Most investors are aware of how to rebalance their portfolio. If not, they should be. But did you know that you can rebalance and tax plan at the same time? Advanced Rebalancing is like regular rebalancing, with a tax planning twist.
According to Investopedia, rebalancing is the process of realigning the weightings of a portfolioÂ of assets. Rebalancing involves periodically buying or sellingÂ assets in a portfolioÂ to maintain an original or desiredÂ level of asset allocationÂ or risk.
A good example is if you want a 60/40 stock to bond portfolio and after a market correction your allocation is 50/50 stock to bonds. You’d need to sell 10% of your bonds and buy 10% more stocks. That’s tough to do when the market is down.
According to NerdWallet, tax planning is the analysis and arrangement of a person’s financial situation in order to maximize tax breaks and minimize tax liabilities in a legal and efficient manner.
According to Vanguard, aÂ Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA.
An example of a Roth conversion and tax planning is converting $24,800 worth of traditional IRA money to a Roth IRA when you have no income, like some retirees. The Roth conversion uses the full standard deduction of $24,800 and your taxable income is still zero.
Essentially, you’ve moved a taxable investment in the traditional IRA to a non-taxable investment, the Roth IRA, and paid no taxes.
What if you could rebalance, do a Roth conversion, and tax plan at the same time?
According to me, advanced rebalancing is converted shares of bonds from an IRA to a Roth while paying minimal taxes in order to rebalance your investments. I loved doing this because it accomplished several things at once. Rebalancing, conversion, and tax planning and Advanced Tax Deferral.
One of the best way to increase your return is to lower your taxes. There are many ways to do this. Advanced rebalancing lowers your taxes and rebalancing your portfolio at the same time.
For more on tax planning, investments, and rebalancing, check out: