Is it worth paying taxes to rebalance
Is it worth paying taxes to rebalance
I have a dilemma. First, some background. We are in our 14th year of retirement. We retired in Jan 2008 at age 57 with $1.5M. Proceeded to lose almost half of that due to the Financial Crisis of '08-'09, where our portfolio bottomed out in March '09 at $864k. We have since recovered and today our portfolio is just north of $2.14M. Over that time I have continued to improve my FI awareness and as such have settled on an Asset Allocation of 65/35. Rebalancing over the last few years has resulted in my taxable brokerage account holding mostly equities and my tax sheltered accounts holding all bonds (mostly Tips).
The quandary I am facing is that my current AA is knocking on the door of 70/30, meaning, based upon my 'plan', I will soon need to rebalance again. Most of my previous rebalancing were able to be carried out in our tax sheltered accounts. But if I need to rebalance again, to get back to the desired 65/35, it will have to happen in my taxable account. That would generate a substantial tax obligation. Even at the long-term-cap gains rate of 15%, a rebalancing move of $100-150k would incur a tax hit of $15-22.5k. Seems like a high price to pay just to rebalance.
Here's what my AA looked like at the end of Sept...
The quandary I am facing is that my current AA is knocking on the door of 70/30, meaning, based upon my 'plan', I will soon need to rebalance again. Most of my previous rebalancing were able to be carried out in our tax sheltered accounts. But if I need to rebalance again, to get back to the desired 65/35, it will have to happen in my taxable account. That would generate a substantial tax obligation. Even at the long-term-cap gains rate of 15%, a rebalancing move of $100-150k would incur a tax hit of $15-22.5k. Seems like a high price to pay just to rebalance.
Here's what my AA looked like at the end of Sept...
Re: Is it worth paying taxes to rebalance
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- willthrill81
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Re: Is it worth paying taxes to rebalance
There's no way that I would pay those kinds of taxes just to rebalance. At this point, with your portfolio being 40% more than when you started and 14 years into retirement, I don't see why you should be too concerned about a little drifting in your AA. When you need to take withdrawals, just do so from the stock side.
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Re: Is it worth paying taxes to rebalance
One way to view your allocation is in absolute rather than relative terms. In other words, if you feel safe with X number if years expenses in bonds, and stocks go up, you still have X years expenses in bonds. That may well be enough for you. You may decide you don't need to rebalance because you are comfortable with your current amount even if the stock percentage has drifted higher. In that situation you could have a policy that has you spend from stocks but otherwise let stocks ride as long as your bond allocation is above your target absolute threshold.
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Re: Is it worth paying taxes to rebalance
I agree with this poster. AA going aggressive isn't a problem because even if the markets crash, their 70/30 would automatically become 65/35...where they wanted to be in the first place.willthrill81 wrote: ↑Tue Oct 26, 2021 1:52 pm There's no way that I would pay those kinds of taxes just to rebalance. At this point, with your portfolio being 40% more than when you started and 14 years into retirement, I don't see why you should be too concerned about a little drifting in your AA. When you need to take withdrawals, just do so from the stock side.
Just keep nudging from equities is the right answer imo.
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Re: Is it worth paying taxes to rebalance
Congrats that things are working well. It's a good problem to have, no? On one hand, your 1.5M in Jan 2008 is equivalent to 1.95M today (source: bls inflation calculator), so even after 14 years of retirement, you're slightly up. Though after taxes on gains, I suppose you're a little down.
I think the answer is "it depends." We rebalance to dial down the risk to an acceptable level for our individual circumstances. You're older, and presumably have Social security income now. Your portfolio has been battle-tested, and the sequence of returns risk, which is higher in early retirement, is lower now by dint of age. You've got the same amount of money, and sadly, fewer years left to spend it. So maybe your risk tolerance is higher, and you can handle a slightly more aggressive ratio as which naturally happens when stocks grow faster than bonds.
Sometimes it helps to imagine an extreme to tease out other effects. If you were 95, there'd be little risk of outliving your money and your risk tolerance is arguably very high such that even a 90/10 portfolio would be fine. Also, at 95, there's basically no incentive to pay capital gains today, when your heirs would owe no capital gains at all due to that "step-up in basis" that's been in the news lately.
Personally, the difference between 65/35 and 70/30 is so small that I wouldn't worry about it. If it drifts to 80/20, then I'd be reconsidering that more deeply. Then again, by the time that happens, your age might make that seem acceptable.
I think the answer is "it depends." We rebalance to dial down the risk to an acceptable level for our individual circumstances. You're older, and presumably have Social security income now. Your portfolio has been battle-tested, and the sequence of returns risk, which is higher in early retirement, is lower now by dint of age. You've got the same amount of money, and sadly, fewer years left to spend it. So maybe your risk tolerance is higher, and you can handle a slightly more aggressive ratio as which naturally happens when stocks grow faster than bonds.
Sometimes it helps to imagine an extreme to tease out other effects. If you were 95, there'd be little risk of outliving your money and your risk tolerance is arguably very high such that even a 90/10 portfolio would be fine. Also, at 95, there's basically no incentive to pay capital gains today, when your heirs would owe no capital gains at all due to that "step-up in basis" that's been in the news lately.
Personally, the difference between 65/35 and 70/30 is so small that I wouldn't worry about it. If it drifts to 80/20, then I'd be reconsidering that more deeply. Then again, by the time that happens, your age might make that seem acceptable.
Re: Is it worth paying taxes to rebalance
If you are moving $100-150k, what is the basis?jcw3rd wrote: ↑Tue Oct 26, 2021 1:36 pm I have a dilemma. First, some background. We are in our 14th year of retirement. We retired in Jan 2008 at age 57 with $1.5M. Proceeded to lose almost half of that due to the Financial Crisis of '08-'09, where our portfolio bottomed out in March '09 at $864k. We have since recovered and today our portfolio is just north of $2.14M. Over that time I have continued to improve my FI awareness and as such have settled on an Asset Allocation of 65/35. Rebalancing over the last few years has resulted in my taxable brokerage account holding mostly equities and my tax sheltered accounts holding all bonds (mostly Tips).
The quandary I am facing is that my current AA is knocking on the door of 70/30, meaning, based upon my 'plan', I will soon need to rebalance again. Most of my previous rebalancing were able to be carried out in our tax sheltered accounts. But if I need to rebalance again, to get back to the desired 65/35, it will have to happen in my taxable account. That would generate a substantial tax obligation. Even at the long-term-cap gains rate of 15%, a rebalancing move of $100-150k would incur a tax hit of $15-22.5k. Seems like a high price to pay just to rebalance.
Here's what my AA looked like at the end of Sept...
You seem to be multiplying 15% by the entire sale, not just the gain.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Re: Is it worth paying taxes to rebalance
You don't have a lot of choices. You can either have a portfolio that is too aggressive for your tastes or you can pay what it costs to get it back where you want it.
However, I don't think it will cost that much. First, you do not have to rebalance all the way back to 65/35 in order to be within your band. Second, some of what you sell should be return of your investment, not capital gains, right?
If you sell and buy only 2.5% of the portfolio, that would be capital gains on a sale of $53,500 of stocks. Even if 80% of that is gains, the tax would only be $6,420. That's not so bad.
The only other idea that comes to mind is to donate shares with the largest gains to charity but I suppose it would take a pretty sizable donation to overcome the standard deduction if you use it. Maybe an every other year approach is worth looking at?
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Re: Is it worth paying taxes to rebalance
I don't know that it is or is not worth rebalancing in your taxable account. That is a personal decision that is hard to weigh in on without a greater understanding of your incomes and expenses.
That said, if you haven't already, you might consider turning off dividend reinvestment in your taxable accounts. You then choose to: (a) spend the dividends or (b) invest them in a bond fund of your choosing. This will avoid unnecessary taxes, slow the drift in your asset allocation over time, and decrease volatility in your overall portfolio.
That said, if you haven't already, you might consider turning off dividend reinvestment in your taxable accounts. You then choose to: (a) spend the dividends or (b) invest them in a bond fund of your choosing. This will avoid unnecessary taxes, slow the drift in your asset allocation over time, and decrease volatility in your overall portfolio.
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Re: Is it worth paying taxes to rebalance
I am very reluctant to sell in my taxable account to rebalance. I would let it ride. Your portfolio is large enough that it can withstand a market downturn.
Re: Is it worth paying taxes to rebalance
Off-topic, but what is that cool, retro-looking spreadsheet you're using?
Re: Is it worth paying taxes to rebalance
Yea, I turned off DRIP when I retired in Jan '08.MattB wrote: ↑Tue Oct 26, 2021 2:02 pm That said, if you haven't already, you might consider turning off dividend reinvestment in your taxable accounts. You then choose to: (a) spend the dividends or (b) invest them in a bond fund of your choosing. This will avoid unnecessary taxes, slow the drift in your asset allocation over time, and decrease volatility in your overall portfolio.
Re: Is it worth paying taxes to rebalance
If you remove your grandkids 529 from your asset allocation you'll get a little closer to your target.
Agree market fluctuation may solve this problem for you.
You could also donate some shares in the taxable account to charity. Do QCDs if you are required to take RMDs.
Agree market fluctuation may solve this problem for you.
You could also donate some shares in the taxable account to charity. Do QCDs if you are required to take RMDs.
Re: Is it worth paying taxes to rebalance
Yea, it's an old open-source app called Spreadsheet Calculator I've been using for 30+ years. Here's a brief wiki link about it...
https://en.m.wikipedia.org/wiki/Sc_(spr ... alculator)
Re: Is it worth paying taxes to rebalance
If you were reinvesting the dividends in bonds, wouldn't there be a bond allocation in the taxable account?jcw3rd wrote: ↑Tue Oct 26, 2021 2:11 pmYea, I turned off DRIP when I retired in Jan '08.MattB wrote: ↑Tue Oct 26, 2021 2:02 pm That said, if you haven't already, you might consider turning off dividend reinvestment in your taxable accounts. You then choose to: (a) spend the dividends or (b) invest them in a bond fund of your choosing. This will avoid unnecessary taxes, slow the drift in your asset allocation over time, and decrease volatility in your overall portfolio.
Link to Asking Portfolio Questions
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Re: Is it worth paying taxes to rebalance
Combining some of the ideas above... let it drift until you are more ready to pay the tax. You could nibble at it a bit each year if you have any room in the 0% cap gains range. Don't reinvest dividends into stocks. Donate highly appreciated shares instead of cash donations or transfer to a DAF. Take any/all withdrawals from the stock side. At some point, you may need to do something so think about that threshold before it happens.
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Re: Is it worth paying taxes to rebalance
That must have been an interesting first year of retirement!jcw3rd wrote: ↑Tue Oct 26, 2021 2:11 pmYea, I turned off DRIP when I retired in Jan '08.MattB wrote: ↑Tue Oct 26, 2021 2:02 pm That said, if you haven't already, you might consider turning off dividend reinvestment in your taxable accounts. You then choose to: (a) spend the dividends or (b) invest them in a bond fund of your choosing. This will avoid unnecessary taxes, slow the drift in your asset allocation over time, and decrease volatility in your overall portfolio.
Re: Is it worth paying taxes to rebalance
Rebalancing isn't important enough to pay much in taxes.
If the market ups and downs don't take you down a bit you can also use appreciated shares for giving or to pass on to children possibly at a lower tax cost -- or not.
If the market ups and downs don't take you down a bit you can also use appreciated shares for giving or to pass on to children possibly at a lower tax cost -- or not.
Re: Is it worth paying taxes to rebalance
$22k does not seem like a high price to pay, with a $2.1M portfolio, to sleep well at night.
Re: Is it worth paying taxes to rebalance
SC FTW!jcw3rd wrote: ↑Tue Oct 26, 2021 2:15 pmYea, it's an old open-source app called Spreadsheet Calculator I've been using for 30+ years. Here's a brief wiki link about it...
https://en.m.wikipedia.org/wiki/Sc_(spr ... alculator)
I've also been using it for years on my Linux boxen running the Ratpoison window manager.
Boy, we sure are an elite group
Re: Is it worth paying taxes to rebalance
That was mine, too; it was a wild two years. Tax loss harvesting and re-balancing to equity. The ultimate stress test right from the start.aristotelian wrote: ↑Tue Oct 26, 2021 2:20 pmThat must have been an interesting first year of retirement!jcw3rd wrote: ↑Tue Oct 26, 2021 2:11 pmYea, I turned off DRIP when I retired in Jan '08.MattB wrote: ↑Tue Oct 26, 2021 2:02 pm That said, if you haven't already, you might consider turning off dividend reinvestment in your taxable accounts. You then choose to: (a) spend the dividends or (b) invest them in a bond fund of your choosing. This will avoid unnecessary taxes, slow the drift in your asset allocation over time, and decrease volatility in your overall portfolio.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Is it worth paying taxes to rebalance
I'd say if you guys survived that you can survive anything. Hope you don't have to, though.jebmke wrote: ↑Tue Oct 26, 2021 2:27 pmThat was mine, too; it was a wild two years. Tax loss harvesting and re-balancing to equity. The ultimate stress test right from the start.aristotelian wrote: ↑Tue Oct 26, 2021 2:20 pm That must have been an interesting first year of retirement!
- arcticpineapplecorp.
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Re: Is it worth paying taxes to rebalance
AAPL makes up 7% of the portfolio. Could you trim that this year and next and split any tax bill over 2 years (or more) and direct those proceeds into non equity taxable?
are dividends being reinvested in money market or other Bond Fund in taxable?
Do you need Sondors Stock? seems such a small part of the portfolio, why bother?
is there a reason you have total bond in Roth rather than in taxable. While bond is not ideal in taxable, it's better there than in Roth.
are dividends being reinvested in money market or other Bond Fund in taxable?
Do you need Sondors Stock? seems such a small part of the portfolio, why bother?
is there a reason you have total bond in Roth rather than in taxable. While bond is not ideal in taxable, it's better there than in Roth.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
- vanbogle59
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Re: Is it worth paying taxes to rebalance
Imagine: Instead of this new-found equity being the result of patient investing, it was completely gratuitous. Found money.
You opened your mail one day only to discover that you had completely forgotten about your 401K contributions from your job at 6 Flags back in the 70s. Now what?
Option A: Honey, I found $100K worth of VTIAX in my old ETrade account. Do you mind if I just let it sit there? It throws our AA out of whack? But, we are so far ahead of where we thought we were. This is great.
Option B: Honey, I found $100K worth of VTIAX in my old ETrade account. I'm gonna rebalance and pay the taxes now. We are so far ahead of where we thought. This is great.
“Would you tell me, please, which way I ought to go from here?'
'That depends a good deal on where you want to get to,' said the Cat"
Re: Is it worth paying taxes to rebalance
I have some old positions that are now composed mid 90%'s of taxable gain but yeah would be an unusual portfolio where the highest basis things were that way. And those are the ones you'd sell generally.
If willing to consider slightly more complicated things two ways to rebalance without recognizing gains are
1. go short equity index futures in IRA, assuming there is enough tax exempt space to do that, which doesn't have to be the whole $150-200k since leveraged, and the new S&P micro contracts represent ~$22k of position each so aren't too large for this size of rebalancing.
2. if you buy tail hedges, far below money SPX (~$457k notional per contract) or XSP (again only 1/10 that size) puts, the expected value is likely to be negative, but you have the full upside of your current position if things continue to go well. And you'd buy those in taxable and recognize a bit of taxable gain each year against the tax deductible losses on the options, if they do lose.
I do both those things to minimize having to sell appreciated assets. But I also just sell in taxable and pay the taxes, all three things in moderation.
The old saying is don't let the tax tail wag the investment dog. I'm skeptical of the responses telling you to just accept ever more risk to avoid paying taxes now (the other issue is what happens to the money and the gains eventually, depends who/what you'd leave the assets to and whether the 'basis step up' in the tax code endures for your life expectancy).
Re: Is it worth paying taxes to rebalance
I'm in the same situation. And I'm in even "worse" shape, diversification wise because Apple now makes up 15%+ of our equity portfolio. Plus we have huge amounts of capital gains in taxable.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
Time is what we want most, but what we use worst. William Penn
Re: Is it worth paying taxes to rebalance
Are you doing any charitable contributions along the way? If so, you can try a DAF.bhsince87 wrote: ↑Tue Oct 26, 2021 3:45 pm I'm in the same situation. And I'm in even "worse" shape, diversification wise because Apple now makes up 15%+ of our equity portfolio. Plus we have huge amounts of capital gains in taxable.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
Re: Is it worth paying taxes to rebalance
Those ratios are not etched in stone; there's no magic to them and they are not the law.Rebalancing isn't important enough to pay much in taxes.
I suspect Warren Buffett doesn't fret about whether his exposure to stocks is too high.
Financial decisions based on emotion often turn out to be bad decisions.
Re: Is it worth paying taxes to rebalance
mervinj7 wrote: ↑Tue Oct 26, 2021 4:11 pmAre you doing any charitable contributions along the way? If so, you can try a DAF.bhsince87 wrote: ↑Tue Oct 26, 2021 3:45 pm I'm in the same situation. And I'm in even "worse" shape, diversification wise because Apple now makes up 15%+ of our equity portfolio. Plus we have huge amounts of capital gains in taxable.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
That's a good point, and it is on my radar. But we're not donating a whole lot of cash at this point. We're still getting our feet wet on the early retirement thing.
Time is what we want most, but what we use worst. William Penn
Re: Is it worth paying taxes to rebalance
It would be a good way to offload the Apple stock now but still space out your grants over time.bhsince87 wrote: ↑Tue Oct 26, 2021 4:28 pmmervinj7 wrote: ↑Tue Oct 26, 2021 4:11 pmAre you doing any charitable contributions along the way? If so, you can try a DAF.bhsince87 wrote: ↑Tue Oct 26, 2021 3:45 pm I'm in the same situation. And I'm in even "worse" shape, diversification wise because Apple now makes up 15%+ of our equity portfolio. Plus we have huge amounts of capital gains in taxable.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
That's a good point, and it is on my radar. But we're not donating a whole lot of cash at this point. We're still getting our feet wet on the early retirement thing.
Re: Is it worth paying taxes to rebalance
Are you taking IRA withdrawals yet? More importantly, do you have tax loss carry forwards to offset equity gains? If so the losses can help in your situation. Otherwise perhaps a partial equity sale to somewhat reduce current year tax costs. You have to have some cost basis in the equities you hold that can reduce the overall gains as well. If you are not dependent on the taxable portfolio for current living expenses what would you do with the proceeds of a sale?jcw3rd wrote: ↑Tue Oct 26, 2021 1:36 pm I have a dilemma. First, some background. We are in our 14th year of retirement. We retired in Jan 2008 at age 57 with $1.5M. Proceeded to lose almost half of that due to the Financial Crisis of '08-'09, where our portfolio bottomed out in March '09 at $864k. We have since recovered and today our portfolio is just north of $2.14M.
************************************************************************************************************************
That would generate a substantial tax obligation. Even at the long-term-cap gains rate of 15%, a rebalancing move of $100-150k would incur a tax hit of $15-22.5k. Seems like a high price to pay just to rebalance.
Here's what my AA looked like at the end of Sept...
- Artsdoctor
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Re: Is it worth paying taxes to rebalance
I wouldn't include the 529 in your asset allocation. You could argue that it's not your money.jcw3rd wrote: ↑Tue Oct 26, 2021 1:36 pm I have a dilemma. First, some background. We are in our 14th year of retirement. We retired in Jan 2008 at age 57 with $1.5M. Proceeded to lose almost half of that due to the Financial Crisis of '08-'09, where our portfolio bottomed out in March '09 at $864k. We have since recovered and today our portfolio is just north of $2.14M. Over that time I have continued to improve my FI awareness and as such have settled on an Asset Allocation of 65/35. Rebalancing over the last few years has resulted in my taxable brokerage account holding mostly equities and my tax sheltered accounts holding all bonds (mostly Tips).
The quandary I am facing is that my current AA is knocking on the door of 70/30, meaning, based upon my 'plan', I will soon need to rebalance again. Most of my previous rebalancing were able to be carried out in our tax sheltered accounts. But if I need to rebalance again, to get back to the desired 65/35, it will have to happen in my taxable account. That would generate a substantial tax obligation. Even at the long-term-cap gains rate of 15%, a rebalancing move of $100-150k would incur a tax hit of $15-22.5k. Seems like a high price to pay just to rebalance.
Here's what my AA looked like at the end of Sept...
Everyone will have a different philosophy. Since you have a 529, you might also be investing for legacy purposes so a large equity allocation might be fine. To me, it's a sad picture to see someone lose a lot of money who didn't need to lose it and then suffer due to the loss.
When it comes to rebalancing, that's a personal decision. The thing that 2008-2009 taught me and that is pertinent to me now as I near retirement, is that you can either reduce your equity allocation yourself or "someone" will do it for you.
Re: Is it worth paying taxes to rebalance
mervinj7 wrote: ↑Tue Oct 26, 2021 4:29 pmIt would be a good way to offload the Apple stock now but still space out your grants over time.bhsince87 wrote: ↑Tue Oct 26, 2021 4:28 pmmervinj7 wrote: ↑Tue Oct 26, 2021 4:11 pmAre you doing any charitable contributions along the way? If so, you can try a DAF.bhsince87 wrote: ↑Tue Oct 26, 2021 3:45 pm I'm in the same situation. And I'm in even "worse" shape, diversification wise because Apple now makes up 15%+ of our equity portfolio. Plus we have huge amounts of capital gains in taxable.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
That's a good point, and it is on my radar. But we're not donating a whole lot of cash at this point. We're still getting our feet wet on the early retirement thing.
The way I understand DAFs is that once I put money in, I can't get it back if I need it. Am I wrong about that?
Time is what we want most, but what we use worst. William Penn
- WoodSpinner
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Re: Is it worth paying taxes to rebalance
Correct! It is a charitable donation to the DAF fund that you manage.bhsince87 wrote: ↑Tue Oct 26, 2021 5:10 pmmervinj7 wrote: ↑Tue Oct 26, 2021 4:29 pmIt would be a good way to offload the Apple stock now but still space out your grants over time.bhsince87 wrote: ↑Tue Oct 26, 2021 4:28 pmmervinj7 wrote: ↑Tue Oct 26, 2021 4:11 pmAre you doing any charitable contributions along the way? If so, you can try a DAF.bhsince87 wrote: ↑Tue Oct 26, 2021 3:45 pm I'm in the same situation. And I'm in even "worse" shape, diversification wise because Apple now makes up 15%+ of our equity portfolio. Plus we have huge amounts of capital gains in taxable.
After pondering it for a few years, we've decided to just let it ride.
We've got about 25 years of expenses in bonds already.
There are a lot of moving pieces to consider, though. In our state, the way we have things set up, my wife gets a step up in basis if I die first. If not, charities will get the money. So that's a plus on the side of delaying stock sales.
A greater concern to me is diversification with respect to Apple. So in years when we can afford some capital gains, I plan to slowly sell that off.
That's a good point, and it is on my radar. But we're not donating a whole lot of cash at this point. We're still getting our feet wet on the early retirement thing.
The way I understand DAFs is that once I put money in, I can't get it back if I need it. Am I wrong about that?
WoodSpinner
WoodSpinner
Re: Is it worth paying taxes to rebalance
This is the way to do it. Direct the withdrawals from the over funded allocation.willthrill81 wrote: ↑Tue Oct 26, 2021 1:52 pm There's no way that I would pay those kinds of taxes just to rebalance. At this point, with your portfolio being 40% more than when you started and 14 years into retirement, I don't see why you should be too concerned about a little drifting in your AA. When you need to take withdrawals, just do so from the stock side.
- Nightowl99
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Re: Is it worth paying taxes to rebalance
When you do decide to sell a portion of the stocks, check to see if you can set the cost basis as HICO, with the highest cost shares being sold first, then maybe that would kick the tax can down the road a little. Also, I'm thinking you're probably better off selling the funds with the least capital gains first.
- dodecahedron
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Re: Is it worth paying taxes to rebalance
If you are charitably inclined, you can rebalance very tax efficiently by donating appreciated securities to the charity of your choice (or a Donor Advised Fund.)
If you have planned major gifts to make (wedding, graduation, etc.) that you would normally make with a check but the recipients would face lower taxes than you on long term capital gains, consider whether an in-kind transfer of stocks might be a better route. (Caution, don't assume that just because your intended donees are low income, their effective marginal tax rate will be lower than yours. Things like kiddie tax, financial aid implications, qualification for refundable credits, etc. can complicate this question.)
If you have planned major gifts to make (wedding, graduation, etc.) that you would normally make with a check but the recipients would face lower taxes than you on long term capital gains, consider whether an in-kind transfer of stocks might be a better route. (Caution, don't assume that just because your intended donees are low income, their effective marginal tax rate will be lower than yours. Things like kiddie tax, financial aid implications, qualification for refundable credits, etc. can complicate this question.)
Re: Is it worth paying taxes to rebalance
First of all, separate out the Roth in your list from the tax-deferred since it follows different tax rules. And change the Roth to all stocks. Right now you are missing out on tax-free growth by not having a stock fund in the Roth!
Then, in taxable, turn off dividend re-investment. Have it go to your settlement (or cash) fund where you can withdraw it without having to sell anything to free up money for your living expenses. If you don’t need to withdraw for living expenses, then invest in a muni fund. (And the muni fund in tax-deferred is a waste, since the interest is already tax-free, if you live in the state that the munis belong to).
Then, in taxable, turn off dividend re-investment. Have it go to your settlement (or cash) fund where you can withdraw it without having to sell anything to free up money for your living expenses. If you don’t need to withdraw for living expenses, then invest in a muni fund. (And the muni fund in tax-deferred is a waste, since the interest is already tax-free, if you live in the state that the munis belong to).
Re: Is it worth paying taxes to rebalance
The reason you rebalance is to control your risk level. If 75% stocks is too risky for you, then you should pay a tax cost to get back to 70% (the limit of the rebalancing band). The tax cost of doing so isn't that great, because you are selling stock for a capital gain but you would sell it anyway in the future for spending.
However, it is possible that your portfolio is now large enough that your risk tolerance has changed. You may have some stock that you now know that you won't spend for your own retirement. That stock can be left out of your own retirement allocation, with the intention of leaving it to your heirs (or, if your heirs don't need it, you can donate it to charity).
However, it is possible that your portfolio is now large enough that your risk tolerance has changed. You may have some stock that you now know that you won't spend for your own retirement. That stock can be left out of your own retirement allocation, with the intention of leaving it to your heirs (or, if your heirs don't need it, you can donate it to charity).
Re: Is it worth paying taxes to rebalance
Thanks!WoodSpinner wrote: ↑Tue Oct 26, 2021 5:34 pmCorrect! It is a charitable donation to the DAF fund that you manage.bhsince87 wrote: ↑Tue Oct 26, 2021 5:10 pmmervinj7 wrote: ↑Tue Oct 26, 2021 4:29 pmIt would be a good way to offload the Apple stock now but still space out your grants over time.
The way I understand DAFs is that once I put money in, I can't get it back if I need it. Am I wrong about that?
WoodSpinner
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Re: Is it worth paying taxes to rebalance
I would rather have the after-tax money on that 5% than lose it all in a market crash.Marseille07 wrote: ↑Tue Oct 26, 2021 1:57 pm
I agree with this poster. AA going aggressive isn't a problem because even if the markets crash, their 70/30 would automatically become 65/35...where they wanted to be in the first place.
I would also remove the 529s from your AA calculations. As someone else said, that's not your money. That would probably put you in the "close enough" AA to not rebalance.
If you decide to rebalance, pick the holdings with the highest relative basis to soften the tax blow. Although I would probably want to reduce the AAPL holding.
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Re: Is it worth paying taxes to rebalance
The thing is, you're taking a tax hit for no reason. If you simply held 70/30 (but slash equities for normal withdrawals) then there's no extra tax hit from rebalancing.Running Bum wrote: ↑Wed Oct 27, 2021 7:47 am I would rather have the after-tax money on that 5% than lose it all in a market crash.
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Re: Is it worth paying taxes to rebalance
You've changed the story on me. Yes, of course you should take withdrawals from your overweight category. In a hot market that probably won't be enough to get back to the desired AA. You're saying, ah, just let the market crash and then you'll be where you want. I'm pointing out that you'll have less money than if you took the tax hit and rebalanced before the correction. I'm assuming the OP has a reason for wanting a 65/35 AA, so that's a justification for taxing a tax hit.Marseille07 wrote: ↑Wed Oct 27, 2021 11:23 am The thing is, you're taking a tax hit for no reason. If you simply held 70/30 (but slash equities for normal withdrawals) then there's no extra tax hit from rebalancing.
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Re: Is it worth paying taxes to rebalance
I'm not changing the story. What I'm saying is rebalancing doesn't help.Running Bum wrote: ↑Wed Oct 27, 2021 1:48 pm You've changed the story on me. Yes, of course you should take withdrawals from your overweight category. In a hot market that probably won't be enough to get back to the desired AA. You're saying, ah, just let the market crash and then you'll be where you want. I'm pointing out that you'll have less money than if you took the tax hit and rebalanced before the correction. I'm assuming the OP has a reason for wanting a 65/35 AA, so that's a justification for taxing a tax hit.
"I'm pointing out that you'll have less money than if you took the tax hit and rebalanced before the correction" is true, but what you're missing is that you'll have less money *during a bull market* because you're constantly rebalancing to reduce equities. It goes both ways, you can't look at one side and ignore the other.
Re: Is it worth paying taxes to rebalance
When in history has the market ever crashed and not recovered?lose it all in a market crash.
When in history has the market ever gone to zero?
On margin it's a different story.
Financial decisions based on emotion often turn out to be bad decisions.
Re: Is it worth paying taxes to rebalance
Isn't that exactly what happened in Japan about 30 years ago?
I'm sure you mean the US stock market, but who is to say that cannot happen here as well?
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Re: Is it worth paying taxes to rebalance
Lesson taken.Artsdoctor wrote: ↑Tue Oct 26, 2021 5:08 pm The thing that 2008-2009 taught me and that is pertinent to me now as I near retirement, is that you can either reduce your equity allocation yourself or "someone" will do it for you.
Re: Is it worth paying taxes to rebalance
True enough. But in retirement more relevant question might be when has the market crashed and not recovered for a few years.
The market may always "go up" on an infinite timescale. But it goes down frequently enough to warrant rebalancing.
Re: Is it worth paying taxes to rebalance
Instead of selling the stocks, you can just buy few put options to reduce the risk.