Ready to make switch but not sure where to begin...

[dualstow]

What % should your VP be?

Harry Browne defined it as the % of your portfolio that you are willing to lose.

[badbally]

In my 401K account, I have an option for the SSGA S&P index fund (ER .65%) as well as a SSGA Russell Small Cap Index (ER .70%).  The ER on these index funds just kills me and I've always had my money invested in couple of actively managed funds that have performed well as compared to the index's.  Now that I'm making the switch, I see that PP prefers the Total Stock Market index but since I don't have that option, what % should I allocate between the 2 index funds in my 401K? 

[Ad Orientem]

In my 401K account, I have an option for the SSGA S&P index fund (ER .65%) as well as a SSGA Russell Small Cap Index (ER .70%).  The ER on these index funds just kills me and I've always had my money invested in couple of actively managed funds that have performed well as compared to the index's.  Now that I'm making the switch, I see that PP prefers the Total Stock Market index but since I don't have that option, what % should I allocate between the 2 index funds in my 401K? 

I feel your pain. My last 401k was mostly unsuitable for a PP and one index fund that worked was similarly very pricey. In my case I gave up on the PP in my 401K and just did a Jack Bogle 50/50 split between stocks and bonds using index funds. In your case I'd just go with the S&P 500 if you can work the other components in somewhere else like an IRA. But sometimes in life your 401K just isn't going to work for a PP. Go with the best available options is a good rule of thumb.

[badbally]

Would a PP makes sense if you're retired and don't need to live off the funds from the PP? 

[craigr]

Also, following the advice here, I made sure all of my gold ETF's were in taxable accounts since that is supposed to be the most efficient.  My strategy was to start with all ETF's and transition into physical when I was more comfortable with the PP.  Since gold went up significantly I have to pay a high tax bill just to reallocate from ETF to physical gold.  My current thinking is to set up mini PP's in each type of account to provide greater flexibility for the future.  It's just tough to give back 28% of my gains just to move from one form of gold to another.

Live and learn.

Kobe,

A few things to mention:

- Please understand that ETFs are first and foremost for convenience. They may have some tax issues and gains of course there is not much to do. On the forum some people have used closed end funds and declared them as Passive Foreign Investment Trusts to have better long-term gains. I am not in this situation so I cannot comment, but you may want to ask about it and read the prospectus to see if that is an option. MachineGhost commented on the 1031 gold exchange option which is also new to me, but is an intriguing option if it is applicable to your situation. I need to research this myself just to understand it more.

- But with the above said, gold is not taxed at a flat 28% rate. It is taxed at your marginal rate or 28%, whichever is lower. Most people outside of the very highest paying tax bracket will not pay 28% tax on gold sales. Please see a qualified CPA or Tax Specialist familiar with your situation to determine how this applies to you.

- I recommend that taxable investors always move very slowly in terms of what they decide to hold in their account. I have been bitten by this myself years back when I bought assets I later didn't want but had locked in gains. It took many years to gradually cycle the assets out with rebalancing, but eventually I did so. Today I always make my portfolio as simple as possible and do not buy anything unless I'd be comfortable holding it, potentially, for decades.

- Again all is not lost and because each person' situation is so unique, it may make sense to talk to a local CPA and explain where you are to see how you can resolve it with minimum costs. Often things are not as bad as they appear once you talk about the problem with an expert in the field.

Hope that helps...

[craigr]

Would a PP makes sense if you're retired and don't need to live off the funds from the PP? 

Depends on your goals. Overall I would say it's a good option if you are seeking moderate growth with lower risk compared to other strategies.

[sophie]

- I recommend that taxable investors always move very slowly in terms of what they decide to hold in their account. I have been bitten by this myself years back when I bought assets I later didn't want but had locked in gains. It took many years to gradually cycle the assets out with rebalancing, but eventually I did so. Today I always make my portfolio as simple as possible and do not buy anything unless I'd be comfortable holding it, potentially, for decades.

This is really good advice - thank you Craig!  I think many of us have been there, and learned the hard way.  Also, keeping detailed records and tracking investment performance in a spreadsheet might help clarify your thoughts.

Someone else here (PointedStick I think?) keeps the taxable and retirement PP's separate.

[Pointedstick]

Someone else here (PointedStick I think?) keeps the taxable and retirement PP's separate.

Yup, that's me. In fact since then, I've added a 4th PP in the form of a taxable PERM holding that I've earmarked for intermediate-term savings that can tolerate fluctuations. I just can't get enough of the permanent portfolio! 

I too struggled with the question of how to break up the assets into the different tax-advantaged vehicles but in the end moving money between them for rebalancing seemed like it would be a nightmare and I had to really ask myself what my investing goals were anyway. The early retirement I'm working toward would be complicated quite a lot by having everything in a 401k and Roth IRA. So that added a third taxable PP into the mix...

In retrospect, it might have been wiser to split a single PP across the 401k and Roth IRAs, but it's not really a big deal, just a little more work twice a month.

[MachineGhost]

In retrospect, it might have been wiser to split a single PP across the 401k and Roth IRAs, but it's not really a big deal, just a little more work twice a month.

Are you saying, you have mini-PP's in each kind of tax category account rather than a giant sprawling one?

[Pointedstick]

In retrospect, it might have been wiser to split a single PP across the 401k and Roth IRAs, but it's not really a big deal, just a little more work twice a month.

Are you saying, you have mini-PP's in each kind of tax category account rather than a giant sprawling one?

Correct. My 401k with Schwab has VIIIX, TLT, GLD, and SCHO. My wife and My Roth IRAs with Vanguard collectively have VTSMX, EDV, VGSH, and IAU, and my DIY taxable PP with TDAmeritrade has VTI, EDV, GTU, and SHY. And I have a bunch of PERM with eTrade.

[Storm]

Personally I prefer the giant sprawling one.  I can buy the tax advantaged asset in each account and eventually end up with a little in all of my accounts for rebalancing purposes.  I think the PP works best in this manner, with tax heavy assets like Treasury bonds doing best in your 401k, while tax deferred assets like gold doing best in your taxable accounts.

[Pointedstick]

The reason why I didn't do that was because I intend to use a lot of the money before retirement age. If I had things all split up so that I held the individual assets mostly in tax-sheltered accounts, once it came time to use them (before age 60) I would have to jump through ridiculous inflexible hoops to access it. If I suddenly need cash but my only asset in taxable is gold, then I would need to use some trick. It's not too bad with a Roth IRA, but withdrawing money early from a 401k without paying penalties is a less flexible affair.

[BearBones]

Personally I prefer the giant sprawling one.  I can buy the tax advantaged asset in each account and eventually end up with a little in all of my accounts for rebalancing purposes.  I think the PP works best in this manner, with tax heavy assets like Treasury bonds doing best in your 401k, while tax deferred assets like gold doing best in your taxable accounts.

I have a feeling that this consistent recommendation is because so many of us are new to the PP. I have a feeling that having unbalanced assets between taxable and tax deferred acts will eventually lead to difficulties, as discussed before. This might occur, for example, in the event of LTTs taking a long term dive in a tax deferred act, and there is eventually little else to rebalance from (i.e., you cannot just move some cash or stocks in from your taxable space). In this scenario, your "little in all accounts" gets used up, you end up with a shrinking 401k, and you are forced to buy LTTs in your taxable act.

I have a feeling that 10 years from now the recommendation will be just to keep a PP in each act. Think I am off base?

[Dieter]

Personally I prefer the giant sprawling one.  I can buy the tax advantaged asset in each account and eventually end up with a little in all of my accounts for rebalancing purposes.  I think the PP works best in this manner, with tax heavy assets like Treasury bonds doing best in your 401k, while tax deferred assets like gold doing best in your taxable accounts.

I have a feeling that 10 years from now the recommendation will be just to keep a PP in each act. Think I am off base?

It is probably sub-optimal, but for simplicity I keep accounts/allocations separate.

[rickb]

Personally I prefer the giant sprawling one.  I can buy the tax advantaged asset in each account and eventually end up with a little in all of my accounts for rebalancing purposes.  I think the PP works best in this manner, with tax heavy assets like Treasury bonds doing best in your 401k, while tax deferred assets like gold doing best in your taxable accounts.

I have a feeling that 10 years from now the recommendation will be just to keep a PP in each act. Think I am off base?

It is probably sub-optimal, but for simplicity I keep accounts/allocations separate.

This seems like a fairly complex topic - anyone know if it's covered in some book someplace?

First, I think we have to be assuming you CAN buy each of the 4 assets in your tax deferred accounts.  If you keep individual PPs in each account (including taxable), the accounts will grow at the same rate - however during accumulation periods of your life you're probably not adding equal amounts and during retirement you're probably not drawing from them equally as well.  If you do this you're not maximizing the advantage of any asset-specific tax treatment - for example, you're paying taxes every year on dividends from long term bonds in your taxable account(s) so these dividends are not compounding tax free.   

If you keep one giant sprawling PP, with assets allocated between taxable and tax deferred accounts (as much as possible) based on tax treatment (perhaps LT in tax deferred, stocks in taxable so gains will be taxed at the long term capital gains rate rather than the income rate, etc.), the value of your taxable and tax deferred accounts may end up growing at unequal rates - and because of rebalancing (and contribution limits) you'll almost certainly not be able to keep all of each kind of asset in its optimal kind of account.  Maybe I'm missing something, but as long as you CAN buy each of the 4 assets in your tax deferred accounts I don't see what the issue is with rebalancing.

Seems to me like the bottom line is either way works, but if you manage each individual account as a PP you're likely giving up some tax related advantages you might have by managing everything as one giant sprawling account.  Individual circumstances vary enough that it might be worth paying a qualified tax professional for advice about this.

[BearBones]

Maybe I'm missing something, but as long as you CAN buy each of the 4 assets in your tax deferred accounts I don't see what the issue is with rebalancing.

Can rebalance, but may eventually run out of assets to rebalance from. In my case, I would like to put all LTTs in tax-deferred act. However, in that case, my 401k would be more than 80% LTTs. I decided do something like 70 LTTs, 10 Stocks, 10 Gold, and 10% cash. But in an inflationary environment, the decline in LTT value might not be offset by increase in others. Eventually, I might have a shrinking 401k of pure LTTs.

Individual circumstances vary enough that it might be worth paying a qualified tax professional for advice about this.

This is more than a tax issue, of course. I bet that the discussions on this forum are more helpful than 99% of most "professionals." That's why I'd like to see more people weigh in on this specific issue again. We've got some damn smart people here (and you are probably one of them).

[Pointedstick]

This is more than a tax issue, of course. I bet that the discussions on this forum are more helpful than 99% of most "professionals."

That's the biggest reason I love hanging out here. I feel like I gain a few fractions of an IQ point every time I read the wisdom regularly handed out for free by MT, craigr, Gumby, stone, moda, MG, and many others. The concentration of intelligence and knowledge here is staggering.

[rickb]

Maybe I'm missing something, but as long as you CAN buy each of the 4 assets in your tax deferred accounts I don't see what the issue is with rebalancing.

Can rebalance, but may eventually run out of assets to rebalance from. In my case, I would like to put all LTTs in tax-deferred act. However, in that case, my 401k would be more than 80% LTTs. I decided do something like 70 LTTs, 10 Stocks, 10 Gold, and 10% cash. But in an inflationary environment, the decline in LTT value might not be offset by increase in others. Eventually, I might have a shrinking 401k of pure LTTs.

Say you establish a PP and you coincidentally have a 401K that's 25% of your assets and you make it 100% LTTs.  If LTTs crash and burn and you need to rebalance, you can't buy more in your 401K so you buy enough in a taxable account to bring the total up to 25%.  Some time later, if LTTs are booming you might choose to rebalance by selling the ones in your taxable account.  You might occasionally (even generally) be forced to have some "misplaced" assets.  If you choose to leave rebalancing "room", it seems you're simply deliberately "misplacing" some assets ahead of time.

If your total is heavily tax-deferred, another option is to try to always rebalance in tax-deferred accounts (so you're not paying capital gains from selling assets in a taxable account).  This is one way individual circumstances may vary.  Figuring out what might be the minimally taxing approach depends on enough variables (including the potential for tax loss harvesting in taxable accounts) that there's probably no "one size fits all" solution.

I think saying screw this, I'll just keep each account rebalanced on its own, is a perfectly valid option - although if you do this I suspect you're paying something for the simplicity.

[sophie]

I have a feeling that 10 years from now the recommendation will be just to keep a PP in each act. Think I am off base?

The simple 4 ETF PP in each account has a lot going for it - fund diversity, easy performance tracking, and trivially simple rebalancing.

Two of HB's most precious tenets, though, were tax minimization and keeping physical gold outside of the U.S. banking system.  You're giving up substantial benefits in both those areas with this system.  It's probably fine if interest and dividends stay low for the next few years, and if most of your funds are in taxable accounts.

Also, if you have limited investment options in one or more retirement accounts, then a unified PP may be your only option.

I have my tax-advantaged accounts set up with at least 2 PP assets in each, with different pairings:  stocks/bonds/cash in one, bonds/gold in another, stocks/gold in a third.  Taxable is mainly cash and physical gold, with enough stocks and bonds that I could rebalance here if I had to.  It's a bit of a pain to keep track of everything, but I don't think I'll have too many problems rebalancing.

[sophie]

The reason why I didn't do that was because I intend to use a lot of the money before retirement age. ...it's not too bad with a Roth IRA, but withdrawing money early from a 401k without paying penalties is a less flexible affair.

This is indeed a sticky issue for early retirement.  The best solution I've read about is to transfer money gradually from the 401K to the Roth (via a rollover IRA), in amounts small enough that you can handle the taxes.  The contributions are then available to withdraw after 5 years.  What are you planning to do with your retirement accounts once you quit full time work?

[Pointedstick]

The reason why I didn't do that was because I intend to use a lot of the money before retirement age. ...it's not too bad with a Roth IRA, but withdrawing money early from a 401k without paying penalties is a less flexible affair.

This is indeed a sticky issue for early retirement.  The best solution I've read about is to transfer money gradually from the 401K to the Roth (via a rollover IRA), in amounts small enough that you can handle the taxes.  The contributions are then available to withdraw after 5 years.   What are you planning to do with your retirement accounts once you quit full time work?

Once I'm retired, I'll be in the 10 or 15% tax bracket, so I plan to do the rollover conversion at that point to minimize the tax hit. I also might start withdrawing from the 401k via SEPP if the need arises, and there's always the ability to withdraw Roth contributions tax free. But I'm also hoping to be able to leave a lot of money in these accounts for when I actually hit age 60.

One advantage of amassing the money in a taxable account that I found out a couple of weeks ago is that the federal long-term capital gains tax rate for the 10 and 15% brackets is 0%, so that lessens the impact of rebalancing and selling. Of course, that's as per the current set of indefinitely-extended-year-by-year tax rates, so hopefully the Democrats don't torch that element as part of whatever deal they eventually end up making with the Republicans.

[BearBones]

Two of HB's most precious tenets, though, were tax minimization and keeping physical gold outside of the U.S. banking system.  You're giving up substantial benefits in both those areas with this system.  It's probably fine if interest and dividends stay low for the next few years, and if most of your funds are in taxable accounts.

True. But there is another side to this, and I wonder if anyone knows if HB took the position that asset classed should be unbalanced.

At least 2 tax related issues argue for a balanced PP in all acts (although that is not what I have done so far):
1. If any tax deferred act is not balanced, it is at risk of significant loss of value in the long run. Most investment advisors, including HB, recommend maximizing tax advantaged accounts, and it would be a real shame to see it shrink. Remember, the asset that makes the most sense currently for tax deferred acts is LTTs. LTTs yields have been declining for 30 years. They could go the other way for the next 30, and you could see your 401k/IRA dwindle.
2. Tax loss harvesting. This is one of the gems of the HB PP, IMO. But if your declining asset class is in the tax deferred act, it is unusable for this purpose.

[Ad Orientem]

Remember, the asset that makes the most sense currently for tax deferred acts is LTTs. LTTs yields have been declining for 30 years. They could go the other way for the next 30, and you could see your 401k/IRA dwindle.
2. Tax loss harvesting. This is one of the gems of the HB PP, IMO. But if your declining asset class is in the tax deferred act, it is unusable for this purpose.

This is an excellent point. In the post World War I world there have been three secular market trends in the bond market. A secular bull market ran from roughly 1920-21 to 1951 when the yield on LTTs dipped below 2%. This was followed by secular bear market that ran until 1981 or thereabouts with LTT yields topping out around 15% (don't you wish you had access to a time machine?). This in turn has been followed by another secular bull market from 1981 and continuing to the present day.

Coincidentally the two previous secular bond markets lasted roughly thirty years. And now we are about thirty years into this one. At the risk of speculating, my gut says the second post war bull market in bonds is winding down. But of course I could easily be wrong. The first one did not end until LTT's were yielding around 1.9%. But that was also in large measure due to the aggressive intervention of the government in the bond market. Not that we would ever see such a thing in this day and age.

[MachineGhost]

Coincidentally the two previous secular bond markets lasted roughly thirty years. And now we are about thirty years into this one. At the risk of speculating, my gut says the second post war bull market in bonds is winding down. But of course I could easily be wrong. The first one did not end until LTT's were yielding around 1.9%. But that was also in large measure due to the aggressive intervention of the government in the bond market. Not that we would ever see such a thing in this day and age.

It might be better to hold the LTT in taxable going forward so the losses can be harvested.

[Tyler]

I handle my PP similar to Pointedstick. One PP for the taxable accounts, and a second spread across various IRAs and 401ks.  I'm also planning for ER, and the stability of the PP is one of the most appealing features for me.  Keeping my near-term accessible funds as a separate PP works well for my goals, and the PP is already pretty tax efficient as long as you don't mess with it.