Taxes

You do not have to worry about tax consequences when trading in accounts like 401(k) plans, IRAs and Roth IRAs. However, if you have a taxable account (personal, joint, trust), tax consequences are definitely a concern and likely a constraint.

If you have a fund worth $100,000 and your cost basis is $60,000, you would have a $40,000 capital gain if that fund was sold. If this fund is not sold, then we must work it into your target allocation and see how it fits with your other investments. Let’s say the fund is a large growth, technology-focused fund. If even after holding it, we still need more allocated to large growth, then we may just use a more broad-based large growth fund. However, if holding it causes you to be over-weighted in large growth, then we may cut back on a similar asset class like large blend.

When dealing with investments with capital gains that we’d prefer to exchange for something else, we like to develop a “tax budget”. In other words, what level of capital gains are you comfortable taking in order to more fully implement our target portfolio?