Rebalance in ROTH or Taxable?

[walkinwood]

Am I missing any advantages/disadvantages in my thinking below?
Thanks in advance.

It is time to rebalance - my equity allocation has crossed my tolerance band.

Our ROTH accounts are 100% equity, our T-IRA accounts are 100% bond and the Taxable is a mix with sufficient equities to rebalance.

Reblance using ROTH funds
Advantages - No LTCG taxes
Disadvantages - Loss of tax free equity growth


Rebalance using Taxable funds
Advantages : Tax free equity growth in ROTH
Disadvantages : LTCG taxes in 15% bracket; More bonds means more taxable income. Possible loss of ACA subsidies.


Practically, I can rebalance in the ROTH now and when I know how much 0% LTCG headroom I have at the end of the year, I can sell equities in taxable (to the 0% threshold) & buy them back in ROTH. Thus using both accounts to rebalance.

 

[CardsFan]

I guess I am not as diligent at rebalancing as you are, and I don't need to worry about ACA (medicare). Roth's are 100% equity, and will stay that way.

In your case, I would consider some stocks in the tIRA, if that is what is needed to get to the AA you want.

 

[RunningBum]

I would rebalance in the Roth. Going by the Boglehead's Tax efficient asset placement https://www.bogleheads.org/wiki/Tax...2:_Place_your_least_tax_efficient_funds_first you would be putting bonds in a Roth over taxable anyway because you don't want tax inefficient funds in taxable. It further helps that you can make AA changes inside the Roth without a taxable event.

 

[Animorph]

I try to keep about 15% bonds in our Roths. Between Roths and tIRA's we allocate 25% bonds. Our taxable accounts are 100% equities, mostly old shares with large capital gains. During equity bear markets I'll take the Roths down to 0% bonds if equity prices get low enough. Maybe it just keeps me even with 100% equities all the time, but it gives me something to do. Equity gains in a Roth are great, but there can also be equity losses and no tax loss harvesting.

 

[Montecfo]

I would not incur taxes to rebalance in most cases.

If you mean equity to debt rebalance I would do in tIRA if at all possible.

My taxable is mostly individual stocks with some cash and short term bonds. When I sell a position then I consider rebalance in my repurchase (maybe add st bonds).

But as long as I have at least 20 percent cash/bonds I don't sweat the debt/equity balance too much at other times. I just move it gradually.

If you mean within equity categories (say small caps versus large caps) I keep that within the tax deferred accounts.

 

[walkinwood]

Thanks all.


Since I have to reduce my equity holding (sell equities), I can't do it in my T-IRA (currently 100% bond funds).



While the posts make good arguments for rebalancing in my ROTH account, I don't think I've seen any new advantage/disadvantage that I may have missed in my original post.


Thanks again.

 

[thefist]

To me it sort of looks like the tax tail wagging the portfolio dog. Rebalancing can start in the taxable by taking the year’s income from equities. As a single filer, the 0% LTCG is so low it’s not feasible to stay there. I don’t pay close attention to AA in percentages, but rather, make sure X years of expenses is available in cash/bonds in case of bear market. And I’ve been slowly adjusting the asset location to be tax optimal as much as practical.
With 100% stock in Roth and 100% bond in IRA, there will eventually be a natural imbalance in the AA because of different growth.

 

[Exchme]

Yes, if you had enough cash flow from income or RMDs to avoid capital gains to rebalance in taxable or if we had a bear market where you had some tax losses to harvest, then it might take a big analysis to figure out the best path (meaning it might be close to a wash).

But when you would have to pay capital gains taxes to do the rebalancing in taxable and then the bond income might put you over ACA limits for tax credits, I don't think a big analysis is necessary, I think you are right to just rebalance in the Roth.

 

[thefist]

One thing to consider regarding ACA subsidies is how close you typically are to the cliff. It doesn’t make sense to trip over the cliff by a couple thousand dollars. If getting subsidies every year isnt practical, or requires too close attention, go over big one year and build up the cash balance to use in other years. Certainly watch other marginal brackets and NIIT, but the ACA cliff is an expensive one.

 

[walkinwood]

I re-balanced in the ROTH account.


Thanks all for the input. I've found that putting out my thoughts for review here is good practice. The combined expertise of this group makes sure I haven't overlooked anything.