Tax-Deferred Account Cash Position

[barrett]

I apologize in advance if this has been discussed elsewhere. I am new to the PP and one of advantages I keep reading about the 25% cash position is that it's useful for living expenses. I have set up a PP in my tax-deferred accounts and I am not planning to use that money for at least the next ten years. In the meantime I have adequate cash outside of my tax deferred accounts for living expenses, so, it would seem to me, I don't need to include that as part of the justification for a 25% cash position. Any advice on this? Specifically, can I increase my exposure to gold, stocks and LTT to, say, 30% each and just have a cash position of 10% in these tax-deferred accounts? That would still seem to be high enough for rebalancing, no? It seems to me that cash for the next few years is likely to yield something close to 0%. I just haven't seen anything yet either in Craig's book or online about setting up a PP that is exclusively in tax-deferred accounts. Thanks for your help!

[rhymenocerous]

I think of all my accounts as one portfolio, so I don't try to mimic my asset allocation in each of my 401k, IRA, taxable account, etc.  Why don't you just count the cash outside of your tax-deferred accounts as part of your PP?  That way you can fill up the tax-deferred space with stocks, LTTs, and gold.

[barrett]

Thanks for the input, rhymenocerous. Your suggestion is one way I have thought about viewing my PP... including some of the cash equivalents in my non-IRA accounts as part of the PP (so that I still have an overall mix of 25/25/25/25). I just thought I should hold at least SOME cash in the IRAs to give me some leverage for buying an asset that has had a down year. I guess if I do as you suggest, I could just rebalance once a year to 33.3% in gold, LTT and stocks. As I get closer to retirement, I can gradually up the cash position in the IRA to 25%. Am I fiddling too much with the sacred formula? It's funny that the PP philosophy is "set it and forget it" but it's still possible to obsess about the details of HOW to do it. I've thought too much about money in the last month! HB would want me to get on with my life!

[barrett]

Me again. What I DO like (a lot) about rhymenocerous' suggestion is that realistically the only gains across the four assets in the near term are likely to be in the LTT, gold and stock positions. Having as much of those three assets as possible in an IRA means being able to sell a portion in an up market without having to pay taxes. I know that in the PP book, it is suggested that gold should be the last asset in a tax-deferred account. But in a gold bull market, the taxes really eat into your gains in a non tax-deferred account, right?

[rickb]

Me again. What I DO like (a lot) about rhymenocerous' suggestion is that realistically the only gains across the four assets in the near term are likely to be in the LTT, gold and stock positions. Having as much of those three assets as possible in an IRA means being able to sell a portion in an up market without having to pay taxes. I know that in the PP book, it is suggested that gold should be the last asset in a tax-deferred account. But in a gold bull market, the taxes really eat into your gains in a non tax-deferred account, right?

Ultimately, gains in gold will be taxed whether you hold it in a taxable account or a tax deferred account.  You can sell gold in a tax deferred account to rebalance without paying taxes today - but if it's in a tax deferred account you will simply pay the same taxes later.  In a tax-deferred account you benefit from compounding (which, over a long period of time, might be substantial) - however, if you hold gold in a tax deferred account you almost certainly aren't talking about physical gold that you can put your hands on.  The ability to physically possess gold makes it quite unlike most other assets, which are essentially pieces of paper whose value you rely on others to respect.  Physical gold is yours.  Nobody else can take its value away without physically taking it from you.  This is a profound quality not easily available from any other asset and likely not available to you if your "gold" is in a tax-deferred account.

Taxes (except for the compounding effect) are basically a wash.  The ability to have physical possession is not.

[barrett]

Thanks for weighing in, rickb. Your point about physically holding gold is well taken. My "gold" is sort of phony gold at this point. Unfortunately, the way my assets are currently configured, I won't be able to buy much physical gold for the next couple of years. Most of the "cash" I have outside of my IRA is in EE and I Bonds. They are very liquid in that I can just go to my bank and get cash for them (probably not in a crisis, I realize), but the reason I keep holding them is that I am getting 3-4% interest on many of them. Yield on any cash is a big plus right now. There are also taxable gains if/when I redeem them. Having just discovered the PP and the value of holding physical gold, I have to accept that building up a respectable position of physical gold is going to be something that I do incrementally. Just trying to adhere to the axiom that I shouldn't let a perfect plan prevent me from implementing a good one.

I have always felt that deferring taxes on any asset is a huge advantage when trying to build wealth. My thinking has always been, the longer I can defer, the better. Your statement "You can sell gold in a tax deferred account to rebalance without paying taxes today - but if it's in a tax deferred account you will simply pay the same taxes later" doesn't ring true for me. If we assume that gold will be taxed at the same rate years from now, isn't paying the taxes on it later a big advantage? Or am I missing something? (it wouldn't be the first time!). Thanks.

[vnatale]

Thanks for weighing in, rickb. Your point about physically holding gold is well taken. My "gold" is sort of phony gold at this point. Unfortunately, the way my assets are currently configured, I won't be able to buy much physical gold for the next couple of years. Most of the "cash" I have outside of my IRA is in EE and I Bonds. They are very liquid in that I can just go to my bank and get cash for them (probably not in a crisis, I realize), but the reason I keep holding them is that I am getting 3-4% interest on many of them. Yield on any cash is a big plus right now. There are also taxable gains if/when I redeem them. Having just discovered the PP and the value of holding physical gold, I have to accept that building up a respectable position of physical gold is going to be something that I do incrementally. Just trying to adhere to the axiom that I shouldn't let a perfect plan prevent me from implementing a good one.

I have always felt that deferring taxes on any asset is a huge advantage when trying to build wealth. My thinking has always been, the longer I can defer, the better. Your statement "You can sell gold in a tax deferred account to rebalance without paying taxes today - but if it's in a tax deferred account you will simply pay the same taxes later" doesn't ring true for me. If we assume that gold will be taxed at the same rate years from now, isn't paying the taxes on it later a big advantage? Or am I missing something? (it wouldn't be the first time!). Thanks.

Six years later how much progress have you made in the "building"?

Vinny