rebalancing in a taxable account

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drew
Posts: 52
Joined: Tue Mar 27, 2007 12:04 pm

rebalancing in a taxable account

Post by drew » Tue Jan 16, 2018 6:38 pm

We have 20% of our investments in tax-sheltered accounts (entirely bonds) and 80% in taxable accounts (70% equities/10% bonds). By directing 100% of new money into bonds and using stock distributions to buy bonds, we have been able to keep near our target 70/30 allocation, and well below our 75/25 band for re-balancing. However, we are considering gliding down towards 65/35 or 60/40 over the next 10 years or so which, barring a market crash, would require some stock selling.

We have some individual stocks (~15-20% of portfolio) with over 80% of their value in capital gains, and the rest of the stocks in diversified mutual funds/ETFs with 30-60% of their values in capital gains. Selling equities now to try to reduce our equity exposure feels like a tough pill to swallow since we're still in a fairly high tax bracket. Am I over-thinking this with my reluctance to incur capital gains?

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: rebalancing in a taxable account

Post by livesoft » Tue Jan 16, 2018 6:48 pm

You are not overthinking it because it appears there is no other way out ... unless ...

You donate shares with LTCG to your Donor Advised Fund (they were all the rage in the last week of December) ... or ...

Give some shares to others (like me or maybe family members) who can benefit while being in a lower tax bracket.
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drew
Posts: 52
Joined: Tue Mar 27, 2007 12:04 pm

Re: rebalancing in a taxable account

Post by drew » Tue Jan 16, 2018 9:30 pm

Already opened the DAF a few weeks back. And we're paying higher taxes for our kids' gains than our own. :(

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: rebalancing in a taxable account

Post by mega317 » Wed Jan 17, 2018 12:44 am

How is that possible?

drew
Posts: 52
Joined: Tue Mar 27, 2007 12:04 pm

Re: rebalancing in a taxable account

Post by drew » Wed Jan 17, 2018 12:13 pm

mega317 wrote:
Wed Jan 17, 2018 12:44 am
How is that possible?
Is this in reference to our kids' tax rate being higher than ours? My understanding of the tax law update with respect to the kiddie tax law was that children's unearned income between $9151-$12500 is taxed at 35%, and unearned income above $12500 is taxed at 37%. Our marginal tax bracket is 24%.

WhiteMaxima
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Joined: Thu May 19, 2016 5:04 pm

Re: rebalancing in a taxable account

Post by WhiteMaxima » Wed Jan 17, 2018 12:44 pm

Take a gap year leave or Sabatical leave. If you marginal rate is below 15% (don't know current rate is), you will pay zero cap gain tax. If your cap gain tax saving > you current aft-tax income, you win. Sell everything and purchase BRKA (or BRKB) because W Buffet never pay dividend.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: rebalancing in a taxable account

Post by retiredjg » Wed Jan 17, 2018 12:52 pm

If you are reinvesting dividends, send the dividends to a bond fund instead. Might help some.

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: rebalancing in a taxable account

Post by mega317 » Wed Jan 17, 2018 1:12 pm

Woof that's a lot of unearned income. I understand now.

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House Blend
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Joined: Fri May 04, 2007 1:02 pm

Re: rebalancing in a taxable account

Post by House Blend » Wed Jan 17, 2018 5:00 pm

drew wrote:
Tue Jan 16, 2018 6:38 pm
Selling equities now to try to reduce our equity exposure feels like a tough pill to swallow since we're still in a fairly high tax bracket. Am I over-thinking this with my reluctance to incur capital gains?
I think ultimately it boils down to deciding how much risk is too much vs. how much it costs to fix. If it is too much risk (or the wrong kind of risk), then you bite the bullet and pay the cap gains tax. If the cost is high but the risk is acceptable, you do what you can (donations, not auto re-investing, etc) and drift.

We faced this decision with my 84yo Mom: I set up a 30/70 portfolio for her several years ago, with 100% of tax-deferred accounts in bonds. She has ample assets to support her needs: basically pension + dividends from taxable cover her expenses. Most of the RMDs end up getting reinvested in muni funds. The effective draw-rate on her portfolio is a bit less than 2%.

With the current market exuberance her portfolio has passed beyond its rebalancing bands (last I checked, 37.5% in equity). My evaluation of the situation is that a market crash won't affect her in any meaningful way, so there is no longer any point in paying significant cap gains tax just to stay inside the bands. (We did pay small amounts of CG tax to rebalance in 2013.)

drew
Posts: 52
Joined: Tue Mar 27, 2007 12:04 pm

Re: rebalancing in a taxable account

Post by drew » Thu Jan 18, 2018 1:19 pm

WhiteMaxima wrote:
Wed Jan 17, 2018 12:44 pm
Take a gap year leave or Sabatical leave.
Ha, that sounds pretty appealing. :)
retiredjg wrote:
Wed Jan 17, 2018 12:52 pm
If you are reinvesting dividends, send the dividends to a bond fund instead. Might help some.
We're already doing this.
House Blend wrote:
Wed Jan 17, 2018 5:00 pm
I think ultimately it boils down to deciding how much risk is too much vs. how much it costs to fix.
This sounds just right to me. The problem, of course, is trying to come up with an appropriate metric for this. It's not something I've codified into our IPS. Nor had I fully thought out how we would glide down to a lower equity asset allocation.

I took a closer look and see that we do have some more recent lots with somewhat lower cost bases. Also, I've been pretty good about tax loss harvesting, so we have some carryover available there. So perhaps I could look at the options more specifically (kind of making up numbers, but proportions should be ballpark reasonable):

1. Sell $10k of individual stocks, and use up $9k of our carryover losses, leaving almost no carryovers.
2. Sell $10k of stock funds, use up $2k of carryover losses.
3. Let it ride.

I suppose that using up carryover losses rather than taking an immediate tax hit makes it a little more palatable, but that selling the higher relative cost basis stock funds instead of the absurdly low cost basis stocks still makes more sense even if I'd rather be rid of the individual stocks.

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