Thread by @money_cruncher

"How do you rebalance your portfolio without triggering a massive tax bill?"

Most people do it the wrong way, especially if they are selling stocks or adjusting portfolio allocations.

Let me explain how to do it right:

1. Tax advantaged accounts

The first way to think about rebalancing is through tax advantageous accounts (like 401ks, traditional IRAs, Roth IRAs, HSAs, etc)

The idea is simple - you avoid creating any taxable events in these accounts.

For example, say I have a portfolio allocation of 95% stocks and 5% bonds. Due to the recent market run up, my bonds are only 1% of the portfolio.

I can then go ahead and sell a small portion of my equities inside the pre-tax 401k and repurchase bonds tax free.

Let's also say you have 5 stocks and want to simplify your investing by buying index fund ETFs. How do you rebalance?

Easy way:

1. Turn off dividend reinvesting
2. Use dividends to buy ETFs
3. Use new money to buy ETFs

Over time, your ETFs will eventually become a bigger part

But what if those 5 stocks grew so large that they make you uncomfortable?

It depends on income, but long term capital gains can be taxed up to 23.8% on federal level + state.

To some, it may be worth it to sell, pay the tax, and move on.

But here are some strategies...

1. Sell gradually. For example, selling in chunks to manage up to 15% long-term capital gains tax.

2. Tax loss harvesting. Selling some shares at a loss and buying back similar shares can generate significant paper losses, especially via direct indexing.

3. Sell during low income years. Depending on how far away you are from retirement, it’s possible to harvest gains at a 0% long-term capital gains tax rate to live off.

4. Tax gain harvesting during low income year

5. Qualified opportunity zones

6. Gifting strategies/donating

There are also different methods for rebalancing. The 2 most common are bands and time adjusted.

For example, you can set up “bands” around your targets, where you start rebalancing when the allocation deviates 5% in either direction.

Or you can have a time based (e.g once/yr)

Overall, rebalancing doesn’t have to be complicated.

The key is just being intentional about your portfolio.

Rebalancing is less about perfection and more about maintaining balance over the long term in a way that's comfortable.

If you liked this thread and learned something new, please:

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