5 Tax-Smart Ways the Wealthy Rebalance Their Investment Portfolios
Written by
Kerra Bolton
Edited by
Jenna Klaverweiden
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Tax season is here, which means taking a closer look at your money. As investors gather documents and review last year’s gains, many find their portfolios no longer match their original plan.
Rebalancing can restore that balance, but selling investments may also trigger capital gains taxes. For wealthy households, the goal is to adjust allocations while limiting the tax hit and protecting long-term returns.
Here are five tax-smart ways the wealthy rebalance their investment portfolios.
1. Harvest Losses To Offset Gains
Tax-loss harvesting is a common strategy. It involves selling investments that are down to offset gains from assets that have appreciated.
Wealthy investors often use realized losses to reduce capital gains taxes owed in the same year. If losses exceed gains, up to $3,000 can be deducted against ordinary income, with remaining losses carried forward.
Before selling, review IRS guidance to avoid triggering the wash-sale rule, which blocks the loss if you buy the same investment back within 30 days.
2. Rebalance Inside Tax-Advantaged Accounts First
Affluent investors often start rebalancing inside tax-advantaged accounts. Trades within traditional IRAs, Roth IRAs and 401(k)s generally do not trigger immediate capital gains taxes.
Instead of selling appreciated assets in a taxable brokerage account, many adjust holdings inside retirement accounts to bring their overall allocation back in line while avoiding a current tax bill.
3. Use New Cash To Adjust Allocations
Another approach is to rebalance with new money instead of selling existing holdings. Dividends, interest payments and fresh contributions can be directed toward underweight assets.
By steering incoming cash to areas that have lagged, wealthy investors can restore their target mix without triggering capital gains taxes from selling winners.
4. Time Sales To Manage Capital Gains Rates
Wealthy investors pay close attention to how long they have held an investment before selling. Assets held for more than one year are generally taxed at long-term capital gains rates, which are lower than short-term rates.
By waiting to cross that one-year threshold or by coordinating sales with lower-income years, investors can reduce the tax owed when trimming appreciated positions.
5. Donate Appreciated Stock Instead of Selling
Another tax-smart strategy wealthy investors use is donating appreciated stock directly to a qualified charity. Instead of selling the investment and paying capital gains tax, the shares are transferred as a gift.
Investors can avoid capital gains on the appreciation and may be eligible for a charitable deduction based on the fair market value of the stock, subject to IRS limits.
Overall, rebalancing is not just about getting back to a target allocation. For wealthy investors, it is also a tax decision. By harvesting losses, using tax-advantaged accounts, directing new cash, timing sales and donating appreciated assets, wealthy investors aim to keep more of their gains working for them instead of sending a larger share to the IRS.
Editor’s note: This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
More From GoBankingRates
