Looking To "Rebalance" Portfolio to Optimize Tax Efficiency

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wannabebogler
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Joined: Mon Jul 07, 2014 10:02 am

Looking To "Rebalance" Portfolio to Optimize Tax Efficiency

Post by wannabebogler »

I have a 70/30 portfolio (a little of the 70% is play money invested in a REIT). The value of my 401k plan is approximately the size of what my bond fund should be in my overall portfolio. A sizeable portion of my bond funds are in my taxable brokerage account. In order to maximize tax efficiency, does it make sense to rebalance the 401k so that it's mostly the bond allocation (and REIT), and have my taxable brokerage account invested mostly in domestic/international index funds?
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retiredjg
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Re: Looking To "Rebalance" Portfolio to Optimize Tax Efficiency

Post by retiredjg »

In general, the answer is yes. Bonds are more efficiently held in a tax-deferred account and stock index funds are a good choice for a taxable account.

There are some exceptions for people in high tax states like CA and NY. And a lot depends on your tax bracket.
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retired@50
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Re: Looking To "Rebalance" Portfolio to Optimize Tax Efficiency

Post by retired@50 »

wannabebogler wrote: Fri Aug 05, 2022 1:23 pm ... In order to maximize tax efficiency, does it make sense to rebalance the 401k so that it's mostly the bond allocation (and REIT), and have my taxable brokerage account invested mostly in domestic/international index funds?
As retiredjg state above, the general answer is yes.

If you're curious about more of the details see Tax Efficient Fund Placement in the Boglehead wiki.

Regards,
This is one person's opinion. Nothing more.
Topic Author
wannabebogler
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Re: Looking To "Rebalance" Portfolio to Optimize Tax Efficiency

Post by wannabebogler »

both answers are what I was looking for. Thank you!
dbr
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Re: Looking To "Rebalance" Portfolio to Optimize Tax Efficiency

Post by dbr »

A couple of extra advantages for stocks in taxable accounts is the possibility of tax loss harvesting, which is greater for assets that are more likely to take large downturns and the possibility of completely avoiding tax on unrealized gains through basis step-up. In any case unrealized gains are tax deferred until realized at the investor's choice. The only better tax optimization might be use of a Roth.

This is beside the currently favorable tax treatment of qualified dividends and long term capital gains. I recently gifted some appreciated stock to a family member who was able to sell it at no tax cost because last year was a no income year for them and they had $80k tax bracket headroom.
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