Originally Posted by potto0213
I currently have all of my bonds in my tax-advantaged accounts (Vanguard Total Bond Index, and Vanguard Inflation Protected Treasuries). I have all of my equities (Vanguard Total Stock Market Index and Vanguard Total International Stock Index) in my taxable accounts. This is to make everything as tax-efficient as possible). I also have some cash in a Vanguard Money Market. It so happens that the current break down is the way I wish my asset allocation to be (approximately 35/55/10 in equity/bonds/cash).
My question is this: I am no longer contributing to my tax-advantaged accounts. What is the best way to perform re-balancing in these circumstances when I determine it is time to do so? If I need more bonds should I just go ahead and purchase them in my taxable accounts? If I need more equities should I purchase them in my tax-advantaged accounts? Should I always keep some of each in my tax-advantaged account so that I can exchange between bonds and equities without causing a taxable event?
Thanks for your help.
I would continue to keep all of your bonds in tax advantaged (to the extend that they fit in your tax advantaged accounts).
1) If your bond allocation does not
all fit in your tax advantaged accounts, then these accounts will be 100% bonds. You also will probably have some bonds or bond funds left over which go in taxable since they don't fit in your tax advantaged accounts. You can use these when rebalancing. In this situation, rebalancing occurs in your taxable accounts and can be a taxable event. As "LOL!" suggests, you should take your dividends in cash and use that cash for rebalancing.
2) If your bond allocation does
all fit in your tax advantaged accounts with more room to spare, then you probably have some equities or equity funds there too and no bonds or bond funds in taxable. You cannot buy new funds, but you can exchange between funds. In this situation, rebalancing occurs in your tax advantaged accounts.
3) If your bond allocation exactly
fits in your tax advantaged accounts, then rebalancing occurs in your tax advantaged accounts when you need more equities or equity funds, and you would be trading some bonds or funds for these equities, as in #2 above. Rebalancing occurs in taxable when you need more bonds or bond funds, trading some equities or equity funds for these in taxable.
Remember that when you are rebalancing, the usual goal is to establish an asset allocation over ALL your accounts, whether taxable or tax advantaged.