Portfolio rebalancing is a long-held approach to investing. Done wisely, it can ensure holdings align with your investment strategy. However, thoughtless actions can have inadvertent consequences come tax time. Ask yourself these four questions before rebalancing to avoid a nasty tax surprise. Which Type of Account Am I Rebalancing In? IRAs have various benefits for Americans. One key perk is that transactions within an IRA are tax-sheltered. Gains or dividends don’t create taxable consequences. That’s ...

Core Insights - Many individuals prefer saving for retirement in tax-advantaged accounts like IRAs or 401(k) plans due to the tax benefits associated with these accounts compared to taxable brokerage accounts [1][2] Group 1: Tax Advantages and Disadvantages - Traditional IRAs and 401(k) plans provide tax breaks on contributions and allow for tax-deferred growth, postponing tax liabilities until withdrawals are made [2] - A significant drawback of these retirement plans is the requirement to take required minimum distributions (RMDs) at a certain age, which can complicate financial planning [2][4] Group 2: Managing RMDs - RMDs can be manageable if individuals have existing financial plans, such as supplementing Social Security benefits with regular withdrawals [3] - However, RMDs can increase annual tax bills and limit the ability to grow investments in a tax-advantaged manner [4] Group 3: Options for RMD Utilization - Individuals can invest their RMDs in a regular brokerage account, allowing the funds to potentially grow over time, even if there is no immediate need for the money [5] - Another option is to donate RMDs to charity, which can be done through a qualified charitable distribution (QCD) to avoid taxes on the amount donated [8]