Rebalancing means adjusting your investment mix to bring your portfolio back to its target percentages. If stocks grow faster than bonds, you end up with more stock exposure than you planned. If bonds rise, you end up with more bond exposure than you want. Rebalancing fixes that drift by selling what has grown too much and buying what has fallen behind.

Rebalancing is supposed to help keep your portfolio on track. It brings your mix of stocks and bonds back to the level that matches your risk tolerance. The problem is that rebalancing can trigger taxes. Selling positions with significant gains creates realized capital gains. Those gains raise your tax bill. Many investors avoid rebalancing because they want to minimize tax liabilities. That choice often leaves them with more risk than they realize.

Advanced planning matters

Rebalancing without a plan can be expensive. A smart plan helps you reduce realized gains. It also enables you to keep risk at the level you want.

The goal is to keep your long-term plan intact. You want fewer surprises from the IRS and fewer surprises from the market. Careful planning ties both goals together.

How to rebalance without selling everything

A tax-aware strategy uses several tools. The first is cash flows. New contributions are the easiest way to rebalance your portfolio. You can buy more of what is underweight. Withdrawals work the same way. You can sell what is overweight when you need cash. These moves reshape your allocation without creating unnecessary gains.

Another tool is rebalancing inside tax-advantaged accounts. You can sell and buy freely inside retirement accounts without realizing gains. Moving only enough inside those accounts can bring your entire portfolio closer to your target mix. This avoids selling in taxable accounts when it is not necessary.

Use ranges instead of fixed targets

Strict rebalancing triggers many small trades. That raises taxes and trading costs. A better approach uses tolerance bands. Instead of returning to a fixed target every time, you set a range. For example, if your target stock allocation is 60 percent, you might allow it to drift between 55 and 65 percent. You only rebalance when the allocation moves outside this range. This reduces trading. It also lowers realized gains. It keeps risk under control.

How tax lots change your outcomes

Tax lots are the individual purchase records for each security. Each lot has its own cost basis. Picking the right lots to sell can cut your tax bill. Some lots have higher cost bases. Selling those creates smaller gains. Some lots may even be at a loss. Selling those can offset gains elsewhere. A tax-aware approach looks at every lot before trading. It tries to find the combination that moves you toward your target while creating the fewest gains.

The role of tax-loss harvesting

Tax-loss harvesting involves selling underperforming investments to realize losses, which can then be used to offset capital gains realized from other investments. This strategy enables investors to reduce their taxable income and can ultimately result in significant tax savings, making it a crucial tool for effective portfolio management.

When the market drops, some positions fall below their purchase price. Selling them captures a realized loss. You can use that loss to offset realized gains from rebalancing. You can even use unused losses to reduce future gains.

Loss harvesting should not change your investment plan. It is a tax strategy. You keep the same overall exposure by buying a replacement fund that is not substantially identical. The goal is to stay invested while minimizing tax liabilities.

Use appreciated positions without selling

Sometimes the best move is to avoid selling appreciated positions altogether. You can donate highly appreciated shares to charity. You can give appreciated shares to family members in lower tax brackets. These gifts remove gains from your portfolio without triggering taxes. This can be especially valuable when you need to reduce concentrated positions.

Why wash sale rules matter

Wash sale rules are IRS regulations that disallow a tax deduction for a loss on a security if a substantially identical security is bought within a 30-day window before or after the sale.

A tax-aware approach tracks every trade. It checks for replacement funds that maintain your exposure while avoiding wash sale problems. Timing matters.

Coordinate taxes and risk in real time

Tax-aware rebalancing is not a set-and-forget approach. Markets move quickly. Your risk exposure changes with those moves. Taxes matter every time you trade. A coordinated plan considers both factors. It weighs whether rebalancing now reduces more risk than it costs in taxes. It checks whether waiting a bit longer keeps you within your tolerance range. It looks for opportunities to harvest losses or use new cash.

Impact of The One Big Beautiful Bill Act

The One Big Beautiful Bill Act does not change the federal long-term capital gains tax rates. The 0 percent, 15 percent, and 20 percent rates remain unchanged.

What does change is the income thresholds that determine who falls into each capital gains bracket. These updated thresholds may cause some high earners to be taxed in a higher bracket at different income levels than before. The rate stays the same. The income point at which the rate applies shifts.

This matters for timing decisions. If you are close to a bracket cutoff, realizing gains during a rebalance might have a bigger tax impact than it used to.

Careful monitoring of taxable income can help you avoid crossing into a higher bracket earlier than you expect.

The tax-aware rebalancing strategy remains unchanged. You still use tax lots, cash flows, tax-loss harvesting, and retirement accounts to reduce realized gains. The tools stay the same. The only difference is the need to pay closer attention to your taxable income throughout the year, as the bracket thresholds shift.

What high earners need to watch

High earners often have significant embedded gains. They also have complex portfolios with multiple accounts. Coordinating rebalancing across these accounts matters. A single trade in a taxable account can create a large tax bill. Rebalancing inside retirement accounts, using tolerance bands, and harvesting losses become essential tools. These choices help protect future wealth. They also keep risk where it belongs.

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Disclaimer: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through TOP Private Wealth, a registered investment advisor and separate entity from LPL Financial.

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