Investment locations?

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vnatale
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Investment locations?

Post by vnatale » Wed Oct 09, 2019 3:24 pm

I’ll soon be investing as part of the Permanent Portfolio in the following four investments

1) Cash (T-Bills no longer than one year)
2) Stocks (Vanguard Total Stock Market Fund)
3) Gold (ETFs and coins)
4) Bonds (Long-term, no shorter than 20 year maturities)

I have a choice of three locations to put them:

a) Outside of a Retirement Plan
b) Traditional IRA
c) Roth IRA

Could you give me your opinion of the optimal location for each investment and rank order them? Also, if you can, your reasons?

And, you can do it as easy as:

1. c, b, a
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Re: Investment locations?

Post by LittleDinghy » Tue Oct 15, 2019 10:49 am

In setting up asset locations for our Golden Butterfly-like (GB) portfolio back in the last week of June of this year when I completed it, I tried to follow the advice in Chapter 13 of The Permanent Portfolio by Rowland and Lawson (TPP). However, there were limitations of investments in my 401k (especially) but also in my wife's 403b, 457b and 401a, and in our respective HSA offerings, that caused quite a bit of variation from what Rowland and Lawson recommend.
1) The only GB asset in my 401k was an S&P 500 index fund, so 20% of the GB portfolio is in my 401k in this fund.
2) And my wife's 401a, 403b and 457b had only small cap value funds (some VSIAX, some home grown by the plan) that would work in the GB. The remainder of our small cap value allocation is outside of a retirement plan
3) The above means I ended up with the long (25-30 year) treasury bonds in our respective Roth accounts and in a traditional IRA.
4) Our longer term cash (1-3 year T-Note ladder) is both in an inherited IRA and outside of a retirement plan. Our short term cash (T-bill ladder) is both in a traditional IRA and outside of a retirement plan.
5) Gold is roughly 25% physical, 40% in ETFs (AAAU) outside of a retirement plan, and 35% (also AAAU) in a Roth for re-balancing purposes.

The asset locations above are quite different from what is recommended in Chapter 13 of TPP, but I had little choice due primarily to having to put the equity allocations in our retirement accounts at work (401k for me; and 401a, 403b, and 457b for my wife).

I do have a related asset location question for the list. Before year end I anticipate rolling over (and paying taxes on) about 4% of the total portfolio's value from my 401k to my Roth (I anticipate doing this every year through 2022 when I retire - just to get more assets into Roth for retirement - I don't anticipate our marginal tax rate decreasing after retirement). Recall from above that the 401k is invested in an S&P 500 index, and that the Roth consists of 25-30 year treasuries (that I purchased on the secondary market) and a gold ETF. As of 9/30 when I last checked, portfolio fractions were 0.2111 S&P500, 0.2039 Small Cap Value, 0.1990 LT Treasury Bonds, 0.1920 Cash, and 0.1939 Gold. I see three things I can do with the 4% in the Roth:
1) put the 4% into equities, probably a Total Stock Market index fund rather than the S&P 500, where it had been in in the 401k.
2) put it all into cash, as Harry Browne may have recommended (per pages 204-205 of TPP)
3) use the 4% to re-balance the entire portfolio back to 20% for each asset class (also mentioned on page 204 of TPP, although in the context of adding new money to the portfolio, which this 4% is not).
Which of the three would those of you experienced with this kind of thing do? Or would you do something else?
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Re: Investment locations?

Post by ochotona » Tue Oct 15, 2019 2:52 pm

vnatale wrote:
Wed Oct 09, 2019 3:24 pm
I’ll soon be investing as part of the Permanent Portfolio in the following four investments

1) Cash (T-Bills no longer than one year)
2) Stocks (Vanguard Total Stock Market Fund) - try to put in Roth IRA / 401k or Taxable, not Traditional IRA
3) Gold (ETFs and coins) - try to put in Roth IRA / 401k or Taxable, not Traditional IRA
4) Bonds (Long-term, no shorter than 20 year maturities) - try to put in Traditional IRA

I have a choice of three locations to put them:

a) Outside of a Retirement Plan
b) Traditional IRA
c) Roth IRA

Could you give me your opinion of the optimal location for each investment and rank order them? Also, if you can, your reasons?

And, you can do it as easy as:

1. c, b, a
Traditional IRAs / 401k convert cap gains to ordinary income, which is poison. You want it tax free in a Roth IRA or 401k, or at least you want long-term capital gains treatment.

Collectibles tax treats gold like ordinary income, but at least it's capped at 28%, which might be a good thing in a possible high tax rate future, we all might be wishing for 28%. And you can give your gold to charity, if you talk to the charity involved and show them how easy it is for them to cash in the physical metal at a local dealer. And even better if you have taxable ETF... just donate your appreciated shares. ZING... you've made a donation, your cap gains problem and tax went away never to be seen again. A few years ago I gave away probably ten thousand dollars of S&P-500 capital appreciation to my church. I rebought new shares with the cash I did not give to church. No waiting period. Just rebuy.

Interest and dividend generating things you keep in Traditional IRA or 401k.
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Re: Investment locations?

Post by mathjak107 » Tue Oct 15, 2019 3:39 pm

I would not waste valuable space in tax deferred accounts to hold any interest bearing instruments with no potential for large gains at any where near these levels .that space is way to valuable to take up with investments that pay so little
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Re: Investment locations?

Post by ochotona » Tue Oct 15, 2019 6:15 pm

mathjak107 wrote:
Tue Oct 15, 2019 3:39 pm
I would not waste valuable space in tax deferred accounts to hold any interest bearing instruments with no potential for large gains at any where near these levels .that space is way to valuable to take up with investments that pay so little
No. Tax deferred accounts expose your gainful investments to ordinary income tax rates when you spend them, instead of long term cap gains.

Must read - The Overtaxed Investor: Slash Your Tax Bill & Be a Tax Alpha Dog, Phil DeMuth
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Re: Investment locations?

Post by vnatale » Tue Oct 15, 2019 6:42 pm

Thank you for this wonderful recommendation. I am about to buy the Kindle version. However, curious as to your response to this one Amazon reviewers' comment (from last month): "It was well written and obviously well researched for it’s time, but laws have changed since it was written and it was not current."

Vinny
ochotona wrote:
Tue Oct 15, 2019 6:15 pm
mathjak107 wrote:
Tue Oct 15, 2019 3:39 pm
I would not waste valuable space in tax deferred accounts to hold any interest bearing instruments with no potential for large gains at any where near these levels .that space is way to valuable to take up with investments that pay so little
No. Tax deferred accounts expose your gainful investments to ordinary income tax rates when you spend them, instead of long term cap gains.

Must read - The Overtaxed Investor: Slash Your Tax Bill & Be a Tax Alpha Dog, Phil DeMuth
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Re: Investment locations?

Post by ochotona » Tue Oct 15, 2019 8:54 pm

vnatale wrote:
Tue Oct 15, 2019 6:42 pm
Thank you for this wonderful recommendation. I am about to buy the Kindle version. However, curious as to your response to this one Amazon reviewers' comment (from last month): "It was well written and obviously well researched for it’s time, but laws have changed since it was written and it was not current."

Vinny
Tax laws change all the time, especially the rates, but the general principles of the book are still intact.

The current tax laws are interesting, because they have me in a slow race against time to convert as much of my IRA to Roth IRA before 12/31/2025, when the current low rates for individuals expire. If Democrats get elected in 2020, I may speed up my process significantly.

Believe this - we are going to face confiscatory tax rates eventually due to our crushing national debt, and our demographics, and given how poorly most people have prepared for retirement. I don't know when eventually is. Five, ten, twenty years. Time to get ready is now.
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Re: Investment locations?

Post by vnatale » Tue Oct 15, 2019 9:05 pm

I was suspecting that the person who wrote that book did not realize that as you stated, "the general principles of the book are still intact".

The person who wrote that criticism made me think that person is the type who thinks he or she knows more than he or she actually does. And, someone who also takes a narrow, specific view rather than a broader one.

Vinny
ochotona wrote:
Tue Oct 15, 2019 8:54 pm
vnatale wrote:
Tue Oct 15, 2019 6:42 pm
Thank you for this wonderful recommendation. I am about to buy the Kindle version. However, curious as to your response to this one Amazon reviewers' comment (from last month): "It was well written and obviously well researched for it’s time, but laws have changed since it was written and it was not current."

Vinny
Tax laws change all the time, especially the rates, but the general principles of the book are still intact.

The current tax laws are interesting, because they have me in a slow race against time to convert as much of my IRA to Roth IRA before 12/31/2025, when the current low rates for individuals expire. If Democrats get elected in 2020, I may speed up my process significantly.

Believe this - we are going to face confiscatory tax rates eventually due to our crushing national debt, and our demographics, and given how poorly most people have prepared for retirement. I don't know when eventually is. Five, ten, twenty years. Time to get ready is now.
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Re: Investment locations?

Post by jacksonm2 » Tue Oct 15, 2019 11:06 pm

ochotona wrote:
Tue Oct 15, 2019 6:15 pm
mathjak107 wrote:
Tue Oct 15, 2019 3:39 pm
I would not waste valuable space in tax deferred accounts to hold any interest bearing instruments with no potential for large gains at any where near these levels .that space is way to valuable to take up with investments that pay so little
No. Tax deferred accounts expose your gainful investments to ordinary income tax rates when you spend them, instead of long term cap gains.

Must read - The Overtaxed Investor: Slash Your Tax Bill & Be a Tax Alpha Dog, Phil DeMuth
I generally follow this strategy trying to keep the investments with the most potential for long term gains in Roth or taxable and put the others in tax-deferred to minimize RMD's of which I'll be taking my first one this year based on the value of my IRA at the end of last year.

It seemed to be working well but this year has so far completely blown that idea out of the water. My IRA still showed a significant loss in my gold and some of my bonds at the end of last year but this year everything is showing up in green. So next year my RMD is probably going to be significantly higher unless something changes by the end of the year.

Not really a bad problem to have so I'm not going to complain about too much growth in my IRA.

I'm thinking right now that this whole idea goes against the PP strategy which basically says you have no idea what investments are going to do well in the long term.
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Re: Investment locations?

Post by mathjak107 » Wed Oct 16, 2019 3:04 am

one of the problems we end up with thinking we will place our dividend paying stocks in a taxable account is depending on the length of time you will own it even a 2% dividend over time wipes out any tax advantage if you are not in the zero capital gains bracket . plus any other distributions make it worse . so utilizing tax advantage space is very important ... at these interest rate levels it is not a good idea filling up valuable space with low interest paying investments .

most investors don't realize the effect of paying taxes on dividends in a taxable account because they think the reduced rates are helping them .. but kitces found it takes as little as a 2% dividend to wipe out any tax savings over decades of time plus there could be taxes from fund turnover . plus any rebalancing or selling can have big tax consequences during your working years when combined with other income .

so these long term capital gain rates can be great if you have no dividends spinning off . dont forget , dividends are very tax inefficient ... you pay tax on an entire dividend .. the same dollars from a portfolio of non div payers only taxes the gain portion . so you need to not be blinded with the mirage of these lower tax rates on long term capital gains if you spin off any income from dividends ....you likely would be ahead by keeping the dividends tax deferred in a tax advantaged retirement account .
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Re: Investment locations?

Post by ochotona » Wed Oct 16, 2019 4:04 am

Dividend payers are a case which isn't quite the Permanent Portfolio's S&P 500. My remarks don't treat high dividend stocks.

Yeah, RMDs... Another problem when the IRA gets too large, another reason not to put growth assets in the IRA.

RMDs will force you to sell gold even if you don't want to. I think of my gold as the last thing I want to let go of, I will only sell when I hit the PP rebalance band... 35%.

From year to year no one knows what does well. You can just have a PP in each type of account. That's not my choice because I have opinions about what will do well over decades, and that's the timescale my tax strategy works on.
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Re: Investment locations?

Post by sophie » Wed Oct 16, 2019 7:32 am

jacksonm2 wrote:
Tue Oct 15, 2019 11:06 pm
I generally follow this strategy trying to keep the investments with the most potential for long term gains in Roth or taxable and put the others in tax-deferred to minimize RMD's of which I'll be taking my first one this year based on the value of my IRA at the end of last year.

It seemed to be working well but this year has so far completely blown that idea out of the water.
I do the same thing. My tax-deferred Keogh is loaded up on gold and bonds. There have been time frames as long as 10 years where this account would have outperformed the stock-heavy taxable and Roth accounts, but for 20 year+ time frames it should underperform.

In your case it's a bit more of a gamble since you're already in the RMD phase, but the odds are certainly in your favor.
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