Rebalancing Your Portfolio Without Triggering a Tax Bill
By: Stacey Nickens
Many investors have seen strong gains in their stock portfolio during 2021. As of close on November 26, the S&P 500 was up 22.3%. An investor who desires certain percentage of their funds to be in stocks may accordingly find that their stock position has risen to a much larger percentage of their portfolio than is desired.
With that said, you may be interested in reducing risk within your portfolio without triggering capital gains tax or without having to constantly rebalance your portfolio during a bull market.
So how can you go about accomplishing that goal?
1. Automate your 401(k) portfolio. Many 401(k)s and similar retirement plans offer an auto-rebalancing option. With this option selected, the retirement portfolio will be periodically and automatically rebalanced to predetermined levels. Investors who want to hold a specific percentage of their funds in stocks and bonds, and who also don’t want to regularly do the rebalancing work themselves, might consider selecting this option on their workplace retirement accounts.
2. Take mutual fund and ETF dividends as cash payouts from your taxable accounts. Many investors choose to automatically reinvest dividends into additional shares of a mutual fund or ETF. Keeping your dividends in cash gives you the choice to instead invest that money in bond funds, I bonds, Treasury inflation-protected securities, or other assets that will diversify your holdings.
3. Sell bond funds at a loss to offset stock gains in taxable accounts. The average bond fund is posting a 2% year-to-date loss. If your bond holdings are underperforming, you could sell them at a loss while also selling appreciated stocks for a gain. As long as your losses offset your gains, you can deduct up to $3,000 in losses from ordinary income on your 2021 return.
4. Gift appreciated stocks. You can gift appreciated stocks to a person through a nontaxable transfer. You could also look into a donor-advised fund. You can contribute to the donor-advised fund and then donate assets from the fund to a charitable account. This donation triggers a tax deduction. Donated securities also do not trigger capital-gains tax.
