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Tax implications of rebalancing a taxable account

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  • Tax implications of rebalancing a taxable account

    If I need to rebalance a taxable account, how can I do this without incurring taxes due to the sale of a fund?

    Also, if I rebalance and "trade" some Vanguard Investor shares (purchased initially) for Vanguard Admiral shares, can I do this without causing a tax payment?

  • #2
    Sure, TLH. Otherwise can you Just buy what is low?

    Admiral is not a taxable event.

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    • #3
      Vanguard will upgrade you to Admiral shares. No need to sell and purchase. They'll do it automatically eventually, but perhaps sooner if you prod them.

      There's no need to rebalance in a taxable account unless that's your only account. Treat your entire portfolio as one and rebalance your asset allocation across the portfolio by trading in a tax-advantaged account like an IRA or 401(k). I gave an example of doing this exact thing in today's post on RMDs & rebalancing. Hope it helps.

      Cheers!

      -PoF

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      • #4




        If I need to rebalance a taxable account, how can I do this without incurring taxes due to the sale of a fund?

        Also, if I rebalance and “trade” some Vanguard Investor shares (purchased initially) for Vanguard Admiral shares, can I do this without causing a tax payment?
        Click to expand...


        the Admiral conversion shouldn't be a problem.

        As far as rebalancing the easiest way to rebalance without incurring taxes is to use new money to balance.  My taxable funds tend to accumulate money in the money market sweep fund, plus there is new money available from work income.  This can be used to rebalance.

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        • #5
          In general, you want to avoid selling shares for the purposes of rebalancing. Ideally, you would rebalance your portfolio by using new money to correct any imbalances in your portfolio. If you must sell, you can use your retirement accounts, which do not incur capital gains until you withdraw money in retirement (or never in the case of Roth accounts).

          Don't have a Vanguard account, but looks like based on the other replies, you'll be ok from that perspective.

          -WSP

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          • #6
            Just to make sure... Using the auto-rebalancing feature in a 401k doesnt affect taxes since one isn't taxed until withdrawal correct? Or do capital gains taxes from this feature just eventually get paid in retirement?

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            • #7




              Just to make sure… Using the auto-rebalancing feature in a 401k doesnt affect taxes since one isn’t taxed until withdrawal correct? Or do capital gains taxes from this feature just eventually get paid in retirement?
              Click to expand...


              As long as the money is sitting in a 401k no taxes are incurred, so you don't have to worry about capital gains taxes.  When you start doing withdrawals in retirement, the withdrawals will be taxed as ordinary income.  For most people this will be at a lower tax rate than they had when they were working.

              So really a 401K is not tax-free, it is tax-deferred, but for most people it's advantageous since it will eventually be taxed at a lower rate.

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