Tax optimizing the PP

[economicsjunkie]

I was wondering if anyone had tried out or researched an approach where you keep all 4 assets in a tax deferred account and try as much as possible to do rebalancing activities inside that account, so that less (or no) immediate taxes would be due whenever you need to sell off an outperforming asset?

[mukramesh]

Almost all portfolio backtesting research ignores taxes since those are very much dependent on individual circumstances. You can just take the results from www.peaktotrough.com and assume they are for a tax deferred account.

[dragoncar]

Yes, people do this

[EdwardjK]

There is no approach with PP assets that will avoid all tax issues.

First, if you have all 4 assets inside a tax deferred account, upon withdrawal all gains will be taxable at ordinary income rates, rather than some at lower capital gains rates.

Second, if you place all 4 assets in a taxable account, all dividend/interest distributions will be taxable - some at reduced capital gains rates and others at ordinary income rates.

The best that can be accomplished is to place those assets with the highest potential for distributions (equities, bonds) in a tax-deferred account and the others (gold, cash) in a taxable account.  Gold has no distributions and cash, with the current low interest rates, will not generate much interest.

Hope this helps.

[Xan]

First, if you have all 4 assets inside a tax deferred account, upon withdrawal all gains will be taxable at ordinary income rates, rather than some at lower capital gains rates.

This is sort of true, but not really.  The tax that's applied on the entire amount when it comes out is equivalent to having paid taxes on the money in the first place.

Say there's an extra $10,000 I've earned and I'm in the 25% bracket, and my investment strategy will cause it to double in 10 years.  If I put it in a tax-deferred, then I have $20,000 at the end of 10 years, but it's all taxable, so it turns into $15,000.

If it put that money in a taxable account, then immediately it turns into $7500.  After 10 years I have the same $15,000.  (And then of course I'd have to pay capital gains taxes on the increase, and potentially there would have been taxes on intermediate trades.)

So it's not really correct to say that your gains are taxed when you have money in a tax-deferred account.

[mukramesh]

There is no approach with PP assets that will avoid all tax issues.

You could hold the entire PP in an HSA. Contributions, earnings, and withdrawals are tax-free 

I just re-read the question and I think we're getting off topic here. Is the OP just asking if rebalancing in a tax-deferred account results in tax penalties? The answer is no. Only withdrawals result in taxes, but this has nothing to do with "sell[ing] off an outperforming asset."

[Jack Jones]

I just re-read the question and I think we're getting off topic here. Is the OP just asking if rebalancing in a tax-deferred account results in tax penalties? The answer is no. Only withdrawals result in taxes, but this has nothing to do with "sell[ing] off an outperforming asset."

I think he's talking about a strategy where you always have enough of the four assets in tax deferred space to enable you to perform rebalances for your whole portfolio without touching your taxable assets. It's similar to how you want to keep enough gold onshore so that you can rebalance w/out traveling to Switzerland.

I also am curious about this.

[economicsjunkie]

I think he's talking about a strategy where you always have enough of the four assets in tax deferred space to enable you to perform rebalances for your whole portfolio without touching your taxable assets.

Yes, that's exactly what I'm asking. What I'm currently doing is keeping only the bonds in the tax deferred account, but I'm wondering if it's better and practical to have a little bit of everything in the tax deferred account so that taxes on gains can be deferred as well, leaving a lot more to invest in the present.