Ask Terry Questions Rebalancing article

Rebalancing article

By Terry Savage on May 26, 2017 | Taxes & Economy

Can you talk about tax implications of rebalancing . Last time I rebalanced I got whacked hard with income taxes. Therefore very reluctant to do this on a regular basis. I get the 401k/IRA part. No tax impact. But the plain old investment account gets crushed by the IRS upon rebalance. Any tips?

Terry Says

You are absolutely correct, which is why I focused on IRA accounts.  In recent years, they have grown to be huge accounts, as people "roll" out of their company 40l(k) or 403(b) workplace accounts.  There is no tax implication when you sell INSIDE an IRA -- and all the money comes out taxed as ordinary income.  But in taxable accounts, when you sell at a profit, the government collects its share -- unless you can offset some of the gains by selling other assets at a loss. It's particularly important to consider taxes outside a retirement account.  You might want to build up more cash inside your IRA if you own stocks outside a retirement plan, in your own name.   At least, if you hold stocks in your own name for longer than a year, you get a capital gains tax break on the profits from a sale.



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