Rebalancing tips if my AA goes beyond my 5% band in a bull market

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Aguilar
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Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

I'm looking for some guidance on rebalancing methods as I draft a new IPS. My plan is to put new money (including dividends) into stocks or bonds based on my AA (target 70/30, age-10 in bonds) so that I'm always inching closer to my target allocation.

If my AA becomes too conservative (outside my -5% band), I'll exchange bonds for stocks in my Roth IRA and, secondarily, my 401k. I'm beginning to invest in munis in my taxable account (NY and natl) so as a third option, I could exchange munis for stocks, though this could result in some cap gains, so it's last resort. I'd consider TLHing to offset gains, though unfortunately most of my taxable investments are locked into avg cost so my chances of TLHing are smaller. Side note, I'm now in Specific ID, actual cost for my taxable funds.

What I'm trying to figure out is, what do I do if/when the market goes up a lot and my AA goes beyond my 5% band. I can exchange stocks in my 401k to bonds (My 401k is 100% bonds but I've set new contributions to 100% equities for this purpose) and I could also exchange stocks in Roth to bonds (though this isn't ideal, I'd rather my Roth have more equities). What else could I do? If I were to sell equities in my taxable and exchange them for munis, I'd have large cap gains (and very likely no losses, especially in a scenario where the market is booming). The only other option I see is to rebalance with new money but if I'm outside the 5% band, that could take a long time.

I can provide my portfolio if it would help.
sycamore
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by sycamore »

Aguilar wrote: Tue Sep 20, 2022 1:45 pm I'm looking for some guidance on rebalancing methods as I draft a new IPS. My plan is to put new money (including dividends) into stocks or bonds based on my AA (target 70/30, age-10 in bonds) so that I'm always inching closer to my target allocation.

If my AA becomes too conservative (outside my -5% band), I'll exchange bonds for stocks in my Roth IRA and, secondarily, my 401k. I'm beginning to invest in munis in my taxable account (NY and natl) so as a third option, I could exchange munis for stocks, though this could result in some cap gains, so it's last resort. I'd consider TLHing to offset gains, though unfortunately most of my taxable investments are locked into avg cost so my chances of TLHing are smaller. Side note, I'm now in Specific ID, actual cost for my taxable funds.

What I'm trying to figure out is, what do I do if/when the market goes up a lot and my AA goes beyond my 5% band. I can exchange stocks in my 401k to bonds (My 401k is 100% bonds but I've set new contributions to 100% equities for this purpose) and I could also exchange stocks in Roth to bonds (though this isn't ideal, I'd rather my Roth have more equities). What else could I do? If I were to sell equities in my taxable and exchange them for munis, I'd have large cap gains (and very likely no losses, especially in a scenario where the market is booming). The only other option I see is to rebalance with new money but if I'm outside the 5% band, that could take a long time.

I can provide my portfolio if it would help.
Can you implement rebalancing only using the 401k account? My guess is yes, as you have both stocks & bonds in that account.

Let's say stocks rise far enough that your AA reaches 77/23. What does your IPS say? Do you (A) rebalance by 2% to get the AA under the 5% threshold, or (B) rebalance to your target AA of 70/30? In case (A), you only need to rebalance 2%. In case (B) it's 7%. If your 401k account holds more than 7% of your whole portfolio in stocks, then you'll have enough room to do all your rebalancing back to bonds.

I would try to do all rebalancing entirely in the 401k because there are no tax consequences to trading. Though maybe your 401k account charges $ for transactions?

If you find you can't do all your rebalancing in the 401k (i.e., because your portfolio is so big), that's a good problem to have :)

Side note: why do you keep bonds in Roth? It's not necessarily wrong but typically people like to keep assets with highest expected growth (i.e., stocks) in tax-free Roth, and bonds in tax-deferred accounts.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by vineviz »

Aguilar wrote: Tue Sep 20, 2022 1:45 pm
What I'm trying to figure out is, what do I do if/when the market goes up a lot and my AA goes beyond my 5% band. I can exchange stocks in my 401k to bonds (My 401k is 100% bonds but I've set new contributions to 100% equities for this purpose) and I could also exchange stocks in Roth to bonds (though this isn't ideal, I'd rather my Roth have more equities). What else could I do?
I think it'd help if we knew the relative sizes of the 401k, Roth IRA, traditional IRA (if any) and taxable.

And honestly I'd suggest trying to avoid thinking of the asset allocation as something you need to manage quite so tightly. I'd probably set a wider band (maybe 10%) and maybe set a policy of limiting hard rebalances to maybe half the difference.

For instance, if the 70/30 drifts to 80/20 that would trigger a rebalance back to 75/25. New contributions (i.e. "soft" rebalancing") would make up the difference.

And for ease of use I might just set the Roth to always be 100% stock, the 401k to be 50/50, and the taxable at whatever it takes to get the total to 70/30.

That way you have the maximum amount of "rebalancing room" in the 401k, and you might not ever have to do a hard rebalance in the taxable account at all.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Aguilar
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

My 401k is over $300k and all bonds. So I can’t rebalance within my 401k only. Right now I’m planning to invest new money in equities so I have some rebalancing potential there.

Roth is around $300k. About 60% is equities.
Taxable is $1.3M
I have about $150k in cash and aside from my EF, I’m moving the rest to munis in my taxable.

I’d like to make my Roth all equities but not sure how without throwing off my AA a lot. If I move the bonds to equities I’d need to move equities to bonds elsewhere and all that’s left is my taxable account where I’d incur cap gains.

As for making my 401k 50/50, if I did that now I’d need to exchange equities to bonds elsewhere. Again, same issue as above.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by vineviz »

Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by dbr »

It can happen that the combinations of asset location, which affects taxation, and asset allocation get in each others way. I would not let asset allocation to the nit start to cause tax costs. Sometimes there is also another way out. My last rebalancing out of stocks was done tax cost free by giving stock shares to someone who had no income in a given year and could sell them without paying tax on the fairly large capital gain that year. Or those gains could also be avoided by basis step up at death while just accepting that the AA would not be rebalanced. Otherwise I would probably just live with a little bit out of balance asset allocation. It is also possible to not insist on perfect asset location although I am glad in this case to realize stock capital gains without a tax cost rather than have them sit in a 401k and eventually be taxed as ordinary income, even if in fact deferred. In a particular case there may be a more obvious solution though the outcome is so affected by detail that it is hard to generalize. It does depend a lot on what AA you want and how large the different accounts are. One can also place tax exempt bonds in taxable and so on.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

vineviz wrote: Tue Sep 20, 2022 4:33 pm Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
taxable is nearly 100% stock. Just started investing in munis there. Once I finish investing my cash in munis, it'll be roughly 92/8. To get to 70/30, I would need to sell a lot of equities and aside from $20k with losses, the rest have gains and would be a big tax hit. I could then move the equities sales $ to munis. That would still leave me needing to move bonds to equities in my Roth and 401k, making my AA too aggressive. Only way to offset this would be to more equities in taxable to munis, taking a further tax hit.

maybe I'm missing something here. is there another way?
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

dbr wrote: Tue Sep 20, 2022 4:41 pm It can happen that the combinations of asset location, which affects taxation, and asset allocation get in each others way. I would not let asset allocation to the nit start to cause tax costs. Sometimes there is also another way out. My last rebalancing out of stocks was done tax cost free by giving stock shares to someone who had no income in a given year and could sell them without paying tax on the fairly large capital gain that year. Or those gains could also be avoided by basis step up at death while just accepting that the AA would not be rebalanced. Otherwise I would probably just live with a little bit out of balance asset allocation. It is also possible to not insist on perfect asset location although I am glad in this case to realize stock capital gains without a tax cost rather than have them sit in a 401k and eventually be taxed as ordinary income, even if in fact deferred. In a particular case there may be a more obvious solution though the outcome is so affected by detail that it is hard to generalize. It does depend a lot on what AA you want and how large the different accounts are. One can also place tax exempt bonds in taxable and so on.
How does this work? I don't know anyone who falls in the 0% LTCG bracket, but just curious.
"My last rebalancing out of stocks was done tax cost free by giving stock shares to someone who had no income in a given year and could sell them without paying tax on the fairly large capital gain that year."
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by dbr »

Aguilar wrote: Tue Sep 20, 2022 5:24 pm
vineviz wrote: Tue Sep 20, 2022 4:33 pm Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
taxable is nearly 100% stock. Just started investing in munis there. Once I finish investing my cash in munis, it'll be roughly 92/8. To get to 70/30, I would need to sell a lot of equities and aside from $20k with losses, the rest have gains and would be a big tax hit. I could then move the equities sales $ to munis. That would still leave me needing to move bonds to equities in my Roth and 401k, making my AA too aggressive. Only way to offset this would be to more equities in taxable to munis, taking a further tax hit.

maybe I'm missing something here. is there another way?
It's confusing because it isn't clear how large each of your accounts is. Unless your 401k is very small compared to taxable and Roth can you not hold only bonds in the 401k and stocks elsewhere. There should probably not be any bonds in the Roth.

Is this a case of trying to get the same asset allocation in each of your types of accounts?
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

dbr wrote: Tue Sep 20, 2022 5:29 pm
Aguilar wrote: Tue Sep 20, 2022 5:24 pm
vineviz wrote: Tue Sep 20, 2022 4:33 pm Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
taxable is nearly 100% stock. Just started investing in munis there. Once I finish investing my cash in munis, it'll be roughly 92/8. To get to 70/30, I would need to sell a lot of equities and aside from $20k with losses, the rest have gains and would be a big tax hit. I could then move the equities sales $ to munis. That would still leave me needing to move bonds to equities in my Roth and 401k, making my AA too aggressive. Only way to offset this would be to more equities in taxable to munis, taking a further tax hit.

maybe I'm missing something here. is there another way?
It's confusing because it isn't clear how large each of your accounts is. Unless your 401k is very small compared to taxable and Roth can you not hold only bonds in the 401k and stocks elsewhere. There should probably not be any bonds in the Roth.

Is this a case of trying to get the same asset allocation in each of your types of accounts?
No, it's to get to my target AA across my portfolio.

I explained earlier but here it is again

My 401k is over $300k and all bonds. So I can’t rebalance within my 401k only. Right now I’m planning to invest new money in equities so I have some rebalancing potential there.

Roth is around $300k. About 60% is equities.
Taxable is $1.3M
I have about $150k in cash and aside from my EF, I’m moving the rest to munis in my taxable.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by dbr »

Aguilar wrote: Tue Sep 20, 2022 5:27 pm
dbr wrote: Tue Sep 20, 2022 4:41 pm It can happen that the combinations of asset location, which affects taxation, and asset allocation get in each others way. I would not let asset allocation to the nit start to cause tax costs. Sometimes there is also another way out. My last rebalancing out of stocks was done tax cost free by giving stock shares to someone who had no income in a given year and could sell them without paying tax on the fairly large capital gain that year. Or those gains could also be avoided by basis step up at death while just accepting that the AA would not be rebalanced. Otherwise I would probably just live with a little bit out of balance asset allocation. It is also possible to not insist on perfect asset location although I am glad in this case to realize stock capital gains without a tax cost rather than have them sit in a 401k and eventually be taxed as ordinary income, even if in fact deferred. In a particular case there may be a more obvious solution though the outcome is so affected by detail that it is hard to generalize. It does depend a lot on what AA you want and how large the different accounts are. One can also place tax exempt bonds in taxable and so on.
How does this work? I don't know anyone who falls in the 0% LTCG bracket, but just curious.
"My last rebalancing out of stocks was done tax cost free by giving stock shares to someone who had no income in a given year and could sell them without paying tax on the fairly large capital gain that year."
For a couple with no taxable income other than the realized cap gain the bracket runs up to $80,000. This was just an illustration that might be unusual. A person can have no taxable income in a year because they are in school, unemployed for some other reason, etc. Alternatively you can give the shares to a qualified charity. For whom and under what circumstances different things make sense depends on all sorts of things.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Artsdoctor »

Given the size of your portfolio, "rebalancing" with new money and dividends are going to go a long way. I've always been impressed at how volatile the market can be without having to actually sell one asset class and buy another although it does happen occasionally. The last time, for me, there was a free-for-all was in the 2008-2009 equity meltdown; there was a mad scramble to buy equities from money anywhere.

The goal of rebalancing is to keep your risk level where you're comfortable. I would not rebalance in a way to incur taxable events. If you have an IRA and a Roth, those will provide you with plenty of opportunities to rebalance if necessary. You can absolutely take advantage of tax-loss harvesting in your taxable account although you'll want to familiarize yourself with that maneuver before trying it.

Some people will be pretty dogmatic about holding fixed income in tax-deferred accounts and equities in Roths. However, during a lot of market turbulence, you'll probably blur those lines a bit (buying equities in your bond-heavy tax-deferred account, for example).
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by dbr »

Aguilar wrote: Tue Sep 20, 2022 5:31 pm
dbr wrote: Tue Sep 20, 2022 5:29 pm
Aguilar wrote: Tue Sep 20, 2022 5:24 pm
vineviz wrote: Tue Sep 20, 2022 4:33 pm Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
taxable is nearly 100% stock. Just started investing in munis there. Once I finish investing my cash in munis, it'll be roughly 92/8. To get to 70/30, I would need to sell a lot of equities and aside from $20k with losses, the rest have gains and would be a big tax hit. I could then move the equities sales $ to munis. That would still leave me needing to move bonds to equities in my Roth and 401k, making my AA too aggressive. Only way to offset this would be to more equities in taxable to munis, taking a further tax hit.

maybe I'm missing something here. is there another way?
It's confusing because it isn't clear how large each of your accounts is. Unless your 401k is very small compared to taxable and Roth can you not hold only bonds in the 401k and stocks elsewhere. There should probably not be any bonds in the Roth.

Is this a case of trying to get the same asset allocation in each of your types of accounts?
No, it's to get to my target AA across my portfolio.

I explained earlier but here it is again

My 401k is over $300k and all bonds. So I can’t rebalance within my 401k only. Right now I’m planning to invest new money in equities so I have some rebalancing potential there.

Roth is around $300k. About 60% is equities.
Taxable is $1.3M
I have about $150k in cash and aside from my EF, I’m moving the rest to munis in my taxable.
Yes, sorry. There is no way for you to immediately reduce stock holding and hold bonds instead and also avoid capital gains on selling the stock assuming things like giving away assets are not really helpful, which they usually aren't when people are trying to accumulate wealth. The 0% bracket on cap gains is likely long gone for you. It looks like the only path is through investing new money though the problem would have originated in the original decision or situation of having a large taxable account almost all in stocks. One of the things you can switch to bonds is any dividends and capital gains distributions from stocks by not reinvesting and buying bonds instead. If you are at high tax rates then munis are what you are buying.

It would be good to list your stock holdings by tax lot to see what individual unrealized gains you have. Some lots may actually be at a loss by now. You can take those losses and then offset gains on other lots or offset $3000 in income each year.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by vineviz »

dbr wrote: Tue Sep 20, 2022 5:51 pm It looks like the only path is through investing new money though the problem would have originated in the original decision or situation of having a large taxable account almost all in stocks. One of the things you can switch to bonds is any dividends and capital gains distributions from stocks by not reinvesting and buying bonds instead. If you are at high tax rates then munis are what you are buying.
I concur. The OP is in a tough spot because of that taxable allocation.

If they are following age-10 in bonds, that would suggest they are roughly 40 years old and (making some assumptions) they've got a decade or two until retirement. My advice is to relax the rebalancing bands and just do as much with new contributions as can be done. A couple of years worth of 401k contributions invested into the bond funds, and making sure to not purchase any more stock in taxable, should get things straightened out.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

dbr wrote: Tue Sep 20, 2022 5:51 pm
Aguilar wrote: Tue Sep 20, 2022 5:31 pm
dbr wrote: Tue Sep 20, 2022 5:29 pm
Aguilar wrote: Tue Sep 20, 2022 5:24 pm
vineviz wrote: Tue Sep 20, 2022 4:33 pm Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
taxable is nearly 100% stock. Just started investing in munis there. Once I finish investing my cash in munis, it'll be roughly 92/8. To get to 70/30, I would need to sell a lot of equities and aside from $20k with losses, the rest have gains and would be a big tax hit. I could then move the equities sales $ to munis. That would still leave me needing to move bonds to equities in my Roth and 401k, making my AA too aggressive. Only way to offset this would be to more equities in taxable to munis, taking a further tax hit.

maybe I'm missing something here. is there another way?
It's confusing because it isn't clear how large each of your accounts is. Unless your 401k is very small compared to taxable and Roth can you not hold only bonds in the 401k and stocks elsewhere. There should probably not be any bonds in the Roth.

Is this a case of trying to get the same asset allocation in each of your types of accounts?
No, it's to get to my target AA across my portfolio.

I explained earlier but here it is again

My 401k is over $300k and all bonds. So I can’t rebalance within my 401k only. Right now I’m planning to invest new money in equities so I have some rebalancing potential there.

Roth is around $300k. About 60% is equities.
Taxable is $1.3M
I have about $150k in cash and aside from my EF, I’m moving the rest to munis in my taxable.
Yes, sorry. There is no way for you to immediately reduce stock holding and hold bonds instead and also avoid capital gains on selling the stock assuming things like giving away assets are not really helpful, which they usually aren't when people are trying to accumulate wealth. The 0% bracket on cap gains is likely long gone for you. It looks like the only path is through investing new money though the problem would have originated in the original decision or situation of having a large taxable account almost all in stocks. One of the things you can switch to bonds is any dividends and capital gains distributions from stocks by not reinvesting and buying bonds instead. If you are at high tax rates then munis are what you are buying.

It would be good to list your stock holdings by tax lot to see what individual unrealized gains you have. Some lots may actually be at a loss by now. You can take those losses and then offset gains on other lots or offset $3000 in income each year.
Right now I have about $20k in intl funds in my taxable with a $2k loss. No losses in my third fund, VTSAX. Is it worth selling the $20k and exchanging into one of my muni funds, and apply the $2k to income come tax time?

Unfortunately, I think it’s unlikely I’ll have VTSAX losses ever. A lot of my buys were a while ago when shares were far less than today. Beyond that, my 2012-2020 covered shares are stuck with avg cost, so the lots that have higher actual cost basis are in effect locked in a lower basis, further away from the current market price. If using actual cost some lots would be in the red if the fund dropped 30%, but instead it would take a 55% drop.
Last edited by Aguilar on Tue Sep 20, 2022 7:24 pm, edited 1 time in total.
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Aguilar
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

vineviz wrote: Tue Sep 20, 2022 6:26 pm
dbr wrote: Tue Sep 20, 2022 5:51 pm It looks like the only path is through investing new money though the problem would have originated in the original decision or situation of having a large taxable account almost all in stocks. One of the things you can switch to bonds is any dividends and capital gains distributions from stocks by not reinvesting and buying bonds instead. If you are at high tax rates then munis are what you are buying.
I concur. The OP is in a tough spot because of that taxable allocation.

If they are following age-10 in bonds, that would suggest they are roughly 40 years old and (making some assumptions) they've got a decade or two until retirement. My advice is to relax the rebalancing bands and just do as much with new contributions as can be done. A couple of years worth of 401k contributions invested into the bond funds, and making sure to not purchase any more stock in taxable, should get things straightened out.
I never knew till recently that I should have bonds in my taxable account. Lesson learned.

I’m 40, single. Aiming to retire at age 55-57.

Like you recommended I can invest new 401k contributions in bonds, not buy stocks in taxable—just munis—and exchange bonds for stocks in my Roth.

What’s the reason to make 401k contributions to bonds instead of equities? Wouldn’t having some equities there give me rebalancing options?
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by vineviz »

Aguilar wrote: Tue Sep 20, 2022 7:17 pm What’s the reason to make 401k contributions to bonds instead of equities? Wouldn’t having some equities there give me rebalancing options?
I'm pretty sure your total allocation is closer to 80/20 right now than to 70/30, so the idea of keeping the 401k in bonds for the moment is to bring that down to your stated target of 70/30 and allow the Roth to move towards 100% stocks.

If my quick calculations are right it will likely take a couple of years of contributions to get the overall asset allocation to the point that you want it, so you can start including stocks in the 401k. I wouldn't necessarily AVOID stocks in the 401k so much as prioritize them in the Roth.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
milktoast
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by milktoast »

My advice. In taxable, put your first 10k/20k per year into ibonds.

Then shift Roth towards stocks to maintain AA. Yeah didn’t help you on your original question. Sorry.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

milktoast wrote: Tue Sep 20, 2022 8:06 pm My advice. In taxable, put your first 10k/20k per year into ibonds.

Then shift Roth towards stocks to maintain AA. Yeah didn’t help you on your original question. Sorry.

How do you put ibonds in taxable? I only know of them being available through Treasury Direct.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by grabiner »

My IPS says that I will only pay a capital-gains tax to rebalance if I am outside a rebalancing band and I do not expect normal inflows (including directing dividends to the correct place) to fix it. This has never happened, although it came close in 2007; one more year of a rise in emerging markets would have taken me from my 10% target over my 15% limit.

The "normal inflows" is most important when I add a new asset class that I hold in my taxable account, such as international small-cap when low-cost ETFs for that class became available. I will not sell for a capital gain in order to get to my target allocation in the new class, but all new money will go to that asset class until I reach the target. And if I get a chance to sell something else for a capital loss, I will reinvest in the underweighted asset class.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by milktoast »

Aguilar wrote: Tue Sep 20, 2022 8:19 pm How do you put ibonds in taxable? I only know of them being available through Treasury Direct.
I should have been more precise. Buy ibonds through treasury direct using the first 10k/20k each year that cannot be contributed to your 401k/Roth accounts and would otherwise be invested in your taxable account.

You could even TLH if you don’t have enough savings to hit those limits this year.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

grabiner wrote: Tue Sep 20, 2022 8:54 pm My IPS says that I will only pay a capital-gains tax to rebalance if I am outside a rebalancing band and I do not expect normal inflows (including directing dividends to the correct place) to fix it. This has never happened, although it came close in 2007; one more year of a rise in emerging markets would have taken me from my 10% target over my 15% limit.

The "normal inflows" is most important when I add a new asset class that I hold in my taxable account, such as international small-cap when low-cost ETFs for that class became available. I will not sell for a capital gain in order to get to my target allocation in the new class, but all new money will go to that asset class until I reach the target. And if I get a chance to sell something else for a capital loss, I will reinvest in the underweighted asset class.
Thanks, makes sense.

Right now I have about $20k in intl funds in my taxable with a $2k loss. No losses in my third taxable fund, VTSAX. Is it worth selling the $20k and exchanging into one of my muni funds, and apply the $2k to income at tax time? The way I see it, if I sold the $20k, I could exchange it for munis in my taxable, and then exchange $20k in Total Bond Market in my Roth to VTSAX.

Unfortunately, I think it’s unlikely I’ll have VTSAX losses unless the market truly tanks. A lot of my buys were a while ago when shares were far less than today. Beyond that, my 2012-2020 covered shares are stuck with avg cost, so the lots that have higher actual cost basis are in effect locked in a lower basis, further away from the current market price. If using actual cost some lots would be in the red if the fund dropped 30%, but instead it would probably take a 55% drop. I'm now in Specific ID, actual cost, across my taxable.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by grabiner »

Aguilar wrote: Wed Sep 21, 2022 9:07 am
grabiner wrote: Tue Sep 20, 2022 8:54 pm My IPS says that I will only pay a capital-gains tax to rebalance if I am outside a rebalancing band and I do not expect normal inflows (including directing dividends to the correct place) to fix it. This has never happened, although it came close in 2007; one more year of a rise in emerging markets would have taken me from my 10% target over my 15% limit.

The "normal inflows" is most important when I add a new asset class that I hold in my taxable account, such as international small-cap when low-cost ETFs for that class became available. I will not sell for a capital gain in order to get to my target allocation in the new class, but all new money will go to that asset class until I reach the target. And if I get a chance to sell something else for a capital loss, I will reinvest in the underweighted asset class.
Thanks, makes sense.

Right now I have about $20k in intl funds in my taxable with a $2k loss. No losses in my third taxable fund, VTSAX. Is it worth selling the $20k and exchanging into one of my muni funds, and apply the $2k to income at tax time? The way I see it, if I sold the $20k, I could exchange it for munis in my taxable, and then exchange $20k in Total Bond Market in my Roth to VTSAX.
You should sell for the capital loss, since this will save you in taxes.

What you should do with the money depends on your tax situation and asset allocation. If your tax situation is such that you prefer munis in taxable and stocks in tax-deferred (high tax bracket and Vanguard has a fund for your state), then you can sell this stock fund to buy a muni fund, and move an equal amount from bonds to stocks in an IRA/401(k) to keep the same stock allocation. If you prefer stocks in taxable, you should sell the stock fund and buy another stock fund.

Your proposal above also suggests that you want to have more US stock and less foreign stock. If this is consistent with your asset allocation, then it makes sense; otherwise, you should sell the bond fund in your IRA to buy a foreign stock fund (and either wait 31 days or buy a different fund from the one you sold, to avoid wash sales).

My point above is only relevant if you are underweighted in foreign stock, and have to hold this foreign stock in a taxable account (because your IRA is full of tax-inefficient funds and your 401(k) doesn't have a good fund in the foreign stock class you are in). This did apply to me when international small-cap ETFs became available. I didn't have room in my Roth IRA to get my target weight in international small-cap unless I sold something else such as REITs, and my employer plan doesn't offer an international small-cap fund. But I didn't want to sell my large-cap US or foreign stock for a capital gain in order to buy more international small-cap, so I used only new money, and sales from capital losses. (When the market dropped in 2008, I had enough money from realized losses to get to my target allocation.)
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

grabiner wrote: Wed Sep 21, 2022 7:21 pm
Aguilar wrote: Wed Sep 21, 2022 9:07 am
grabiner wrote: Tue Sep 20, 2022 8:54 pm My IPS says that I will only pay a capital-gains tax to rebalance if I am outside a rebalancing band and I do not expect normal inflows (including directing dividends to the correct place) to fix it. This has never happened, although it came close in 2007; one more year of a rise in emerging markets would have taken me from my 10% target over my 15% limit.

The "normal inflows" is most important when I add a new asset class that I hold in my taxable account, such as international small-cap when low-cost ETFs for that class became available. I will not sell for a capital gain in order to get to my target allocation in the new class, but all new money will go to that asset class until I reach the target. And if I get a chance to sell something else for a capital loss, I will reinvest in the underweighted asset class.
Thanks, makes sense.

Right now I have about $20k in intl funds in my taxable with a $2k loss. No losses in my third taxable fund, VTSAX. Is it worth selling the $20k and exchanging into one of my muni funds, and apply the $2k to income at tax time? The way I see it, if I sold the $20k, I could exchange it for munis in my taxable, and then exchange $20k in Total Bond Market in my Roth to VTSAX.
You should sell for the capital loss, since this will save you in taxes.

What you should do with the money depends on your tax situation and asset allocation. If your tax situation is such that you prefer munis in taxable and stocks in tax-deferred (high tax bracket and Vanguard has a fund for your state), then you can sell this stock fund to buy a muni fund, and move an equal amount from bonds to stocks in an IRA/401(k) to keep the same stock allocation. If you prefer stocks in taxable, you should sell the stock fund and buy another stock fund.

Your proposal above also suggests that you want to have more US stock and less foreign stock. If this is consistent with your asset allocation, then it makes sense; otherwise, you should sell the bond fund in your IRA to buy a foreign stock fund (and either wait 31 days or buy a different fund from the one you sold, to avoid wash sales).

My point above is only relevant if you are underweighted in foreign stock, and have to hold this foreign stock in a taxable account (because your IRA is full of tax-inefficient funds and your 401(k) doesn't have a good fund in the foreign stock class you are in). This did apply to me when international small-cap ETFs became available. I didn't have room in my Roth IRA to get my target weight in international small-cap unless I sold something else such as REITs, and my employer plan doesn't offer an international small-cap fund. But I didn't want to sell my large-cap US or foreign stock for a capital gain in order to buy more international small-cap, so I used only new money, and sales from capital losses. (When the market dropped in 2008, I had enough money from realized losses to get to my target allocation.)
What portion of your equities are intl? I used to hold 20% int but these days I think it’s down to about 13%. First priority will be to TLH the intl fund and exchange bonds to equities in my Roth. I didn’t realize you could generate a wash sale between taxable and Roth. In that case, I’d exchange the bonds to VTSAX in my Roth. If I decide to increase my intl equities, I could wait 31 days and then exchange some of the remaining bonds in my Roth to VTIAX, but it would make my AA more aggressive, and I have no way to offset this move without incurring a cap gain in my taxable.
Last edited by Aguilar on Wed Sep 21, 2022 9:12 pm, edited 1 time in total.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by grabiner »

Aguilar wrote: Wed Sep 21, 2022 8:39 pm What portion of your equities are intl? I used to hold 20% int but these days I think it’s down to about 13%.
My equities are 50% international, and have been at that level for years. I am decreasing my stock allocation by 2% per year as I get closer to retirement, so both US and foreign stock allocations decrease by 1% per year; I now hold 42% US and 42% foreign stock, and 16% bonds.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

grabiner wrote: Wed Sep 21, 2022 8:48 pm
Aguilar wrote: Wed Sep 21, 2022 8:39 pm What portion of your equities are intl? I used to hold 20% int but these days I think it’s down to about 13%.
My equities are 50% international, and have been at that level for years. I am decreasing my stock allocation by 2% per year as I get closer to retirement, so both US and foreign stock allocations decrease by 1% per year; I now hold 42% US and 42% foreign stock, and 16% bonds.
That’s an aggressive portfolio.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by DIYtrixie »

Aguilar wrote: Tue Sep 20, 2022 1:45 pm my AA (target 70/30, age-10 in bonds)
OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by grabiner »

Aguilar wrote: Wed Sep 21, 2022 9:14 pm
grabiner wrote: Wed Sep 21, 2022 8:48 pm
Aguilar wrote: Wed Sep 21, 2022 8:39 pm What portion of your equities are intl? I used to hold 20% int but these days I think it’s down to about 13%.
My equities are 50% international, and have been at that level for years. I am decreasing my stock allocation by 2% per year as I get closer to retirement, so both US and foreign stock allocations decrease by 1% per year; I now hold 42% US and 42% foreign stock, and 16% bonds.
That’s an aggressive portfolio.
Agreed, and not just in international stocks. I overweight small-cap, value, and emerging markets, so I have more risk than indicated by my stock percentage. But I know my risk tolerance (going back to the 2000-2002 bear market, when I lost a quarter of my 80%-stock portfolio; my portfolio has been similar to the current one since 2002), have a secure job, and own a home which is not part of my portfolio but which covers a significant fraction of my living expenses. I never recommend anyone match my portfolio; if a portfolio like mine is right for you, then you know enough to ignore that advice.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

DIYtrixie wrote: Wed Sep 21, 2022 9:38 pm
Aguilar wrote: Tue Sep 20, 2022 1:45 pm my AA (target 70/30, age-10 in bonds)
OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by dbr »

Aguilar wrote: Wed Sep 21, 2022 10:30 pm
DIYtrixie wrote: Wed Sep 21, 2022 9:38 pm
Aguilar wrote: Tue Sep 20, 2022 1:45 pm my AA (target 70/30, age-10 in bonds)
OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
I suggest you look at a model like this one, use negative spending for contributions, and see what difference there is in outcome for different asset allocations. One thing this model does not do is change asset allocation with age, but you can see what different asset allocations do over time. Probably the main thing to absorb is how wide the uncertainty in future results is with the conclusion that you have to make huge changes in asset allocation to significantly change the ex ante prospects. Note the theory here is that the variability in past results by starting year is a surrogate for the uncertainty of future results. It is really hard to figure out today what the path of the next 50 years is exactly going to be.

https://engaging-data.com/visualizing-4-rule/
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

dbr wrote: Thu Sep 22, 2022 8:20 am
Aguilar wrote: Wed Sep 21, 2022 10:30 pm
DIYtrixie wrote: Wed Sep 21, 2022 9:38 pm
Aguilar wrote: Tue Sep 20, 2022 1:45 pm my AA (target 70/30, age-10 in bonds)
OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
I suggest you look at a model like this one, use negative spending for contributions, and see what difference there is in outcome for different asset allocations. One thing this model does not do is change asset allocation with age, but you can see what different asset allocations do over time. Probably the main thing to absorb is how wide the uncertainty in future results is with the conclusion that you have to make huge changes in asset allocation to significantly change the ex ante prospects. Note the theory here is that the variability in past results by starting year is a surrogate for the uncertainty of future results. It is really hard to figure out today what the path of the next 50 years is exactly going to be.

https://engaging-data.com/visualizing-4-rule/
I'll dig into this. Looks pretty complex. Do you think my AA might be too aggressive?
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by dbr »

Aguilar wrote: Thu Sep 22, 2022 2:37 pm
dbr wrote: Thu Sep 22, 2022 8:20 am
Aguilar wrote: Wed Sep 21, 2022 10:30 pm
DIYtrixie wrote: Wed Sep 21, 2022 9:38 pm
Aguilar wrote: Tue Sep 20, 2022 1:45 pm my AA (target 70/30, age-10 in bonds)
OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
I suggest you look at a model like this one, use negative spending for contributions, and see what difference there is in outcome for different asset allocations. One thing this model does not do is change asset allocation with age, but you can see what different asset allocations do over time. Probably the main thing to absorb is how wide the uncertainty in future results is with the conclusion that you have to make huge changes in asset allocation to significantly change the ex ante prospects. Note the theory here is that the variability in past results by starting year is a surrogate for the uncertainty of future results. It is really hard to figure out today what the path of the next 50 years is exactly going to be.

https://engaging-data.com/visualizing-4-rule/
I'll dig into this. Looks pretty complex. Do you think my AA might be too aggressive?
Why would you think that? The main reason an allocation would be too aggressive is that the investor can't manage to live through large stock declines without panicking and selling out. You would have to know yourself to know that. Another reason is that the investor has no ability to make up losses by waiting for the market to come back and saving and investing along the way. Someone working for another 17 years can both wait and also will be adding money. Unless you know something we don't know it would not seem either of those reasons would be an issue.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

dbr wrote: Thu Sep 22, 2022 3:02 pm
Aguilar wrote: Thu Sep 22, 2022 2:37 pm
dbr wrote: Thu Sep 22, 2022 8:20 am
Aguilar wrote: Wed Sep 21, 2022 10:30 pm
DIYtrixie wrote: Wed Sep 21, 2022 9:38 pm

OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
I suggest you look at a model like this one, use negative spending for contributions, and see what difference there is in outcome for different asset allocations. One thing this model does not do is change asset allocation with age, but you can see what different asset allocations do over time. Probably the main thing to absorb is how wide the uncertainty in future results is with the conclusion that you have to make huge changes in asset allocation to significantly change the ex ante prospects. Note the theory here is that the variability in past results by starting year is a surrogate for the uncertainty of future results. It is really hard to figure out today what the path of the next 50 years is exactly going to be.

https://engaging-data.com/visualizing-4-rule/
I'll dig into this. Looks pretty complex. Do you think my AA might be too aggressive?
Why would you think that? The main reason an allocation would be too aggressive is that the investor can't manage to live through large stock declines without panicking and selling out. You would have to know yourself to know that. Another reason is that the investor has no ability to make up losses by waiting for the market to come back and saving and investing along the way. Someone working for another 17 years can both wait and also will be adding money. Unless you know something we don't know it would not seem either of those reasons would be an issue.
Got it, sounds good. I'll dig into the visualizing 4 rule model.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by DIYtrixie »

Aguilar wrote: Thu Sep 22, 2022 3:04 pm
dbr wrote: Thu Sep 22, 2022 3:02 pm
Aguilar wrote: Thu Sep 22, 2022 2:37 pm
dbr wrote: Thu Sep 22, 2022 8:20 am
Aguilar wrote: Wed Sep 21, 2022 10:30 pm

Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
I suggest you look at a model like this one, use negative spending for contributions, and see what difference there is in outcome for different asset allocations. One thing this model does not do is change asset allocation with age, but you can see what different asset allocations do over time. Probably the main thing to absorb is how wide the uncertainty in future results is with the conclusion that you have to make huge changes in asset allocation to significantly change the ex ante prospects. Note the theory here is that the variability in past results by starting year is a surrogate for the uncertainty of future results. It is really hard to figure out today what the path of the next 50 years is exactly going to be.

https://engaging-data.com/visualizing-4-rule/
I'll dig into this. Looks pretty complex. Do you think my AA might be too aggressive?
Why would you think that? The main reason an allocation would be too aggressive is that the investor can't manage to live through large stock declines without panicking and selling out. You would have to know yourself to know that. Another reason is that the investor has no ability to make up losses by waiting for the market to come back and saving and investing along the way. Someone working for another 17 years can both wait and also will be adding money. Unless you know something we don't know it would not seem either of those reasons would be an issue.
Got it, sounds good. I'll dig into the visualizing 4 rule model.
For something simpler, you can try Vanguard’s risk assessment questionnaire:
https://investor.vanguard.com/tools-cal ... stionnaire

It is often recommended here as a good starting point.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

I started the TLH process at eTrade yesterday. Even though I have the NY muni fund in my taxable account, eTrade wouldn’t let me exchange my intl fund shares (the TLH) into the muni. I had to sell them to cash and will buy the muni shares Monday. Just the same, eTrade wouldn’t let me exchange VBTLX shares in my Roth to IXUS. So I have to do this over two days as well. Once my intl fund sell orders settle Monday and I know the value of the shares sold, I’ll sell that value of VBTLX in my Roth, and then on Tuesday I’ll buy the IXUS shares.

The way things work at eTrade I can only do exchanges into the same fund family and class. This means I’m out of the market a bit. Not ideal. I also can’t invest in the NY muni and natl limited term exempt admiral, only investors. Is this reason to move my taxable and Roth back to Vanguard?
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

I have a second TLH opportunity—should I move forward with it?

In my taxable I have $57k in VTSAX shares that have losses. Most short term, some long term. total losses is about $4k. If I TLHd this, I could shift the $57k to munis in my taxable and then exchange bonds in my Roth for US equities. To avoid a wash sale, would the Vanguard S&P 500 Index fund work? Earlier in this thread Grabiner mentioned you can have wash sales between taxable and Roth so I want to ensure I avoid that.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by sycamore »

Aguilar wrote: Mon Sep 26, 2022 2:25 pm To avoid a wash sale, would the Vanguard S&P 500 Index fund work?
Your choices are:

A) yes -- because funds A and B follow different indexes and are plainly not substantially identical
B) maybe, maybe not -- because what matters is whether they're economically substantially identical, e.g., degree of overlap
C) indeterminate -- because the IRS has never said what counts as substantially identical

I vote A. And I hope you get audited and taken to Tax Court so we can all get a definitive answer about what's substantially identical :)

Side note: I'd probably partner with Vanguard Large Cap fund or Schwab US Broad Market fund (SCHB) but they're all close enough.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

sycamore wrote: Mon Sep 26, 2022 4:25 pm
Aguilar wrote: Mon Sep 26, 2022 2:25 pm To avoid a wash sale, would the Vanguard S&P 500 Index fund work?
Your choices are:

A) yes -- because funds A and B follow different indexes and are plainly not substantially identical
B) maybe, maybe not -- because what matters is whether they're economically substantially identical, e.g., degree of overlap
C) indeterminate -- because the IRS has never said what counts as substantially identical

I vote A. And I hope you get audited and taken to Tax Court so we can all get a definitive answer about what's substantially identical :)

Side note: I'd probably partner with Vanguard Large Cap fund or Schwab US Broad Market fund (SCHB) but they're all close enough.
I'll go with VFIAX S&P 500 Index. Years ago I sold some VFIAX and bought VTSAX with no issues. I certainly hope I don't get audited :)
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

Can short term losses be applied to offset up to $3k income per tax year? Any limitations to TLH'ing short term losses vs long term losses?

Just read this on the Wiki (see below). VFIAX pays a distribution tomorrow so I'll sell the VTSAX shares (VTSAX just paid a distribution) tomorrow and buy munis on Thursday. Will also sell the same $ amount of VBTLX in my Roth tomorrow and will buy VFIAX on Thursday. Might exchange VFIAX to VTSAX after 31 days.

If you're TLH'ing into funds that pay monthly dividends, how do you deal with the timing issue? Seems like you'd run into dividends and tax consequences no matter what.


Should I tax loss harvest before or after a distribution?
The general rule is to sell before and buy after a dividend and capital gains distribution. The more important concern is to buy after the distribution; if you sell Fund A to buy Fund B, you want to wait until after Fund B makes a large distribution, even if you receive a distribution from Fund A. The reason is that you pay tax on any distribution, but every dollar of distribution reduces the fund's NAV by one dollar, so you get a tax benefit from this dollar as a capital loss (or reduced gain) if you sell. When you are selling Fund A to TLH, you will always get the capital loss. If you buy Fund B, you do not get any benefit from the capital loss until you sell. Even if you intend to switch back immediately, if Fund B pays a qualified dividend, you need to hold Fund B for 61 days rather than 31 or else the dividend loses its qualified status, and waiting 61 days increases the potential cost of switching back.

It is usually desirable to TLH before a distribution as long as you need not buy the replacement fund before its distribution, but it depends on the type of distribution. If the distribution is a capital-gains distribution, then it is exactly canceled by the capital loss, so there is no net tax effect. If the distribution is an ordinary dividend then it has increased taxes at the marginal tax rate, and the capital loss is likely to give less in tax savings. If the distribution is a qualified dividend and the capital loss offsets long-term gains, this is break-even because the qualified dividend and reduced capital gain are taxed at the same rate. If the distribution is a qualified dividend and the capital loss offsets short-term gains or ordinary income, there is a benefit for waiting. And if the distribution is a mostly qualified dividend with foreign tax credit, you may pay tax at less than the long-term gains rate, and should wait for the distribution before harvesting the loss.
Last edited by Aguilar on Tue Sep 27, 2022 12:00 pm, edited 2 times in total.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by ruralavalon »

Aguilar wrote: Tue Sep 20, 2022 1:45 pm I'm looking for some guidance on rebalancing methods as I draft a new IPS. My plan is to put new money (including dividends) into stocks or bonds based on my AA (target 70/30, age-10 in bonds) so that I'm always inching closer to my target allocation.

If my AA becomes too conservative (outside my -5% band), I'll exchange bonds for stocks in my Roth IRA and, secondarily, my 401k. I'm beginning to invest in munis in my taxable account (NY and natl) so as a third option, I could exchange munis for stocks, though this could result in some cap gains, so it's last resort. I'd consider TLHing to offset gains, though unfortunately most of my taxable investments are locked into avg cost so my chances of TLHing are smaller. Side note, I'm now in Specific ID, actual cost for my taxable funds.

What I'm trying to figure out is, what do I do if/when the market goes up a lot and my AA goes beyond my 5% band. I can exchange stocks in my 401k to bonds (My 401k is 100% bonds but I've set new contributions to 100% equities for this purpose) and I could also exchange stocks in Roth to bonds (though this isn't ideal, I'd rather my Roth have more equities). What else could I do? If I were to sell equities in my taxable and exchange them for munis, I'd have large cap gains (and very likely no losses, especially in a scenario where the market is booming). The only other option I see is to rebalance with new money but if I'm outside the 5% band, that could take a long time.

I can provide my portfolio if it would help.
Aguilar wrote: Tue Sep 20, 2022 4:23 pm My 401k is over $300k and all bonds. So I can’t rebalance within my 401k only. Right now I’m planning to invest new money in equities so I have some rebalancing potential there.

Roth is around $300k. About 60% is equities.
Taxable is $1.3M
I have about $150k in cash and aside from my EF, I’m moving the rest to munis in my taxable.

I’d like to make my Roth all equities but not sure how without throwing off my AA a lot. If I move the bonds to equities I’d need to move equities to bonds elsewhere and all that’s left is my taxable account where I’d incur cap gains.

As for making my 401k 50/50, if I did that now I’d need to exchange equities to bonds elsewhere. Again, same issue as above.
Aguilar wrote: Tue Sep 20, 2022 5:24 pm
vineviz wrote: Tue Sep 20, 2022 4:33 pm Make the 401K 50% stocks

Make the Roth IRA 100% stocks

Make taxable 70/30 or as close as you can get without a tax bomb.

What’s the allocation in taxable now? And what would it be if you used cash to rebalance?
taxable is nearly 100% stock. Just started investing in munis there. Once I finish investing my cash in munis, it'll be roughly 92/8. To get to 70/30, I would need to sell a lot of equities and aside from $20k with losses, the rest have gains and would be a big tax hit. I could then move the equities sales $ to munis. That would still leave me needing to move bonds to equities in my Roth and 401k, making my AA too aggressive. Only way to offset this would be to more equities in taxable to munis, taking a further tax hit.

maybe I'm missing something here. is there another way?
I would keep the tax-deferred 401k all bonds rather than use any of the Roth IRA for bonds.

Consider adding some I savings bonds from Treasury Direct to have more tax-advantaged bonds.

What is your tax filing status?

What is your tax bracket, both federal and state?

How much are you currently contributing annually to each account?

Aguilar wrote: Wed Sep 21, 2022 10:30 pm
DIYtrixie wrote: Wed Sep 21, 2022 9:38 pm
Aguilar wrote: Tue Sep 20, 2022 1:45 pm my AA (target 70/30, age-10 in bonds)
OP, how did you arrive at this AA? I mean, age-10 is certainly common advice but not necessarily a good fit for everyone, as it does not account for different retirement timelines, other assets like pensions, etc.
Mainly based on the common advice. I’m aiming to retire in 17 years. I don’t have a pension. What do you suggest?
In my opinion 60/40 at age 40, portfolio around $2.1million, 17 years from retirement, no pension, is within the range of what is reasonable. In my opinion it is a good basic asset allocation for your situation, and for future years into retirement.

In my opinion Vanguard 500 Index Fund (VFIAX) is a good, probably safe tax loss harvesting partner for Vanguard Total Stock Market Index Fund (VTSAX). It's performance has been nearly identical to the total stock market index fund since the creation of the first total stock market index fund (some years one fund type is a little ahead of the other, sometimes the other is a little ahead), but the fund using a different index is probably not going to be considered "substantially" identical" for purposes of the wash sale problem.
Last edited by ruralavalon on Tue Sep 27, 2022 1:07 pm, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Aguilar
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

ruralavalon wrote: Tue Sep 27, 2022 11:42 am What is your tax filing status?
married filing separately, soon to be filing single (divorce in progress)
ruralavalon wrote: Tue Sep 27, 2022 11:42 am In my opinion 60/40 at age 40, portfolio around $2.1million, 17 years from retirement, no pension, is within the range of what is reasonable. In my opinion it is a good basic asset allocation for your situation, and for future years into retirement.
Thanks for the feedback. What's your reason for 60/40?

Took a while to reach Treasury Direct to unlock my account but succeeded and am buying $10k I-bonds today. Soon will have moved almost all my Roth bonds to equities as well as a result of my TLHs in my taxable account.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by ruralavalon »

What is your tax bracket, both federal and state?

How much are you currently contributing annually to each account?

Aguilar wrote: Tue Sep 27, 2022 1:06 pm
ruralavalon wrote: Tue Sep 27, 2022 11:42 am What is your tax filing status?
married filing separately, soon to be filing single (divorce in progress)
ruralavalon wrote: Tue Sep 27, 2022 11:42 am In my opinion 60/40 at age 40, portfolio around $2.1million, 17 years from retirement, no pension, is within the range of what is reasonable. In my opinion it is a good basic asset allocation for your situation, and for future years into retirement.
Thanks for the feedback. What's your reason for 60/40?
So you will be able to buy $10k in I bonds annually.

In my opinion 60/40 is a good basic default choice at nearly any age for nearly all persons. 60/40 has long been considered a trusty guidepost for the moderate risk investor. Morningstar 2/3/2022, "Why the 60/40 Portfolio Continues to Outlast Its Critics" , link.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Aguilar
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by Aguilar »

ruralavalon wrote: Tue Sep 27, 2022 2:21 pm What is your tax bracket, both federal and state?

How much are you currently contributing annually to each account?

Aguilar wrote: Tue Sep 27, 2022 1:06 pm
ruralavalon wrote: Tue Sep 27, 2022 11:42 am What is your tax filing status?
married filing separately, soon to be filing single (divorce in progress)
ruralavalon wrote: Tue Sep 27, 2022 11:42 am In my opinion 60/40 at age 40, portfolio around $2.1million, 17 years from retirement, no pension, is within the range of what is reasonable. In my opinion it is a good basic asset allocation for your situation, and for future years into retirement.
Thanks for the feedback. What's your reason for 60/40?
So you will be able to buy $10k in I bonds annually.

In my opinion 60/40 is a good basic default choice at nearly any age for nearly all persons. 60/40 has long been considered a trusty guidepost for the moderate risk investor. Morningstar 2/3/2022, "Why the 60/40 Portfolio Continues to Outlast Its Critics" , link.
24% fed, likely 32% next year. NY is 6.33%. I also pay NYC tax.

I max my 401k and am doing my first backdoor Roth this year. Taxable account investment (new money, not moving cash from the sidelines) will likely be around $50k this year.
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Re: Rebalancing tips if my AA goes beyond my 5% band in a bull market

Post by ruralavalon »

Aguilar wrote: Tue Sep 27, 2022 2:47 pm
ruralavalon wrote: Tue Sep 27, 2022 2:21 pm What is your tax bracket, both federal and state?

How much are you currently contributing annually to each account?

Aguilar wrote: Tue Sep 27, 2022 1:06 pm
ruralavalon wrote: Tue Sep 27, 2022 11:42 am What is your tax filing status?
married filing separately, soon to be filing single (divorce in progress)
ruralavalon wrote: Tue Sep 27, 2022 11:42 am In my opinion 60/40 at age 40, portfolio around $2.1million, 17 years from retirement, no pension, is within the range of what is reasonable. In my opinion it is a good basic asset allocation for your situation, and for future years into retirement.
Thanks for the feedback. What's your reason for 60/40?
So you will be able to buy $10k in I bonds annually.

In my opinion 60/40 is a good basic default choice at nearly any age for nearly all persons. 60/40 has long been considered a trusty guidepost for the moderate risk investor. Morningstar 2/3/2022, "Why the 60/40 Portfolio Continues to Outlast Its Critics" , link.
24% fed, likely 32% next year. NY is 6.33%. I also pay NYC tax.

I max my 401k and am doing my first backdoor Roth this year. Taxable account investment (new money, not moving cash from the sidelines) will likely be around $50k this year.
For the foreseeable future use $10k annually to buy I-bonds at Treasury Direct for more tax-advantaged bonds.

Your tax bracket is or will soon be high enough for tax-exempt bonds. I suggest that you consider Vanguard New York Long-Term Tax-Exempt Fund Admiral Shares (VNYUX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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