The theme this week on the One Minute Retirement Tip podcast is: how to rebalance your investment portfolio. 

Today, I’m talking about something that might be holding you back from rebalancing your portfolio like you should, and that is taxes. 

When you have money in a 401k or an IRA, rebalancing your portfolio is a much less complicated decision. There are no taxes to consider with rebalancing your investments in these types of accounts, and the fees for rebalancing are often quite low...even $0 if you’re rebalancing in your 401k.

Where things get more complicated is in your taxable accounts. This could be a trust account, a joint account, or a regular brokerage account. When you rebalance your portfolio in a taxable account, you must consider the tax consequences.

If you’re selling investments with big gains, the tax consequences can be significant - thousands if not 10s of thousands of dollars, and possibly much more. The prospect of paying capital gains taxes can cloud your thinking and good judgement when it comes to rebalancing your portfolio. After all, no one likes to pay taxes. I just sold off part of a client’s stock position last week that currently makes up over ⅓ of her investment portfolio. Her deceased husband bought the stock about 20 years ago, and the stock has gone gang-busters over the last 5-10 years. Her cost basis in the stock is extremely low, so she will owe thousands of dollars in taxes for selling just a portion of the stock. It’s like a shot of vinegar in your mouth when you’re retired, since your income is usually lower and it’s more burdensome to pay the extra taxes on selling. 

But over ⅓ of her portfolio is in this stock, and in my opinion, she would be much better off in the long-run selling a portion of the stock this year, paying the taxes from the proceeds of selling the stock, re-invest the remainder and having a portfolio that is less risky.

The way I look at it is: Never let the tax tail wag the dog. Taxes are an important consideration, but it shouldn’t be the primary factor in your investment decisions. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance