I'm becoming more skeptical that LLT will remain at this (elevated) price level...I'm thinking of selling the LTT (EDV) in IRA space & purchasing 30 year bond in taxable space...if price falls way down, I can tax loss harvest...all the while maintaining the PP LTT allocation.
I think that a reversion to mean could be in order...ie a 30% correction to resume the previous uptrend...
The potential opportunity to do tax loss harvesting benefit seems to outweigh the limited xtra cost of taxes due on interest income...
Comments?
position bonds in taxable to take advantage of tax loss harvesting?
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murphy_p_t
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Re: position bonds in taxable to take advantage of tax loss harvesting?
Though I tend to disagree with your assumptions about LTT's, I still concur with your idea, as long as the money you're using to do this isn't going to come at the cost of a capital gain recognition (held in appreciated stocks or gold).
I see little wrong with keeping a chunk of LTT's in your taxable accounts. In fact, I wouldn't be entirely opposed to someone who thought keeping a decent mix of all PP assets in their taxable accounts was a good idea to the degree they could loss-harvest.
The ability to take losses of 5, 10, 15, 30%!! at the expense of 3% interest are pretty attractive if you ask me. Yields are low enough that I wouldn't mind playing the game you suggest.
If I were in a wealthy enough position where I was 50, with half my wealth in t/d accounts and half in taxable (I'm not saying this is you, but just using it as a convenient measuring stick), I'd probably keep at least $30k or so of LTT's in taxable accounts for both stability purposes and for loss-harvesting.
At some point it becomes less and less lucrative, though, as you're only allowed $3k per year in losses on your tax return. Luckily, these losses offset ordinary income, but when they come back as capital gains, are taxed at lower rates.
I see little wrong with keeping a chunk of LTT's in your taxable accounts. In fact, I wouldn't be entirely opposed to someone who thought keeping a decent mix of all PP assets in their taxable accounts was a good idea to the degree they could loss-harvest.
The ability to take losses of 5, 10, 15, 30%!! at the expense of 3% interest are pretty attractive if you ask me. Yields are low enough that I wouldn't mind playing the game you suggest.
If I were in a wealthy enough position where I was 50, with half my wealth in t/d accounts and half in taxable (I'm not saying this is you, but just using it as a convenient measuring stick), I'd probably keep at least $30k or so of LTT's in taxable accounts for both stability purposes and for loss-harvesting.
At some point it becomes less and less lucrative, though, as you're only allowed $3k per year in losses on your tax return. Luckily, these losses offset ordinary income, but when they come back as capital gains, are taxed at lower rates.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: position bonds in taxable to take advantage of tax loss harvesting?
To build on it, I have thought about this and how much benefit there is to keeping a sub-par taxable asset for loss-harvesting purposes. With treasuries, not only do you have to put up with 3% interest, but you have lower volatility than stocks. I'm wondering, if you're going to do this, if it pays to use a smaller amount of EDV for volatility purposes, since you're really doing this to bank on a prediction.
Further, for every $3,000 in losses you're able to capture, that's another year out of ability to realize a tax-benefit from those losses (unless you have gains elsewhere to offset).
So if you do this with more than, say $30k, you'll probably see diminishing returns, IMO. A 30% decrease of $30k would be $9k, and give you 3 years worth of losses to recognize.
If you STILL don't like doing this, one thing I'd suggest is instead of using loss-harvesting as your goal, simply move more of your LTT's to Traditional IRA accounts, and your favorite PP asset to Roth. This prevents you from having to sweat over taxable interest, when to sell, etc, but still gives you some of the juice to your realizable net worth you were hoping for.
Further, for every $3,000 in losses you're able to capture, that's another year out of ability to realize a tax-benefit from those losses (unless you have gains elsewhere to offset).
So if you do this with more than, say $30k, you'll probably see diminishing returns, IMO. A 30% decrease of $30k would be $9k, and give you 3 years worth of losses to recognize.
If you STILL don't like doing this, one thing I'd suggest is instead of using loss-harvesting as your goal, simply move more of your LTT's to Traditional IRA accounts, and your favorite PP asset to Roth. This prevents you from having to sweat over taxable interest, when to sell, etc, but still gives you some of the juice to your realizable net worth you were hoping for.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
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MachineGhost
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Re: position bonds in taxable to take advantage of tax loss harvesting?
Why not just hold a 30-Year Treasury and roll it over every year back into an on the run?moda0306 wrote: To build on it, I have thought about this and how much benefit there is to keeping a sub-par taxable asset for loss-harvesting purposes. With treasuries, not only do you have to put up with 3% interest, but you have lower volatility than stocks. I'm wondering, if you're going to do this, if it pays to use a smaller amount of EDV for volatility purposes, since you're really doing this to bank on a prediction.
MG
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: position bonds in taxable to take advantage of tax loss harvesting?
MG,
That's not a bad idea... I wasn't even thinking of it in terms of physical bond ownership. Though thinking more about it I think a better soft way to play a bet on LTT's is to get them into Traditional IRA accounts and getting stocks, etc into a Roth.
This is a way of playing your guess and getting a boost to your tax-free account, but not having to realize the tax on the interest.
That's assuming, of course, that this is even an option for him.
That's not a bad idea... I wasn't even thinking of it in terms of physical bond ownership. Though thinking more about it I think a better soft way to play a bet on LTT's is to get them into Traditional IRA accounts and getting stocks, etc into a Roth.
This is a way of playing your guess and getting a boost to your tax-free account, but not having to realize the tax on the interest.
That's assuming, of course, that this is even an option for him.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
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alvinroast
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Re: position bonds in taxable to take advantage of tax loss harvesting?
Interesting idea.
If I was really convinced that LTT will be the laggard in the short term I might put it in the tax-deferred since the IRS already owns twenty-some-odd-percent of that.
On a somewhat related note, I'm thinking if I wanted to bet on a particular part of the PP doing well I would put that in the Roth to the extent possible. I'm starting to think that putting some gold in the Roth could be very helpful. If gold goes to $x000 I would one day be able to withdraw it tax free. Also, of all of the categories gold seems the most likely to have additional or higher taxes levied in the future. Having it in the Roth just might avoid that particular pain...
If I was really convinced that LTT will be the laggard in the short term I might put it in the tax-deferred since the IRS already owns twenty-some-odd-percent of that.
On a somewhat related note, I'm thinking if I wanted to bet on a particular part of the PP doing well I would put that in the Roth to the extent possible. I'm starting to think that putting some gold in the Roth could be very helpful. If gold goes to $x000 I would one day be able to withdraw it tax free. Also, of all of the categories gold seems the most likely to have additional or higher taxes levied in the future. Having it in the Roth just might avoid that particular pain...
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WildAboutHarry
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Re: position bonds in taxable to take advantage of tax loss harvesting?
Another beneficial aspect of holding treasuries in taxable is that if you live in a state with high state and local income taxes (i.e., CA, NY, etc.), interest on notes, bills, bonds, savings bonds, etc. is not taxable at the state and local level.
I think holding LTT in taxable, with the possibility of tax-loss harvesting, is well worth the federal tax hit on the meager yields.
I think holding LTT in taxable, with the possibility of tax-loss harvesting, is well worth the federal tax hit on the meager yields.
It is the settled policy of America, that as peace is better than war, war is better than tribute. The United States, while they wish for war with no nation, will buy peace with none" James Madison
Re: position bonds in taxable to take advantage of tax loss harvesting?
I am mainly a taxable investor. I do have a small inherited IRA that is all bonds but I have to hold bonds in taxable in order to have 25% weighting in bonds. I have taken advantage of tax loss harvests with bonds but it was more of an opportunity then planned. I just hold my assests without predicting what will happen as far as market direction. When I have to pay tax I do and when I have tax loss harvest opportunities I take advantage. As far as the permenant portfolio goes has anyone come up with optimal tax loss harvest rebalance band strategy?
Having rules to follow are good in portfolio management. I have just been doing it anytime I can harvest about $3k or more in my account and about 20% loss in my sons account which is smaller. I think that this topic has not been explored enough.
Having rules to follow are good in portfolio management. I have just been doing it anytime I can harvest about $3k or more in my account and about 20% loss in my sons account which is smaller. I think that this topic has not been explored enough.
Re: position bonds in taxable to take advantage of tax loss harvesting?
steve,
I think it depends how aggressive you feel like being exploiting the lack of certainty around the wash sale rule.
I am quite aggressive. I'd feel fully comfortable exchanging EDV for TLT, SCV (small cap value) for VTI, or GLD for IAU.
So I'll continue assuming people aren't worrying about the wash sale rule because they've found dissimilar-enough options that they're comfortable taking a bit of risk with.
In that world, I say take any loss you can get whenever you can get it... maybe using $?,000 (whatever you feel comfortable with) as a floor before deciding to sell so you're not doing it every day there is a loss. Using the individual selection basis method, you should not really lose out buy "selling too early," because you can sell the shares you just bought after selling (make sense?).
So while you only may get $3,000 of tax-benefit (ordinary rate!!) in the current year, there's still no reason not to realize the loss if you can find a reasonable alternative investment to avoid the wash sale rule, especially in the PP where rebalancing releases capital gains more than your average portfolio.
Take the losses when you can, no exceptions (that I can think of), other than that of materiality and not selling every day. Set a size of loss-increment that feels right for you and go.
Blah blah... not official tax advice... consult your accountant... blah blah.
I think it depends how aggressive you feel like being exploiting the lack of certainty around the wash sale rule.
I am quite aggressive. I'd feel fully comfortable exchanging EDV for TLT, SCV (small cap value) for VTI, or GLD for IAU.
So I'll continue assuming people aren't worrying about the wash sale rule because they've found dissimilar-enough options that they're comfortable taking a bit of risk with.
In that world, I say take any loss you can get whenever you can get it... maybe using $?,000 (whatever you feel comfortable with) as a floor before deciding to sell so you're not doing it every day there is a loss. Using the individual selection basis method, you should not really lose out buy "selling too early," because you can sell the shares you just bought after selling (make sense?).
So while you only may get $3,000 of tax-benefit (ordinary rate!!) in the current year, there's still no reason not to realize the loss if you can find a reasonable alternative investment to avoid the wash sale rule, especially in the PP where rebalancing releases capital gains more than your average portfolio.
Take the losses when you can, no exceptions (that I can think of), other than that of materiality and not selling every day. Set a size of loss-increment that feels right for you and go.
Blah blah... not official tax advice... consult your accountant... blah blah.
Last edited by moda0306 on Thu Feb 16, 2012 9:01 am, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: position bonds in taxable to take advantage of tax loss harvesting?
I have been pondering these issues as well. The take home point that I am going to employ is that given the limited upside of long term treasuries and their low yield, it would be reasonable to have only gold and stocks in my small Roth, and keep long term treasuries in my TIRA and 403b, with a dollop in taxable for tax lost harvesting. I wonder if wash sale restrictions would apply between TLT and direct bond ownership. I am sure EDV would not be substantially similar, but TLT gives me pause.
Re: position bonds in taxable to take advantage of tax loss harvesting?
If the IRS comes to your door saying "TLT and 30-year treasuries are too similar," I'd point them to the securities lending allowed by TLT, and point to MF Global.
By then, they'll have just enough idea wtf you're talking about to feel completely outclassed and leave with their tail between their legs.
At least that's my dream audit by the IRS.
That said, if you're going the other way with it it will be harder to argue since you're diving into risk instead of avoiding it by selling TLT.
I like your plan, though... stocks & gold in a Roth, LTT's in Taxable IRA, and dollop for rebalancing in taxable accounts... I'm assuming you have other things in taxable accounts such as gold and cash, if not some stocks?
By then, they'll have just enough idea wtf you're talking about to feel completely outclassed and leave with their tail between their legs.
At least that's my dream audit by the IRS.
That said, if you're going the other way with it it will be harder to argue since you're diving into risk instead of avoiding it by selling TLT.
I like your plan, though... stocks & gold in a Roth, LTT's in Taxable IRA, and dollop for rebalancing in taxable accounts... I'm assuming you have other things in taxable accounts such as gold and cash, if not some stocks?
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: position bonds in taxable to take advantage of tax loss harvesting?
As far as the permanent portfolio goes has anyone come up with optimal tax loss harvest rebalance band strategy?moda0306 wrote: steve,
I think it depends how aggressive you feel like being exploiting the lack of certainty around the wash sale rule.
I am quite aggressive. I'd feel fully comfortable exchanging EDV for TLT, SCV (small cap value) for VTI, or GLD for IAU.
So I'll continue assuming people aren't worrying about the wash sale rule because they've found dissimilar-enough options that they're comfortable taking a bit of risk with.
In that world, I say take any loss you can get whenever you can get it... maybe using $?,000 (whatever you feel comfortable with) as a floor before deciding to sell so you're not doing it every day there is a loss. Using the individual selection basis method, you should not really lose out buy "selling too early," because you can sell the shares you just bought after selling (make sense?).
So while you only may get $3,000 of tax-benefit (ordinary rate!!) in the current year, there's still no reason not to realize the loss if you can find a reasonable alternative investment to avoid the wash sale rule, especially in the PP where rebalancing releases capital gains more than your average portfolio.
Take the losses when you can, no exceptions (that I can think of), other than that of materiality and not selling every day. Set a size of loss-increment that feels right for you and go.
Blah blah... not official tax advice... consult your accountant... blah blah.
This would apply to any taxable holding not just bonds.
Taking tax losses has not been my problem, Let me say that I am completely comfortable managing my own portfolio and not really asking for personal advice. I have been using the permanent portfolio strategy long before I found this forum.
What I am talking about is a rule based system for someone who does not know much about portfolio management but can follow some simple rules like rebalance at 35/15. I think this would be a good topic for upcoming book. Tax gain harvesting is another topic that can help investors in taxable accounts.