re-balancing versus capital gains tax

[medved]

I think one area I may be somewhat different than many people is around 85% of what I have is in taxable accounts -- so I don't have as much flexibility as many others have to reallocate within tax deferred accounts.

[audreyh1]

Plenty of folks here with mostly taxable accounts, us included.

I have made AA changes gradually in the past, over several years. Otherwise you just have to bite the bullet and pay the taxes.

[LOL!]

Quote:

Originally Posted by medved I think one area I may be somewhat different than many people is around 85% of what I have is in taxable accounts -- so I don't have as much flexibility as many others have to reallocate within tax deferred accounts.

I'll just say you have to pay attention more, but the opportunities are there.

1. Tax-loss harvest whenever you can and build up carryover losses.

2. Use tax-exempt muni bond funds in your tax bracket. Even these funds can be tax-loss harvested as was the case last December.

3. Take dividends and distributions in cash. Most index funds of equities are paying out about 2% a year, so that knocks back the value of these funds at around a rate of 2% a year. Use the cash for buying the things that are underweighted.

4. And of course when adding to taxable, don't buy more equity funds; buy those tax-exempt muni bond funds instead.

5. Charitable giving is not done with cash, but through your Donor-Advised Fund and you only donate appreciated shares held long-term to your DAF.

[Blue Collar Guy]

Quote:

Originally Posted by walkinwood ....... If the market tanks, by definition, you'll be very uncomfortable and may do something rash & suffer irrecoverable damage. Good luck.

Im looking for a comfortable spot on my floor where I can curl up and cry when the air goes out of the balloon. Im hearing the air trying to escape as I type this.

[medved]

Quote:

Originally Posted by LOL! I'll just say you have to pay attention more, but the opportunities are there. 1. Tax-loss harvest whenever you can and build up carryover losses. 2. Use tax-exempt muni bond funds in your tax bracket. Even these funds can be tax-loss harvested as was the case last December. 3. Take dividends and distributions in cash. Most index funds of equities are paying out about 2% a year, so that knocks back the value of these funds at around a rate of 2% a year. Use the cash for buying the things that are underweighted. 4. And of course when adding to taxable, don't buy more equity funds; buy those tax-exempt muni bond funds instead. 5. Charitable giving is not done with cash, but through your Donor-Advised Fund and you only donate appreciated shares held long-term to your DAF.

What did I say that suggested to you that I am not doing these things and therefore "need to pay attention more"? In fact, I am doing all of these things, with the possible exception that I might be able to allocate more of my portfolio to municipal bonds or municipal bond funds than I currently am.

[phil1ben]

Just saw this thread. As you suggested there is no good answer. I also have virtually no tax deferred accounts. We have exchanged comments on other threads. My stock allocation is only 25% but my investment real estate allocation(mostly apartment complexes) makes up the difference. So far.....I have delayed capital gains (by not selling) to a great extent which given the rise in the market has worked out. Since I do not need the money from the stock I am continuing to reinvest dividends. Like you I have already tax loss harvested all losses and I am sitting on all gains among about 30 individual stocks.

I have owned many of my positions for a number of years and watch the market everyday. When I think it is time to sell a stock I do so and simply hold my nose regarding the tax issue. So the tax issue is a strong incentive not to sell but in a few instances this preference has been overcome by what I have personally determined is "irrational exuberance" in a particular stock.

What I am finding more difficult is the ability to replace my matured/called municipal bonds. Because the amount of new issues has been limited (effected by the new tax law which limits the ability to issue advance refunding and private activity bonds), there is high demand and interest rates have remained low. I am simply not willing to go out 25 years to get a 4.0% yield. I normally hold until maturity and a 25 year bond would mature when I'm 83. So cash has been accumulating. Some of that has went into real estate and some into stock. It is important to remember that these are all good problems to have.

[Stormy Kromer]

Hi medved. Just curious how your allocation drifted to 63% equities from your target of 50%. I'm guessing due to the equity market performance of the past several years. If so, that extra 13% isn't a bad thing. Also, if you invest 100% of your new money into fixed income, how long would it take you to get to 50-50 ?

[REattempt]

Quote:

Originally Posted by LOL! Are your tax-deferred accounts at 100% fixed income? If not, then you have a ways to go.

LOL! I don't understand this...can you explain? Thanks!

[LOL!]

Quote:

Originally Posted by REattempt LOL! I don't understand this...can you explain? Thanks!

Generally there are 3 kinds of accounts that one has:

Roth accounts - taxed money going in, not taxed on withdrawal, no RMDS

tax-deferred - no taxes paid going in, taxed on withdrawal, RMDs.

taxable - taxed money going in, capital gains taxes on capital gains on sales, unrealized capital gains are not taxed, return of capital not taxed, special rate on qualified dividends, too.

In general, tax inefficient investments will go in Roth and tax-deferred accounts. Bond funds are tax inefficient because of the way their monthly dividends would be taxed, so they should probably go in tax-deferred accounts before they go in taxable accounts and Roth accounts. So unless tax-deferred accounts are 100% bond funds (i.e. fixed income), there is little reason to have bond funds in Roth and taxable accounts.

Until all tax-deferred accounts are 100% fixed income, then all rebalancing could be done in the tax-deferred account(s). That is, each account does not have to have the same asset allocation as long as the portfolio as a whole has the desired asset allocation. So taxable and Roth could be 100% equities with tax-efficient equities in both taxable and Roth, but tax inefficient equities in Roth. And tax-deferred can have the bond funds, the tax-efficient equities, and the tax-inefficient equities.

[RenoJay]

I bit the bullet about a year ago and started an ongoing significant sale of a lot of appreciated stock to get to desired AA. Yeah it hurts to pay the taxes, but it’s a lot like learning to spend after decades as a saver. Once you make the decision that taxes are unavoidable and that you need to incur them, they become less of a factor than sleeping well.