4. Consider the impact of taxes
Over time, your asset mix will change due to market performance and withdrawals, including required minimum distributions (RMDs). As you rebalance your portfolio to bring it back into alignment with your target mix, it’s important to consider the tax implications, since managing taxes effectively can help preserve more of your retirement savings and support your legacy and wealth-transfer objectives.
Because selling assets within a tax-advantaged retirement account generally does not trigger taxes, you can rebalance those accounts as necessary. In a taxable account, however, the process can be more complex. Rebalancing means selling positions that have gotten too large—which can lead to capital gains.
For Fabry’s clients who have a managed account, the investment management team works to bring the portfolio back to its agreed-on allocation while trying to minimize gains to the extent possible. For example, the team tries to avoid selling anything that would incur short-term capital gains. When assets need to be sold, they review the specific tax lots of each holding to identify those with the highest purchase prices.1
Finally, for qualified2 clients who have both taxable and tax-advantaged accounts assigned to their retirement goal, either individually or jointly owned, across a household, the investment team can rebalance across all of them together, preferably making adjustments to the tax-advantaged accounts. This allows a couple’s overall portfolio to stay aligned with the target mix while potentially reducing taxes.
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