Apologies if this is an obvious question...but how do I rebalance to acheive my AA plan when some of my asset classes are in tax-deferred/restricted accounts (IRA and 401k)? The problem being that I can't move additional cash in/out once I've reached my annual contribution limits.
For example, let's say I have my REIT fund and my commodities fund in my Roth account. They're each 5% of my total porfolio at the beginning of the year. At the end of the year, they've gone up while other assets have gone down, so they're each 7%. I could sell part of each of them and bring them back down to 5%, but the cash from the sale would still be stuck in my Roth account, and worse it would be stuck earning lousy MM interest rates. If I wanted to make my annual contribution on the first day of the next year, I would have even more cash in the account that I couldn't invest without throwing off my AA plan.
The other solution would be to increase the investment in my other funds (in other accounts) so that the 7% moves back down to 5%. However, I could run into the same problem with my 401k - once I've put in my $14k for 2005, I can't add any more cash...so I couldn't increase the value of the funds in the 401k (making the roth funds a smaller percentage of the overall portfolio). The only solution I see is to hold identical funds in a taxable account, where I can easily tweak the amount up or down as necessary...but that's not advisable for tax-inefficient funds like REITs and bonds. And sitting on idle cash is no fun at all...so what do I do?
The problem isn't as bad if both funds decline to 3%, since I can make my contribtion on the first day of the next year and hopefully bring them back up to 5%.
But still the question remains...how do I keep my AA plan intact given the limitations of moving funds in/out of my tax-restricted accounts?
For example, let's say I have my REIT fund and my commodities fund in my Roth account. They're each 5% of my total porfolio at the beginning of the year. At the end of the year, they've gone up while other assets have gone down, so they're each 7%. I could sell part of each of them and bring them back down to 5%, but the cash from the sale would still be stuck in my Roth account, and worse it would be stuck earning lousy MM interest rates. If I wanted to make my annual contribution on the first day of the next year, I would have even more cash in the account that I couldn't invest without throwing off my AA plan.
The other solution would be to increase the investment in my other funds (in other accounts) so that the 7% moves back down to 5%. However, I could run into the same problem with my 401k - once I've put in my $14k for 2005, I can't add any more cash...so I couldn't increase the value of the funds in the 401k (making the roth funds a smaller percentage of the overall portfolio). The only solution I see is to hold identical funds in a taxable account, where I can easily tweak the amount up or down as necessary...but that's not advisable for tax-inefficient funds like REITs and bonds. And sitting on idle cash is no fun at all...so what do I do?
The problem isn't as bad if both funds decline to 3%, since I can make my contribtion on the first day of the next year and hopefully bring them back up to 5%.
But still the question remains...how do I keep my AA plan intact given the limitations of moving funds in/out of my tax-restricted accounts?