Tax-Smart Rebalancing

Rebalance without giving the IRS a cut

1

Use new deposits to buy the underweight asset (no selling needed)

2

Reinvest dividends into the underweight asset instead of the same fund

3

If you must sell, sell lots with losses first (tax-loss harvesting)

4

Sell in your IRA/401(k) first where there's no tax impact

5

Only sell in taxable accounts as a last resort

Tax-efficient moves

Direct new money to underweight assets

Rebalance inside IRA/401(k)

Harvest losses while rebalancing

Use dividend reinvestment strategically

Tax-costly moves

Selling big winners in taxable accounts

Rebalancing too frequently (more taxable events)

Ignoring short-term vs long-term gains

Forgetting about wash sale rules

Tax drag

0.5-1.0%/yr

if rebalancing carelessly

Asset location benefit

0.1-0.75%/yr

right assets in right accounts

Bonds belong in

Tax-deferred

IRA/401(k)

asset location

Hold bonds and REITs in tax-deferred accounts (IRA). Hold stocks and index funds in taxable accounts. This alone can add 0.1-0.75%/yr in after-tax returns.

Check yourself

What's the most tax-efficient way to rebalance a taxable account?