Tax Tail Wagging My PP Dog

[I Shrugged]

I have nothing with losses, nothing at all.  That's a good thing, for sure.  I have not bought anything in probably 5-7 years.  Well, maybe just some cash-like short term bond fund purchases.  Just letting it grow, less the distributions we've spent. 

[Kbg]

Run some historical scenarios on what you might lose if you don't rebalance. US Stocks are A) on one of their longer term bull runs and B) quite expensive by all measures that matter. They have been more expensive, but they are in the area where the markets normally correct.  One simple scenario...which would be a ball park estimate.

Whatever your taxes are going to be by whatever your losses would be with a 25-33% market decline in equities with and without rebalancing then project 6-15% annually for an equities rebound. (Likely on the higher end as rebound returns are normally higher than LT historical average).

The good thing about this problem is it is simple math against whatever you decide the future may look like.

[Tyler]

Random weekend thought on the tax topic (yes, I need to get out more):

Depending on your situation, there could be something to be said for rebalancing annually rather than sticking strictly to the bands.  For a couple married filing jointly, up to $73,800 of long-term stock and bond capital gains per year are tax free.  And for gold, one can make the argument that a retired couple living solely off their PP should prioritize their withdrawals as: 1) dividends/interest, 2) gold sales (when over 25% of the portfolio) up to the $20,300 standard deduction + personal exception total, and 3) cash.  That will provide a nice tax-free baby gold rebalance annually, help delay any large gold rebalance down the line, and prolong the cash portion as well.

Any tax advisers out there should should feel free to correct my reasoning before I learn the hard way. 

[TripleB]

I haven't done the specific research to see if this is feasible, or what the costs are, because it doesn't apply to me and it won't be an easy calculation, but what if you used options and/or inverse ETFs to delay rebalancing?

For example, suppose you bought some double/triple inverse stock ETF with some of your cash portion. For each 1% of your portfolio that's in an 3x Inverse Stock ETF, 3% of your stock portfolio is "neutralized" and between the two, you essentially have 4% "cash".

Of course, that's not strictly true due to the costs involved in holding the inverse ETF. However, if you simply want to delay selling for a few months until 2015, you could consider this method.

Alternatively (and probably a much better option, pun intended), is to use options. You could buy some options to sell the SP500 Index Fund at current market value. Such that if the market drops, your options increase in value. If the market goes up, your options lose money, but you counterbalance that with the fact that 35% of your portfolio is stocks and those are going up. You're basically time-shifting the sale of your stocks at the cost of the options. If the cost of delaying the sale of the stocks is less than the tax difference of holding off, then consider it.

I'm not sure why you're so opposed to just paying the 15% capital gains tax and "reset" the cost basis. You're going to have to pay those taxes eventually anyway, and if you reset the cost basis now, then if you experience losses in stocks going forward, you benefit substantially from being able to deduct those losses against marginal income tax rates. Tax loss harvesting.

Since all of your money is taxable anyway, I don't see you losing much by paying the taxes now. If you had to liquidate some of your 401k to pay taxes, that would be awful. But since your money is all taxable, it makes little difference in the long run. Sure, you lose the compounding effect of what those taxes today could have earned over time, but I think that's negated by your newfound ability to tax loss harvest on your zero cost basis stocks. You'll note that I started this post with complicated and expensive strategies to lock in your earnings without paying taxes. I did that intentionally to make this option look better because just paying the taxes is probably your best option unless you live in a state with 5%+ state income tax and plan to retire in a 0% state income tax state in the near future.

The last piece of advice I have is to consider donating appreciated shares of stock to charity, if you're so inclined. You get the full tax deduction from the total value of the appreciated shares, and no one pays taxes on the earnings. Not you nor the charity.

[Kshartle]

The last piece of advice I have is to consider donating appreciated shares of stock to charity, if you're so inclined. You get the full tax deduction from the total value of the appreciated shares, and no one pays taxes on the earnings. Not you nor the charity.

Wouldn't that be unpatriotic and unfair to all the baby birds depending on those tax dollars? Sen. Schumer would be very unhappy if he had to back on his congressional staff. Ohhh wait, they're probably unpaid interns to begin with. The irony is these unpaid interns probably help him work on min wage legislation.

[brownehead]

Some simple options:
-Sell only from the stocks found with less gains.
-Sell something now and something more in january
-Rebalance stocks to 30% or so, instead of 25% (we don't really know if stocks will be up or down next years, but we know for sure that you are going to pay taxes on the sellings).