Re-allocating in taxable account

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Re-allocating in taxable account

Post by ppanther412 » Mon Jun 29, 2020 9:30 pm

Thinking ahead to when I'm at an age (currently 36) where I'd be ready to start reducing my exposure in equities and expanding into more conservative investments. I have a taxable brokerage account that is 85/15 equities/bonds with not too much new money going in. Are there any ways to minimize the tax burden of changing my allocation? The only strategy I can think of is to significantly re-balance my 401k and Roth IRA first to get as close as possible to my overall target allocation before touching the brokerage account. Or do I eventually just need to bite the bullet, sell positions, and take the tax hit?

Thanks and apologies if this question has been answered before.

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Re: Re-allocating in taxable account

Post by stan1 » Mon Jun 29, 2020 9:34 pm

Many would rebalance in the tax deferred accounts rather than paying taxes if you don't otherwise need to withdraw from the taxable account. At 36 your situation might be very different in 20 or 30 years. I buy holdings in taxable I intend to hold for the rest of my life, but reality might prove to be quite different than that.

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Re: Re-allocating in taxable account

Post by 123 » Mon Jun 29, 2020 9:35 pm

Many people adjust their asset allocations without tax consequences by directing new contributions (or cash dividends) toward whatever direction they wish to go.
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Re: Re-allocating in taxable account

Post by grabiner » Mon Jun 29, 2020 9:39 pm

When possible, do your rebalancing in your 401(k) and Roth IRA, keeping the correct overall taxable allocation. You can use new money and non-reinvested dividends to buy more bond funds. If you happen to have losses to harvest in your taxable account, you also have the option of selling taxable stock to buy bonds, and selling an equal amount of bonds in tax-deferred to buy stock.

But if your 401(k) and Roth IRA are all bonds, and you need more bonds, then you should sell stock from your taxable account to decrease your risk. You are selling stock that you were going to sell anyway, intending never to buy it back; this is a tax you had to pay.
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Re: Re-allocating in taxable account

Post by BL » Mon Jun 29, 2020 9:49 pm

Don't forget that new money also includes dividends and distributed capital gains which could be distributed now or later to fixed income.

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