Tax-Aware Portfolio Rebalancing

⚡In 30 seconds

  • •How to rebalance your portfolio while minimizing tax consequences.
  • •Uses 2 calculator(s) for hands-on examples

Portfolio rebalancing keeps your asset allocation on track, but selling appreciated assets triggers capital gains. Tax-aware rebalancing minimizes the tax impact while maintaining your desired allocation.

When to Rebalance

Calendar-based: rebalance annually or quarterly.

Threshold-based: rebalance when allocations drift by 5-10% from targets.

Hybrid: check periodically but only rebalance when thresholds are exceeded.

Tax-Efficient Strategies

Direct new contributions to underweight assets.

Use tax-advantaged accounts for the selling portion when possible.

Harvest losses to offset gains from rebalancing.

Consider the timing relative to holding periods.

Asset Location Matters

Hold tax-inefficient assets (bonds, REITs) in tax-advantaged accounts.

Keep tax-efficient assets (index funds, long-term holdings) in taxable accounts.

This "asset location" strategy can significantly improve after-tax returns.

Example: Rebalancing a 60/40 Portfolio

Your 60% stock / 40% bond portfolio has drifted to 70% stock / 30% bonds after a market rally.

  • 1.Target: 60% stocks, 40% bonds
  • 2.Current: 70% stocks, 30% bonds
  • 3.Option 1: Sell stocks, buy bonds (may trigger gains)
  • 4.Option 2: Direct new savings to bonds until ratio corrects
Check your portfolio balance →

FAQ

How often should I rebalance?

Annual rebalancing is sufficient for most investors. More frequent rebalancing rarely improves returns but may increase costs and taxes.

Key Terms

Portfolio RebalancingAdjusting portfolio holdings to maintain target as...Tax-Loss HarvestingSelling losing investments to offset gains and red...Cost BasisThe original purchase price of an investment, used...

Tools & Resources

→ Portfolio Risk Calculator→ Capital Gains Calculator→ Capital Gains Tax Guide← Back to Guides→ Investment Glossary