, but generally the "exactness" of one's portfolio allocation doesn't really count much. 67/33 has essentially the same risk return of 65/35.

My advice is to keep a vigilant eye and try to do everything by very small, very tax efficient, steps.

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arcticpineapplecorp.
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Re: taxation when rebalancing??

Post by arcticpineapplecorp. » Thu Nov 07, 2019 8:14 pm

In addition to what's been written, sometimes you may have opportunites to tax loss harvest which can help offset gains on stocks sold for a profit. You should read more here:

https://www.bogleheads.org/wiki/Tax_loss_harvesting
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Brianmcg321
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Re: taxation when rebalancing??

Post by Brianmcg321 » Thu Nov 07, 2019 8:18 pm

Its better to re-balance with new money rather than selling existing shares. It doesn't have to be perfect.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

Topic Author
simpleidiot
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Re: taxation when rebalancing??

Post by simpleidiot » Thu Nov 07, 2019 8:58 pm

Thank you, friends.

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Artsdoctor
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Re: taxation when rebalancing??

Post by Artsdoctor » Thu Nov 07, 2019 9:04 pm

simpleidiot wrote:
Thu Nov 07, 2019 8:03 pm
As my username implies, I am an investing simpleton, but please answer me this:

Once I have my desired asset allocation that I intend to rebalance once annually, won't I get a tax hit when I sell stock or bond to achieve my desired allocation?

If yes, is the standard wisdom that any such tax hit is worth the long-term benefits of the balanced allocation?

FYI s have all my tax-advantaged accounts (Trad IRA, Roth IRA, SIMPLE IRA) in Target Retirement 2055 so that of course auto balances.

My taxable account is mostly VTSAX and some VGSLX.

Please clue me in, thank you!
Remember that the idea of re-balancing centers around risk management. If you've chosen your asset allocation at 60/40, for example, it's hopefully because you think it's going to get you where you need to go with a risk that you can handle. Re-balancing may or may not change your returns in the end, but it keeps your risk steadier than if you did nothing.

The two biggest levers you can use for re-balancing is doing everything you need to do in your tax-advantaged accounts, and putting new contributions where they're needed most. Re-balancing by selling in a taxable account doesn't happen as often as you think it should.

But speaking of taxation, the real estate fund (VGSLX) is considered a tax-INefficient fund. Presumably, if you're holding it in your taxable account, your marginal tax bracket is quite low. If that is the case, then re-balancing should not really affect your taxation much. If you're in a moderate-to-high tax bracket, then you might want to re-consider holding your real estate fund in a taxable account.

rkhusky
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Re: taxation when rebalancing??

Post by rkhusky » Thu Nov 07, 2019 9:37 pm

simpleidiot wrote:
Thu Nov 07, 2019 8:03 pm
FYI s have all my tax-advantaged accounts (Trad IRA, Roth IRA, SIMPLE IRA) in Target Retirement 2055 so that of course auto balances.

My taxable account is mostly VTSAX and some VGSLX.
If you have too much in stock, you can move to a TR fund with an earlier year. If you have too much in bonds, you can move to a TR fund with a later year.

jdilla1107
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Re: taxation when rebalancing??

Post by jdilla1107 » Thu Nov 07, 2019 10:56 pm

- Rebalance with new money to the underweight investment.
- Try to rebalance in tax advantaged accounts
- Don't reinvest dividends and instead rebalance with them
- Don't rebalance too precisely. Allow the allocation to float a bit. (Write down how much "a bit" is so you don't cheat.)
- When selling, use tax lots so you are selling the shares with the least appreciation

dcabler
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Re: taxation when rebalancing??

Post by dcabler » Fri Nov 08, 2019 6:53 am

jdilla1107 wrote:
Thu Nov 07, 2019 10:56 pm
- Rebalance with new money to the underweight investment.
- Try to rebalance in tax advantaged accounts
- Don't reinvest dividends and instead rebalance with them
- Don't rebalance too precisely. Allow the allocation to float a bit. (Write down how much "a bit" is so you don't cheat.)
- When selling, use tax lots so you are selling the shares with the least appreciation
We have a winner! :D

Admiral
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Re: taxation when rebalancing??

Post by Admiral » Fri Nov 08, 2019 7:01 am

Unless your portfolio is very large and you contribute very little, as long as you're still investing your drift can be controlled with new money. I've been a Bh for 10 years (in terms of investment strategy) and have never had my assets be more than 5% above or below my target AA (70/30). They've been close and are currently about 2.5% high due to the market run up. But generally it's taken care of itself. I'm adding about 4-5% of the total portfolio balance per year (of course this percentage is/will shrink over time as the balance grows).

As others said, you can always swap things in retirement accounts to eliminate taxation as an issue (for now).

retiredjg
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Re: taxation when rebalancing??

Post by retiredjg » Fri Nov 08, 2019 7:14 am

simpleidiot wrote:
Thu Nov 07, 2019 8:03 pm
Once I have my desired asset allocation that I intend to rebalance once annually, won't I get a tax hit when I sell stock or bond to achieve my desired allocation?
If you sell stocks or bonds in your taxable account, you will have a tax hit if you sell at a gain.

However, you say that you hold Total Stock and Vanguard's Real Estate Index in taxable - neither of those is a bond. Both are stock funds. There would be no need to "rebalance".

Unless you put in the wrong ticker symbol maybe?

Unless the amount is very small, it is not a great idea to hold REITs (such as VGSLX) in taxable because they throw off dividends that are taxable each year. For most situations, a REIT should be held in one of your IRAs.

KingRiggs
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Re: taxation when rebalancing??

Post by KingRiggs » Fri Nov 08, 2019 9:12 am

Hold tax-efficient equity funds in your taxable accounts, and change your tax-advantaged accounts from target-date funds to a mix of index equity and bond funds. Then you can rebalance entirely within your tax-advantaged space. Works well unless your AA and the size of your accounts dictate that you hold bonds in taxable, then it becomes SLIGHTLY more complicated...
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Middle
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Re: taxation when rebalancing??

Post by Middle » Fri Nov 08, 2019 12:40 pm

I would just add that there is no reason to get entirely out of the Target Retirement funds you are using in the tax-advantaged accounts. Do just enough to get yourself to your desired asset allocation. Likely that means selling some TR for a bond fund. But yes, just to echo what others have said, try to get setup so that you can do your rebalancing in the tax advantaged space to minimize tax hits. At some point you will see that redirecting new contributions and/or redirecting dividends does not move the needle much.

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GerryL
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Re: taxation when rebalancing??

Post by GerryL » Fri Nov 08, 2019 1:44 pm

KingRiggs wrote:
Fri Nov 08, 2019 9:12 am
Hold tax-efficient equity funds in your taxable accounts, and change your tax-advantaged accounts from target-date funds to a mix of index equity and bond funds. Then you can rebalance entirely within your tax-advantaged space. Works well unless your AA and the size of your accounts dictate that you hold bonds in taxable, then it becomes SLIGHTLY more complicated...
When I started out, I knew nothing about the "bonds are best held in tax-advantaged accounts" concept, but I did know I wanted to keep things simple. My taxable account is in a balanced fund that reflects my 60/40 AA. Any rebalancing I do is in tax-advantaged space.

KyleAAA
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Re: taxation when rebalancing??

Post by KyleAAA » Fri Nov 08, 2019 1:55 pm

In addition to rebalancing with new funds and redirecting dividends, you could use tax-advantaged accounts for this. Instead of investing in the target retirement funds, you could invest in its individual constituents. That way, whatever needs to be sold can probably be done in a tax-advantaged account rather than taxable.

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