Newbie Question (specifically 401k issues)

[Hadrian]

Hello, first I want to say this is a great resource I've discovered. I first became interested in the Permanent Portfolio mid last year and have been mulling over converting to it for some time now and  recently decided to take a plunge.

I'm only two years out of college in the work force, so it's still early in my investing life but I've already got a bit of a complicated problem.

So my first job out of college was working for State government, which had a nice pension program but a really terrible 457b plan for anyone looking to do any pre-tax investing. The options available were all very high expense ratio, terrible funds and I wanted no part of it (this predates any knowledge of the PP.) So I set up a normal IRA since my pay with the State wasn't the best I figured the end of year tax deduction would help me more right now than going for a Roth IRA. At the time I was pursuing mostly real estate and dividend aristocrat stocks and put basically all my money in the Vanguard Dividend Appreciation fund and the Vanguard REIT ETF. At the end of that first year I got a much better job in the private sector and liquidated my one year pension contributions from the State and rolled them into my IRA.

At my next job (current job) the 401k plan essentially matches your contributions dollar for dollar up to 6%. So I put 6% in so I'd get the full match, and then I additionally was investing 6% post-tax in my IRA as I still liked the flexibility of being able to buy / trade equities and anything else I'd want in the Vanguard IRA. After doing that for a year I was hit with something basically because I was stupid, when I found out my income at my current job was too high and I was not able to deduct any of the IRA contributions I had made for any part of 2012, so going forward I will not be making any further regular IRA contributions and will be pursuing a Roth option if I continue to make separate contributions to an IRA.

So anyway, that's my current situation going into this conversion to the Permanent Portfolio. Compared to some horror stories I've heard, I think my Fidelity 401k offers some good options for PP stocks / cash / bonds:

Stocks: FXSIX
Bonds: PGOVX
Cash: FMPXX or something they're calling "MIP CL 1"

But, there is no way at all to get exposure to gold.

So my questions (I'm sorry this post is already too long, thank you to anyone who reads through it):

For my cash component, should I go with the Fidelity Money Market or the "MIP CL 1", which is described as: "Managed Income Portfolio Class 1, The fund seeks to preserve your principal investment while earning a level of interest income that is consistent with principal preservation. The fund seeks to maintain a stable net asset value (NAV) of $1 per share, but it cannot guarantee that it will be able to do so. The yield of the fund will fluctuate." Its composition is: 43% treasuries, 10% U.S. Agency, 1.75% other govt, 20% corporate, 7% MBS, 10% ABS, 4% CMBS, 3% CMO. The duration of the bonds are 7% <6 months, 4% 6mo - 1 y, 23% 1-2 years, 27% 2-3 years, 21% 3-4 years, 15% 4-5 years, and .23% 5+ years.

As for getting exposure to gold, I have a few options. One option would be setting up a Roth to make contributions to an ETF like GLD, or just buying that in my regular non-retirement brokerage account (I have a regular brokerage account I'm planning to treat as my variable portfolio, but could hold the gold component of the PP in it.) The problem is, and always will be, I'm kicking in 6% of my income to my 401k, my employer is matching that, every month. At most I could see myself contributing 10% into another savings vehicle outside of the 401k, and historically I've only done an extra 6% outside of the 401k for 12% total savings (plus another 6% from employer.) So the 401k is always going to be the lion's share of my savings, which means it will be very, very hard to rebalance so that I can keep gold at 25%. Is this a scenario where I should just accept the fact my PP will be imperfect, and put as much as I can into gold outside my 401k?

[Hadrian]

One option I've been thinking about for possibly moving some 401k dollars out here and there for rebalances would be:

My employer allows your contributions to be either "Regular 401k" or "Roth 401k." Additionally, my employer allows you to withdraw up to 50% of your total assets at any time while you are employed with the company. This will normally trigger a taxable event. However, I've done research on the Roth situation, and it appears that if I made at least a portion of my 401k contributions Roth contributions, I could withdraw the Roth contributions tax free. I've studied the IRS publications, and it says on Roth withdrawals that if you make an early withdrawal you must pay tax on the earnings and a 10% penalty on any taxable withdrawal. But it says that you can always withdraw as much as you put in on a Roth basis tax free. I've noticed a lot of websites seem to assume anytime you withdraw from a Roth vehicle that you must pay the tax + 10% penalty, but the IRS publication and some deeper digging makes it very specifically clear that as long as you do not withdraw any more from your Roth than you contributed, they aren't taxable withdrawals (since you're just withdrawing the contributions you made post-tax, and not the tax-free earnings that accrued) and thus aren't subject to the 10% penalty (which only applies to taxable withdrawals.) Through this scheme, I believe I'd be able to, annually, liberate some portion of my employer sponsored plan dollars and make that part of the rebalancing process.

[Pointedstick]

Welcome!

Does your Fidelity-hosted 401k have a brokerage window option? If it does, then you're home free, because you can then buy individual treasuries and gold ETFs to your heart's delight. If not, I'd recommend buying physical gold bullion outside your 401k.

The Roth vs traditional 401k thing really depends on your tax situation. If you're single and being walloped with a high federal and state tax rate now, I'd recommend staying with a traditional 401k so you can avoid those punitive taxes because your tax situation is more likely to be better in the future. You might get married (and be able to use the much nicer married tax brackets), you might move to a state with no income tax, you might retire early and discover that your taxable income is so low you're eligible for welfare, you might find a great new loophole in the future, and so on and so forth.

Finally, if your income is too high to quality for the IRA tax deduction, are you sure you're still eligible to contribute to a Roth IRA?

[AgAuMoney]

Through this scheme, I believe I'd be able to, annually, liberate some portion of my employer sponsored plan dollars and make that part of the rebalancing process.

It is doubtful your employers plan allows regular in service withdrawals for a young (less than say 59-1/2) person.  Perhaps they could.  Were you looking in the IRS docs for 401(k) plans or IRAs?  They are regulated very differently...

[AdamA]

So anyway, that's my current situation going into this conversion to the Permanent Portfolio. Compared to some horror stories I've heard, I think my Fidelity 401k offers some good options for PP stocks / cash / bonds:

Stocks: FXSIX
Bonds: PGOVX
Cash: FMPXX or something they're calling "MIP CL 1"

I think you're right.  FXSIX is great for the stock portion.

PGOVX is better than what is offered by most 401K's, and, if it's the best you can do, then use it.

Beware though, it holds non-Treasury bonds.



As you can see, it's not the same as TLT.

Still, if PGOVX is what you have available, then by all means use it.  Just be aware of it's limitations and risks. 

Same goes for FMPXX.  It's not a Treasury-only fund, so there's going to be some counterparty risk.  Again, if it's what's available to you, then use it, because IMO it's still better than most other options.

It's hard to resist using these funds giving the tax advantage of the 401K and the fact that your employer matches up to 6%.

So the 401k is always going to be the lion's share of my savings, which means it will be very, very hard to rebalance so that I can keep gold at 25%. Is this a scenario where I should just accept the fact my PP will be imperfect, and put as much as I can into gold outside my 401k?

That's a common problem.

What I might consider in your case would be something like

45% FXSIX
45% PGOVX
10% Gold coins or Gold ETF in another account. 

Then I'd save some cash in a separately for emergencies. 

Whatever you decide, just make sure you understand the limitations and risks involved.   

[Hadrian]

Thanks, I knew PGOVX had some non-government holdings but wasn't aware it deviated so much from TLT performance-wise.

Some other bond options in the 401k:

PTLDX (Short-Term)
PTTRX (Pimco Total Return)
VBTIX (Vanguard Total Bond Market)
VIPIX (Vanguard TIPS)

By the way, what tool were you using to generate the image you attached? I've been using a tool on marketwatch to do similar comparisons but wasn't very happy with the interface...

[Hadrian]

It is doubtful your employers plan allows regular in service withdrawals for a young (less than say 59-1/2) person.  Perhaps they could.  Were you looking in the IRS docs for 401(k) plans or IRAs?  They are regulated very differently...

From my 401k site:

A partial withdrawal (also referred to as an in-service withdrawal) allows you to withdraw a portion of your account balance.

The available amount shown for a partial withdrawal is based on your plan rules, and is typically less than your full balance. Some plans restrict you from withdrawing your employer's contributions or pre-tax assets. See your plan rules for details.

It shows an amount equal to about half my current holdings (a little less.) Digging into the plan rules a bit more it appears that as long as I'm employed, I can withdraw my own after-tax contributions and earnings from those contributions, employer's contributions, earnings from employer's contributions or profit sharing contributions. If I am withdrawing company contributions made on a pre-tax basis, I'd have to pay the 10% penalty and income taxes on the money, but I think if I'm withdrawing post-tax dollars (contributions only, not any tax-free earnings) I wouldn't face the penalty / tax hit. So basically the only thing I'm specifically not allowed to withdraw are my own pre-tax contributions/earnings from those contributions.

[MediumTex]

It is doubtful your employers plan allows regular in service withdrawals for a young (less than say 59-1/2) person.  Perhaps they could.  Were you looking in the IRS docs for 401(k) plans or IRAs?  They are regulated very differently...

From my 401k site:

A partial withdrawal (also referred to as an in-service withdrawal) allows you to withdraw a portion of your account balance.

The available amount shown for a partial withdrawal is based on your plan rules, and is typically less than your full balance. Some plans restrict you from withdrawing your employer's contributions or pre-tax assets. See your plan rules for details.

It shows an amount equal to about half my current holdings (a little less.) Digging into the plan rules a bit more it appears that as long as I'm employed, I can withdraw my own after-tax contributions and earnings from those contributions, employer's contributions, earnings from employer's contributions or profit sharing contributions. If I am withdrawing company contributions made on a pre-tax basis, I'd have to pay the 10% penalty and income taxes on the money, but I think if I'm withdrawing post-tax dollars (contributions only, not any tax-free earnings) I wouldn't face the penalty / tax hit. So basically the only thing I'm specifically not allowed to withdraw are my own pre-tax contributions/earnings from those contributions.

You might explore the possibility of taking a plan loan to purchase gold bullion within a PP implementation strategy.  This sort of thing can work well in some situations.

You definitely want to look into whether the plan offers a brokerage window option.  If it doesn't, you might contact your HR people and tell them that they should add one, considering how limited the plan's fund lineup is for someone seeking strong diversification across a group of assets broader than stock funds and a handful of intermediate term bond funds.

[AdamA]

You might explore the possibility of taking a plan loan to purchase gold bullion within a PP implementation strategy.  This sort of thing can work well in some situations.

+1

I did this and it worked great.

[AdamA]

By the way, what tool were you using to generate the image you attached? I've been using a tool on marketwatch to do similar comparisons but wasn't very happy with the interface...

Google Finance. 

Then I used TinyPic.com to link the image.

[AdamA]

Thanks, I knew PGOVX had some non-government holdings but wasn't aware it deviated so much from TLT performance-wise.

Some other bond options in the 401k:

PTLDX (Short-Term)
PTTRX (Pimco Total Return)
VBTIX (Vanguard Total Bond Market)
VIPIX (Vanguard TIPS)

By the way, what tool were you using to generate the image you attached? I've been using a tool on marketwatch to do similar comparisons but wasn't very happy with the interface...

I like VBTIX, but it's not for the PP (it's just an index fund for the bond market).  If I couldn't use the PP, I'd probably do something like 1/3 VXSIX, 1/3 VBTIX, 1/3 Gold.  I'd have some cash saved too, for emergencies. 

[Hadrian]

So I spoke with some people at work and it doesn't appear we have any brokerage window option. Apparently HR actually discussed this when they were reviewing our plan benefit for FY 2013 (any changes to our benefits tend to happen at the beginning of a FY), but decided against it because of "liability concerns with letting employees invest in potentially risky investments in their 401k  accounts." But they did alert me to an alternative, in that Fidelity is set up so that I can request my "in service withdrawable" contributions be rolled over to a Fidelity IRA. I don't really know if that helps, but it might be cleaner than taking a loan? I also think Rollovers by default avoid any tax hits. I guess I could feel out how that would work and do that once a year to try and keep things balanced to some degree.

[Pointedstick]

Apparently HR actually discussed this when they were reviewing our plan benefit for FY 2013 (any changes to our benefits tend to happen at the beginning of a FY), but decided against it because of "liability concerns with letting employees invest in potentially risky investments in their 401k  accounts."

Yes, good thing they only let you invest in those low-risk stock funds. 

[MediumTex]

Apparently HR actually discussed this when they were reviewing our plan benefit for FY 2013 (any changes to our benefits tend to happen at the beginning of a FY), but decided against it because of "liability concerns with letting employees invest in potentially risky investments in their 401k  accounts."

Yes, good thing they only let you invest in those low-risk stock funds. 

Mama always said that investing a 401(k) account was kind of like a box of chocolates.  You never knew what you were gonna get, but you could safely assume that it would be made up of either volatile equity funds or intermediate bond funds that gave you little upside exposure when rates were falling.  That's just what my mama said.