PP in IRA

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Xan
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PP in IRA

Post by Xan » Wed May 20, 2020 2:06 pm

I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
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Re: PP in IRA

Post by mathjak107 » Wed May 20, 2020 3:11 pm

I keep no cash in valuable ira space ...that space is golden and tax advantaged ...no place I want to keep a low yielding asset with zero gain

Plus if I need more cash I want it accessible to me now with no tax liability.
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Re: PP in IRA

Post by Xan » Wed May 20, 2020 3:16 pm

That would seem to be a disadvantage of the "PP-per-tax-treatment" scheme. But I don't like having to forecast which assets will have gains and which won't. That seems like a very un-PP activity to me.
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Re: PP in IRA

Post by mathjak107 » Wed May 20, 2020 4:17 pm

Cash gains are minimal even using shy .....to take up valuable compounding space in an ira makes no sense .....I would keep some pp assets in the taxable account that won’t fit in the ira .

The rebalancing taxEs would likely be no where near the gains on the bulk of the pp assets and what you would give up in compounding
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Re: PP in IRA

Post by pmward » Wed May 20, 2020 4:23 pm

mathjak107 wrote:
Wed May 20, 2020 4:17 pm
Cash gains are minimal even using shy .....to take up valuable compounding space in an ira makes no sense .....I would keep some pp assets in the taxable account that won’t fit in the ira .

The rebalancing taxEs would likely be no where near the gains on the bulk of the pp assets and what you would give up in compounding
One caveat, I think that there may be a case for someone that is stuck with a large traditional IRA/401k balance to keep the cash in the traditional to avoid large and increasing forced distributions. But yeah, in a Roth or HSA cash is wasted space and opportunity, imo.
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Re: PP in IRA

Post by pp4me » Wed May 20, 2020 4:27 pm

Xan wrote:
Wed May 20, 2020 2:06 pm
I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
Selecting which assets to place in which type of account seems to be the only kind of tinkering and placing bets on the future left if you strictly follow the PP. So far, my bets have been completely wrong so I'm going to have to re-evaluate my strategy at the end of this year and maybe I will just treat each account the same, if that's what you are suggesting.

I opened up Roth accounts around the same time I started the PP in 2008 and at that time I decided to place a long term bet on gold because it was soaring. Then I switched to the GB, sold the gold, and used the Roth accounts for the SCV portion. Wrong idea again, as SCV is now the asset that is tanking the most and the IRA account where I put all the "safe" assets is doing the best.

So it does seem to make sense to apply the same level of agnosticism about the future to all of the account types.
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Re: PP in IRA

Post by mathjak107 » Wed May 20, 2020 4:43 pm

pmward wrote:
Wed May 20, 2020 4:23 pm
mathjak107 wrote:
Wed May 20, 2020 4:17 pm
Cash gains are minimal even using shy .....to take up valuable compounding space in an ira makes no sense .....I would keep some pp assets in the taxable account that won’t fit in the ira .

The rebalancing taxEs would likely be no where near the gains on the bulk of the pp assets and what you would give up in compounding
One caveat, I think that there may be a case for someone that is stuck with a large traditional IRA/401k balance to keep the cash in the traditional to avoid large and increasing forced distributions. But yeah, in a Roth or HSA cash is wasted space and opportunity, imo.
You can always take your rmd from the ira and sell an asset and immediately rebuy it in the taxable account. Pretty much you are just switching hats
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Re: PP in IRA

Post by mathjak107 » Wed May 20, 2020 4:46 pm

In case you have not read it , kitces did a look at what assets to keep where .

Kitces :

Given that recent research has shown effective asset location strategies can add 20-50+ basis points of “free” value to annual returns, providing guidance on asset location is becoming increasingly popular. Yet unfortunately, asset location strategies are often dominated by myths and misperceptions! Ultimately, the reality is that good asset location decisions actually should be influenced by both the tax efficiency of investments and also their expected returns, which makes the analysis somewhat more complex… but also reveals why in today’s environment most bonds AND CASH actually should NOT go into tax-deferred accounts!

https://www.kitces.com/blog/asset-locat ... io-design/
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Re: PP in IRA

Post by Xan » Wed May 20, 2020 5:11 pm

"today's environment" -- I'm looking for a more, er, permanent outlook.
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Re: PP in IRA

Post by Xan » Wed May 20, 2020 5:13 pm

pp4me wrote:
Wed May 20, 2020 4:27 pm
Xan wrote:
Wed May 20, 2020 2:06 pm
I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
Selecting which assets to place in which type of account seems to be the only kind of tinkering and placing bets on the future left if you strictly follow the PP. So far, my bets have been completely wrong so I'm going to have to re-evaluate my strategy at the end of this year and maybe I will just treat each account the same, if that's what you are suggesting.

I opened up Roth accounts around the same time I started the PP in 2008 and at that time I decided to place a long term bet on gold because it was soaring. Then I switched to the GB, sold the gold, and used the Roth accounts for the SCV portion. Wrong idea again, as SCV is now the asset that is tanking the most and the IRA account where I put all the "safe" assets is doing the best.

So it does seem to make sense to apply the same level of agnosticism about the future to all of the account types.
This anecdote definitely does line up with my preference of having separate PPs.

Anybody have thoughts on reducing cash in a not-needed-for-a-long-time PP?
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Re: PP in IRA

Post by sophie » Wed May 20, 2020 5:16 pm

If you're safely below the 22% tax bracket and have no state income tax to worry about, then it makes sense to run separate PPs in each account. It sure makes tracking and rebalancing a lot easier.

For me, the tax advantages of spreading assets around multiple types of accounts are very significant given my tax bracket and state of residence. I get Xan's concerns but they pale in comparison to, say, reducing the tax consequences of rebalancing to zero.

There's also the major advantage of keeping cash accessible so you can use it as an emergency fund. My answer to "do you dial down cash in a 401K" is not to have cash in the 401K. It's in taxable, I bonds (i.e. tax-deferred), or Roth.

I did stuff the one tax-deferred account that I have in the PP with gold and bonds, figuring that over time those assets would not do as well as stocks which would reduce the eventual tax bite. While my Roth focuses on stocks and cash. The markets, of course, are laughing at me.
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Re: PP in IRA

Post by mathjak107 » Wed May 20, 2020 5:30 pm

Xan wrote:
Wed May 20, 2020 5:13 pm
pp4me wrote:
Wed May 20, 2020 4:27 pm
Xan wrote:
Wed May 20, 2020 2:06 pm
I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
Selecting which assets to place in which type of account seems to be the only kind of tinkering and placing bets on the future left if you strictly follow the PP. So far, my bets have been completely wrong so I'm going to have to re-evaluate my strategy at the end of this year and maybe I will just treat each account the same, if that's what you are suggesting.

I opened up Roth accounts around the same time I started the PP in 2008 and at that time I decided to place a long term bet on gold because it was soaring. Then I switched to the GB, sold the gold, and used the Roth accounts for the SCV portion. Wrong idea again, as SCV is now the asset that is tanking the most and the IRA account where I put all the "safe" assets is doing the best.

So it does seem to make sense to apply the same level of agnosticism about the future to all of the account types.
This anecdote definitely does line up with my preference of having separate PPs.

Anybody have thoughts on reducing cash in a not-needed-for-a-long-time PP?
Cash is an integral part of the pp. in fact I never would consider spending the cash in the pp down anymore then I would any other asset in the pp ....the cash serves two purposes ....it acts as the other side of the barbell for the long term treasuries so you don’t want to unbalance that ..plus the cash acts as an option would , letting you buy assets cheaper when they are down except it has no expiration date
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Re: PP in IRA

Post by mathjak107 » Wed May 20, 2020 5:35 pm

Xan wrote:
Wed May 20, 2020 5:11 pm
"today's environment" -- I'm looking for a more, er, permanent outlook.
There is nothing in life that will remain forever through all scenarios ..not even the pp may be fine as is if we have a long term rise in rates back up ...

So we have to go with what was , what is and what stands a reasonable chance of continuing ....if that changes at some point then we re-evaluate and change with the big picture .

For now it makes no sense eating up valuable ira space with cash ....if one day interest on cash is something to be reckoned with , well then reevaluate and change it
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Re: PP in IRA

Post by Smith1776 » Thu May 21, 2020 8:22 pm

As a Canadian I find this meme highly relatable in this thread.


Image
I still find the James Rickards portfolio fascinating.
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Re: PP in IRA

Post by jhogue » Fri May 22, 2020 10:31 am

Xan wrote:
Wed May 20, 2020 2:06 pm
I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
I started my HBPP with the idea of placing a PP in taxable, tax deferred, and tax-free (Roth) each. I have moved away from that concept over time.

I think it is essential to realize that tax efficient placement of HBPP assets is highly personalized. 401k, 457b, T-IRA, Roth IRA, inherited IRA, etc. each have different tax treatment and everyone does not have access to the same type of accounts. The age of the investor matters too.

Most of my stocks (88%) are now in Roth IRAs. Most of my T-bonds are in T-IRA (86%). Cash and gold are both split between taxable and T-IRAs, with a growing portion of Cash in tax deferred savings bonds. This seems most tax efficient for me, but I can see why other investors’ portfolios could differ with their particular circumstances.

I think we are having this discussion in part because interest rates on half of the portfolio are now close to zero, so STT and LTT placement seems increasingly irrelevant.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: PP in IRA

Post by mathjak107 » Fri May 22, 2020 12:07 pm

plus a long time myth was disproved and that is as little as a 2% dividend in a taxable account over the long term wipes out any tax savings from the special rates and then it acts as a drag on the investments return once the tax savings is wiped away ..


this is a huge factor , as old school teaching said to take advantage of special capital gain rates when you could
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Re: PP in IRA

Post by jhogue » Fri May 22, 2020 5:16 pm

mathjak107 wrote:
Fri May 22, 2020 12:07 pm
plus a long time myth was disproved and that is as little as a 2% dividend in a taxable account over the long term wipes out any tax savings from the special rates and then it acts as a drag on the investments return once the tax savings is wiped away ..


this is a huge factor , as old school teaching said to take advantage of special capital gain rates when you could
This post is unintelligible to me. Perhaps the author could resort to standard English grammar.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: PP in IRA

Post by mathjak107 » Sat May 23, 2020 2:13 am

jhogue wrote:
Fri May 22, 2020 5:16 pm
mathjak107 wrote:
Fri May 22, 2020 12:07 pm
plus a long time myth was disproved and that is as little as a 2% dividend in a taxable account over the long term wipes out any tax savings from the special rates and then it acts as a drag on the investments return once the tax savings is wiped away ..


this is a huge factor , as old school teaching said to take advantage of special capital gain rates when you could
This post is unintelligible to me. Perhaps the author could resort to standard English grammar.
it means exactly what it says .

old school thinking was to put dividend paying stocks in to a taxable account because of special capital gain rates .

that actually turned out to be the wrong thing to do .

the spinning off of as little as a 2% dividend that is taxable at all will erode any tax savings over the long term . not only that but once it is finished nipping away at the tax savings it further erorodes the return from the taxes compared to had it been in a 401k or ira at taxed at regular rates ...
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Re: PP in IRA

Post by Tyler » Sat May 23, 2020 10:23 am

Xan wrote:
Wed May 20, 2020 2:06 pm
I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
While I'm generally a "build a full portfolio in each account" kinda guy, I will say that if there's one PP asset I'd be tempted to dial back in a retirement account it would be cash. But before doing so, I would think about what it does for a portfolio and what you're losing by removing it. For example, T-bills have historically been one of the most consistent inflation hedges money can buy. Do you plan to cover that situation in another way?
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Re: PP in IRA

Post by mathjak107 » Sat May 23, 2020 12:17 pm

“Cash is not an inflation hedge. There have been multiple 10+ year periods where Treasury bills have failed to outpace inflation. The ability of cash to hedge inflation is a function of how benevolent central bankers are in giving savers a fair rate.”

https://movement.capital/how-to-hedge-i ... bond-risk/

I guess there are arguments for and against it
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Re: PP in IRA

Post by Xan » Sun May 24, 2020 6:06 pm

Tyler wrote:
Sat May 23, 2020 10:23 am
Xan wrote:
Wed May 20, 2020 2:06 pm
I personally favor having a separate PP in each tax category. In other words, one PP for taxable, another for traditional IRA, and another for Roth IRA.

The IRA money won't/can't be touched for quite a long time. What are everyone's thoughts on dialing back the cash percentage in IRA PPs?
While I'm generally a "build a full portfolio in each account" kinda guy, I will say that if there's one PP asset I'd be tempted to dial back in a retirement account it would be cash. But before doing so, I would think about what it does for a portfolio and what you're losing by removing it. For example, T-bills have historically been one of the most consistent inflation hedges money can buy. Do you plan to cover that situation in another way?
Thanks, Tyler. That gives some good things to think about.
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Re: PP in IRA

Post by jhogue » Tue May 26, 2020 8:15 am

Tyler,

As I am retired, I have been tempted to "dial back" on cash. Especially in this kind of ultra-low rate environment cash seems like a drag on performance.

Here's the problem as I see it: Cash is the biggest damper on volatility for the actions of the other three assets. It is what smoothes out the ride. If that's the case, then decreasing cash should mean higher volatility going forward. Also, if you think of Treasurys in the PP as a barbell, cutting back on cash would tilt your barbell towards a longer average maturity if/when interest rates rise again. That seems problematic for an optimal retiree portfolio. What do you think?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: PP in IRA

Post by mathjak107 » Tue May 26, 2020 9:16 am

jhogue wrote:
Tue May 26, 2020 8:15 am
Tyler,

As I am retired, I have been tempted to "dial back" on cash. Especially in this kind of ultra-low rate environment cash seems like a drag on performance.

Here's the problem as I see it: Cash is the biggest damper on volatility for the actions of the other three assets. It is what smoothes out the ride. If that's the case, then decreasing cash should mean higher volatility going forward. Also, if you think of Treasurys in the PP as a barbell, cutting back on cash would tilt your barbell towards a longer average maturity if/when interest rates rise again. That seems problematic for an optimal retiree portfolio. What do you think?
i would not mess with the balance ... if you want a pp use the pp as designed . otherwise play the hunches in the variable portfolio ...
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Re: PP in IRA

Post by Tyler » Tue May 26, 2020 10:12 am

jhogue wrote:
Tue May 26, 2020 8:15 am
Here's the problem as I see it: Cash is the biggest damper on volatility for the actions of the other three assets. It is what smoothes out the ride. If that's the case, then decreasing cash should mean higher volatility going forward. Also, if you think of Treasurys in the PP as a barbell, cutting back on cash would tilt your barbell towards a longer average maturity if/when interest rates rise again. That seems problematic for an optimal retiree portfolio. What do you think?
I don't disagree with any of that. And don't get me wrong -- cash is one of my favorite assets.

My default recommendation for anyone with a PP is to keep the cash as-is. It's there for a reason. But I'm not totally opposed to tweaking things like cash levels in a retirement account to your personal life situation. Just take the time to think about why it's part of the portfolio before doing anything.
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Re: PP in IRA

Post by sophie » Wed May 27, 2020 10:51 am

I agree that cash is one of the best aspects of the PP, and one should take care to understand that thoroughly before letting it go.

For a retirement account that will definitely not be touched for at least 10 years, dialing down cash might be a reasonable decision. The hitch is that you don't really KNOW that you won't touch it for 10 years, do you? Job loss events happen, and most likely during the very type of economic environment in which cash is the most precious.

Here's another option: design your PP so that it sprawls over all your accounts, including 401K and taxable. Within that structure, you can then keep approximately equal proportions of gold, stocks, and bonds in each account, while cash is distributed unevenly, e.g. keep very little in the 401K and overweight it in taxable. Just be sure the total amount of cash is in keeping with the overall allocation.

BTW I am insanely jealous of Xan's 401K, which apparently allows him to invest in gold.
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