Minimize transaction fees and taxes
When it’s time to rebalance your portfolio, consider these tax-efficient best practices to potentially further improve your investment performance without sacrificing your risk/return profile.
Focus on tax-advantaged accounts
Selling investments from a taxable account that’s gained value will most likely mean you’ll owe taxes on the realized gains. To avoid this, you could rebalance within your tax-advantaged accounts only.
Rebalance with portfolio cash flows
Direct cash inflows such as dividends and interest into your portfolio’s underweighted asset classes. And when withdrawing from your portfolio, start with your overweighted asset classes.
Consideration: If you’re age 72 or over, take your required minimum distribution (RMD) from your retirement account(s) while you’re rebalancing your portfolio. You can then reinvest your RMDs in one of your taxable accounts that has an underweighted asset class.
Be mindful of costs
To minimize transaction costs and taxes, you could opt to partially rebalance your portfolio to its target asset allocation. Focusing primarily on shares with a higher cost basis (in taxable accounts) or on asset classes that are extremely overweighted or underweighted will limit both taxes and transaction costs associated with rebalancing.