Reblancing vs. Capital Gains Tax

[Chuckanut]

I have a bit of a dilemma. Thanks to the stock market gains over the past few years, my AA is out of wack by over 5%. I want 60/40 and it is now 65/35. In the past I have re balanced using tax sheltered money, but for 2020, my IRA accounts are mostly bonds and cash equivalents. So I now have to sell stocks in my taxable accounts to re-balance. The sales would be limited to shares with LT capital gains. My estimate is that the sales will trigger about 75K in LT gains. Yes, I realize that all things considered this a good problem to have.

My belief is to stick to my AA, re-balance, pay the taxes and don't risk losing the big gains of 2020. Don't let the tax tail wag the dog. Consider the taxes paid as insurance to help preserve the gains. etc. etc. etc.

Thoughts. Surely I am not the only person to face this 'good to have' problem.

 

[statsman]

I wonder. You'll end up selling taxable stocks, pay taxes on the capital gains, and end up having to purchase bonds/cash in the taxable accounts because you have nowhere else to invest. Of course, the taxable bonds/cash will throw off taxable income immediately. I will be curious what the solution is here.

 

[pb4uski]

Depending on your other 2021 sources of income, some or all of that $75k of LTCG might be at 0% tax... if your 2021 taxable income, after standard deduction of $25,100, is $80,800 or less... so $105,900 of total income.

 

[audreyh1]

You have to either pay the tax, or live with a riskier portfolio. Hopefully some of it will be taxed at 0%.

 

[Chuckanut]

You have to either pay the tax, or live with a riskier portfolio. Hopefully some of it will be taxed at 0%.

I took some rebalance profits on an up day. A small amount will be taxed at 15%, I suspect. After all nobody goes broke taking a profit.

 

[audreyh1]

I took some rebalance profits on an up day. A small amount will be taxed at 15%, I suspect. After all nobody goes broke taking a profit.

Ultimately yes. If rebalancing is your plan, and you don’t do it when some of your assets seem highly valued, you’ll probably regret it if they drop suddenly. But the fact is no one knows what’s going to happen.

Personally I’m usually able to find some higher cost basis shares to sell.

Also, if you itemize and donate to charity anyway, donating some highly appreciated securities to a DAF can be a tax efficient way to rebalance.

 

[walkinwood]

Also, if you itemize and donate to charity anyway, donating some highly appreciated securities to a DAD can be a tax efficient way to rebalance.

If you don't normally itemize, this may be the year to fund a Donor Advised Fund with appreciated securities (which is what Audrey is probably suggesting - don't know what a DAD is). You can take the deduction & pre-fund your charitable giving for the next few years.

 

[Exchme]

Yes, you should stick to your plan or you are market timing, which rarely ends well. I'm approaching the need to rebalance, though still have room in the T-IRA. But still it's HARD to sell when everything is rocketing up like a meteor. (It's also hard to sell when things are down, because then you missed the top).