Real-world examples of tax-efficient rebalancing strategies examples

Before getting into formulas or theory, it helps to anchor on concrete examples of tax-efficient rebalancing strategies examples that keep realized gains low. Many of the best examples share a simple theme: change the portfolio without (or with minimal) selling in taxable accounts.

One classic example of a tax-efficient move: a 40-year-old investor with a 70/30 stock–bond target sees stocks jump after a rally, leaving them at 78/22. Instead of selling stocks in their taxable brokerage account and realizing gains, they:

• Direct all new 401(k) and IRA contributions to bond funds for the next 6–12 months.
• Turn off dividend reinvestment for stock funds in their taxable account and send all new dividends to a money market or bond fund.

Over the next year, the portfolio drifts back toward 70/30, and the investor never sold a taxable share. This kind of example is boring in the best way: the stock–bond mix gets back in line, and the tax bill doesn’t move.

Examples of tax-efficient rebalancing strategies examples using new cash flows

One of the most tax-friendly examples of rebalancing is to use cash flows instead of sales. This is especially powerful for workers still in their accumulation years.

Consider a high-earning couple in their mid-30s saving aggressively:

• Target allocation: 80% global stocks, 20% bonds.
• Accounts: 401(k)s, Roth IRAs, and a taxable brokerage account.
• After a strong year for U.S. tech, their portfolio drifts to 88% stocks, 12% bonds.

Rather than selling stock ETFs in the taxable account, their advisor recommends:

• Directing all 401(k) contributions for the next year into a bond index fund.
• Directing all taxable-account contributions into a short-term bond ETF.
• Stopping automatic reinvestment of stock ETF dividends and routing them to the bond ETF.

Within 9–12 months, the portfolio returns close to 80/20 purely through where new money goes, not what gets sold. This is one of the best examples of tax-efficient rebalancing strategies examples because it:

• Avoids realizing capital gains in the taxable account.
• Uses tax-deferred space (401(k)s) to absorb the bond allocation.
• Maintains risk control without a spike in reported income.

The IRS doesn’t care if you buy more of one asset; taxes are triggered when you sell. So whenever you have steady contributions, using them as your primary rebalancing lever is often the lowest-friction, lowest-tax example of good portfolio hygiene.

Asset location: an example of rebalancing with account placement, not trades

Another underappreciated example of tax-efficient rebalancing is asset location. Instead of thinking, “What do I sell?” you think, “Which account should hold which asset class?”

Suppose a 55-year-old investor has:

• A traditional IRA
• A Roth IRA
• A taxable brokerage account

They want a 60/40 portfolio but also want to minimize taxes as they approach retirement. One practical example of a tax-efficient setup:

• Hold most of the bond allocation inside the traditional IRA (where interest is tax-deferred).
• Hold stock index funds with high expected growth inside the Roth IRA (where future growth is tax-free under current rules).
• Hold tax-efficient stock index ETFs (broad market, low turnover) in the taxable account.

When it’s time to rebalance:

• They buy or sell bond funds inside the IRA to adjust the overall stock–bond mix.
• They avoid selling stock ETFs in taxable unless they can pair gains with harvested losses.

This is one of the cleaner examples of tax-efficient rebalancing strategies examples because most rebalancing activity happens in tax-advantaged accounts, where trades generally don’t trigger current tax. The taxable account becomes the “set it and mostly leave it” piece of the puzzle.

For background on how different account types are taxed, the IRS provides plain-language guidance on retirement accounts and capital gains at irs.gov and in its capital gains FAQs.

Tax-loss harvesting paired with rebalancing: real examples

Tax-loss harvesting is often marketed as a standalone strategy, but some of the best examples are when it’s combined with rebalancing.

Imagine an investor with a 70/30 target who owns:

• A U.S. total stock market ETF (fund A)
• An international stock ETF (fund B)
• A bond ETF (fund C)

After a year where international stocks underperform badly, the portfolio drifts to:

• 64% stocks (with international at a loss)
• 36% bonds

Instead of just buying more international stocks, the investor:

• Sells fund B (international ETF) in taxable at a loss.
• Immediately buys a similar but not substantially identical international ETF (fund D) to avoid a wash sale.
• Uses some of the proceeds to buy additional stocks so the portfolio moves closer to 70/30.

Result:

• The investor harvests a capital loss that can offset current or future capital gains, and potentially up to $3,000 of ordinary income per year in the U.S. (per IRS Topic No. 409 on capital gains and losses).
• The overall allocation moves closer to target.

This is a textbook example of tax-efficient rebalancing because the investor adds risk back where it’s cheap (international stocks) while also banking a loss for future tax benefits. The market risk profile is maintained, but the tax profile improves.

Using tax-advantaged accounts as the rebalancing “shock absorbers”

Another pattern that shows up in many real examples of tax-efficient rebalancing strategies examples is to treat IRAs and 401(k)s as shock absorbers.

Picture a 50-year-old with:

• $600,000 in a 401(k)
• $200,000 in a Roth IRA
• $400,000 in a taxable brokerage account

Target allocation: 60% stocks, 40% bonds across all accounts.

After a strong bull market, the overall mix drifts to 72% stocks, 28% bonds. Instead of touching the taxable account, the investor and advisor:

• Sell stock funds inside the 401(k).
• Buy bond funds inside the 401(k) to restore the 60/40 mix.

No trades occur in taxable, so there are no realized capital gains. The entire rebalancing operation happens in a tax-deferred environment.

For many U.S. investors, this is one of the best examples of tax-efficient rebalancing strategies examples: use 401(k)s and IRAs as the primary place for allocation adjustments, and touch taxable accounts only when absolutely necessary or when you can offset gains with harvested losses.

Rebalancing around capital gains distributions

Mutual funds and some ETFs distribute capital gains annually, often in November or December. Smart investors use this calendar reality as another example of tax-efficient rebalancing.

Consider a taxable account holding an actively managed mutual fund that announces a large year-end capital gains distribution. The investor has been considering trimming this fund anyway because it no longer fits their strategy.

A tax-aware approach might be:

• Sell the fund before the distribution date if they are already sitting on a gain they’re willing to realize now.
• Use the proceeds to buy a more tax-efficient index ETF that better fits their target allocation.

Alternatively, if the fund is at a loss, they may wait until after the distribution to realize a larger loss (depending on their tax situation and the size of the payout).

This timing decision is a subtle example of tax-efficient rebalancing: the investor was going to rebalance; they simply chose when to act to manage the tax hit.

The SEC and FINRA both provide investor education on how mutual fund distributions work and why timing can matter. See FINRA’s guidance on mutual fund distributions for more context.

Shifting risk with derivatives: advanced examples

For larger portfolios or high-net-worth investors, some of the more advanced examples of tax-efficient rebalancing strategies examples involve derivatives, especially index futures.

Imagine an investor with a large, low-basis stock portfolio in a taxable account. Selling those stocks would trigger a huge capital gains tax bill, but the investor wants to reduce equity exposure from 80% down to 60%.

One advanced example:

• The investor keeps the low-basis stocks in taxable.
• In a futures account, they short equity index futures (e.g., S&P 500 futures) to synthetically reduce net stock exposure.
• Over several years, they gradually realize gains in the taxable account in a controlled way, perhaps harvesting losses elsewhere or using years with lower income to realize gains at lower tax rates.

This is not for everyone, and it carries its own risks and complexity. But it’s a real-world example of using derivatives to change risk exposure without immediate large stock sales. For sophisticated investors and institutions, this can be one of the more powerful examples of tax-efficient rebalancing strategies examples.

Rebalancing during retirement: examples that coordinate with withdrawals

Once you’re drawing down your portfolio, rebalancing and withdrawal strategy become intertwined.

Consider a 67-year-old retiree with:

• 50/50 target allocation.
• A taxable account, a traditional IRA, and a Roth IRA.
• Required minimum distributions (RMDs) starting at age 73 under current U.S. rules (see the IRS page on Required Minimum Distributions).

A practical example of tax-efficient rebalancing in retirement:

• When stocks outperform and the portfolio drifts to 60/40, the retiree takes withdrawals from stock funds in taxable and the traditional IRA to fund living expenses.
• When bonds outperform and the portfolio drifts the other way, withdrawals are directed more from bond funds.
• RMDs are satisfied in a way that nudges the portfolio back toward the 50/50 target (for example, taking RMDs from whichever asset class is overweight inside the IRA).

Here, rebalancing is partly accomplished through what you sell to live on, rather than separate, extra trades. It’s another example of tax-efficient rebalancing that uses a required action (withdrawals) to maintain the allocation.

Putting it together: patterns across the best examples

Looking across these real examples of tax-efficient rebalancing strategies examples, a few patterns stand out:

• Use cash flows first. New contributions and withdrawals are often the least-taxing way to move back toward target.
• Favor tax-advantaged accounts for trades. Make most allocation shifts inside IRAs and 401(k)s; treat taxable accounts more gently.
• Harvest losses when available. Pair rebalancing with tax-loss harvesting when markets give you the opportunity.
• Pay attention to timing. Capital gains distributions, income variations, and changes in tax law can all influence when you rebalance.
• Keep the taxable side tax-efficient. Low-turnover index funds and ETFs, long holding periods, and careful lot selection (specific identification) help reduce realized gains.

In 2024–2025, with higher interest rates and more frequent volatility spikes, portfolios are drifting out of balance more quickly. That actually creates more opportunities for tax-aware investors: more chances to harvest losses, more room to use new contributions to correct drift, and more flexibility to coordinate RMDs and withdrawals with allocation targets.

None of these examples require exotic products or complicated algorithms. They do require being intentional about where you trade, what you sell, and when you choose to act.

FAQ: examples-focused questions on tax-efficient rebalancing

Q: What are simple examples of tax-efficient rebalancing strategies for a beginner?
A beginner-friendly example of tax-efficient rebalancing is to use new contributions to fix drift: if your stocks are overweight, send all new money to bond funds until you’re back near target. Another example is to rebalance primarily inside your 401(k) or IRA, where trades usually don’t trigger current taxes.

Q: Can you give an example of rebalancing that avoids capital gains in a taxable account?
Yes. Suppose your stocks are overweight. Instead of selling stock ETFs in taxable, you can redirect all new contributions and dividends into bond funds and make offsetting stock sales and bond purchases inside a traditional IRA. You’ve changed your overall allocation, but your taxable account hasn’t realized gains.

Q: Are there examples of tax-efficient rebalancing strategies examples that use tax-loss harvesting every year?
In volatile markets, many investors systematically scan their taxable accounts for positions trading below cost basis. When they find them, they sell at a loss, buy a similar (but not substantially identical) fund, and use that moment to nudge the allocation back toward target. That recurring process is a practical example of pairing tax-loss harvesting with rebalancing.

Q: What is an example of when you might accept taxes to rebalance anyway?
If your risk level is far off target—say, you’re at 90% stocks when you intended 60%—the risk of a large drawdown can outweigh the tax cost. In that case, a disciplined investor may sell appreciated positions in taxable, realize gains, and pay the tax to avoid carrying far more risk than they can handle in a bear market.

Q: Where can I learn more about how different investments are taxed before I rebalance?
The IRS site has investor-facing explanations of capital gains and losses, qualified dividends, and retirement account rules. Start with Topic No. 409, Capital Gains and Losses and the IRS FAQs on Required Minimum Distributions. Many university finance departments also publish plain-language guides on tax-aware investing strategies.