Newbie Seeking Advice

[stuper1]

Hi,

I just recently learned of the PP, and I am very attracted to it.  I recently received the PP book by Roland/Lawson, and I am working my way through it.  Here's my situation.  I am 46 years old, married, with two kids (12 and 9).  I have a 401(k) with about $250,000 in it (invested in a Fidelity passive age-based portfolio).  I believe the 401(k) has a brokerage window that I can use to invest 25% of my 401(k) funds in other things beside the standard mutual funds, etc.  I also have a Roth IRA with about $50,000 in it, and my wife has a Roth IRA with about $50,000 in it.  We also have about $50,000 in various non-IRA savings accounts.  We have no significant debts other than our modest home mortgage.  We are saving for our kids' college education with some separate 529 plans.

So, here's my question.  If we want to go full-blast into converting our investments into the PP, how should we do that?  I'd like to keep things pretty simple.  Ongoing investments will mainly go into the 401(k) and Roth IRAs.

Here's the best picture I've come up with.  I would be very appreciative of other people's ideas.  We have about $400k overall, so we'd want about $100k in the different asset classes.  I'm thinking we'll want to keep most or all of the $50k non-IRA money in cash type assets as an emergency fund.  The other $50k in cash will be in the 401(k) account in a Fidelity fund (maybe FDLXX).  We'll put another $100k of the 401(k) money into a stock index fund, and $50k into a long-term Treasury bond fund.  I'll check soon, but I'm hoping the 401(k) brokerage window can be used to put $50k into a gold ETF.  Then, in the Roth IRAs, we'll put $50k into a different long-term Treasury bond fund, and $50k into a different gold ETF.

I will be very grateful for any advice that others may have.  I'm not real crazy about buying physical gold and putting it into a safe deposit box, so if you suggest that, please explain a bit.  Thanks!

[KevinW]

That plan sounds pretty solid to me.

You might consider using some of the taxable money to buy physical gold bullion, for the reasons outlined in the book.

Also you might consider implementing a separate 4x25 PP in each account instead of one big PP. This is simpler in the sense that you can manage each account independent of the others, and your tax deferral strategy is unaffected by the performance of individual assets. But more complicated in the sense that you have more positions to manage.

Just food for thought.

EDIT: One other thing to consider: my wife manages her own 4x25 PP separate from mine. That way both of us are qualified to manage our investments, which gives us peace of mind. You might want to set things up that way from the beginning.

[AgAuMoney]

The plan sounds pretty good.

If not doing physical gold, then putting it in a tax advantaged account is a good thing.  (Gold is taxed as a collectible in the U.S.)

I would recommend you consider at least a little bit of physical gold.  I'm thinking at least one ounce each for you and the wife, up to maybe 20 ounces.  With $100K of gold, having a few ounces of physical is not a large extra cost (especially if you consider ETF fees for a few years), is extremely unlikely to ever need to be sold to rebalance,  and is not a large risk even stored at home with other valuables or hidden away.  And if you ever need to just get out of dodge, a few ounces that could be carried or hidden in baggage might be very handy.

As for how to convert, it makes me uncomfortable to jump all at once into something new.  If it were me, I'd spread the conversion process (e.g. the buying of new assets, for you it is likely the gold) over 6 to 12 months.  The risk is a big jump in price between now and then.  The other risk is a big drop in price.  Studies of the stock market with people receiving a lump sum have shown that it is almost always beneficial to lump it in.  I can think of lots of reasons why that might or might not be true especially for other asset classes.  Bottom line I'm just personally more comfortable spreading it out so that's what I do.

[rhymenocerous]

I think your plan looks very solid.  Ideally, gold is the most tax-efficient asset because it throws off no dividends, so you only pay tax when you sell it (you control when this happens).  Although, in the current interest rate environment, you aren't going to be paying much tax on cash anyway, so I think it's fine to hold that $50k in non-IRA assets in cash.  If you are able to purchase anything you want in the 401k, I would hold your stocks in the Roth IRAs.  The idea is that you want to grow your Roth space as much as possible because withdrawals during retirement won't be taxed, so ideally you would hold the asset with the highest expected return there.  Also, I don't know if it's possible in your 401k, but you could look into buying 30 yr Treasuries directly (it's very easy to do once you get used to it).  One possible setup across your accounts could be:

Non-IRA:
$50k cash

His & Her Roth:
$100k Total Stock Market Index Fund

His 401k:
$50k SHY
$100k IAU
$100k TLT

[stuper1]

I had the original thought about putting the stocks into the Roth IRAs, but in the PP book, they say to use the following priority for tax-deferred accounts:  bonds, cash, stocks, gold.  I consider the Roth IRAs the most tax-deferred accounts, since actually all tax has already been paid.  That's why I proposed to put the bonds in there.  I think my 401k brokerage window only allows up to 25% of my 401k to be invested that way, so my maximum gold in the 401k is $62.5k -- that's why I proposed putting the rest into a Roth IRA.

Am I misunderstanding the tax advice?  Would I be better off with stocks in the Roths, rather than bonds?

[flyingpylon]

stuper1- Your situation is incredibly similar to my own, right down to our ages and the ages of our kids! 

You might want to double-check the Fidelity brokerage window limitations... I also have a Fidelity 401k, but I have 100% of my account in the brokerage portion and new contributions also get put in there automatically.  The % allowed in brokerage might vary by employer, but I'm not sure.

As rhymenocerous mentioned, you can buy 30yr treasuries directly at Fidelity.  It's pretty easy, and free.  Also, as an alternative to FDLXX you can buy T-bills directly too.  They can be set to automatically roll over each year.  Of course both of these will depend on what % you can have in brokerage.

I would also second AgAuMoney's advice to hold some physical gold.  There's a bit of a mental hurdle at first, but once you get over that it just makes a lot of sense.

Regarding the 529s... some people say it's better to put money into your retirement funds because it will not be used in financial aid calculations when your kids are ready to go to college.  Depending on your interpretation of the questions on the financial aid forms, physical gold might help there too.

[melveyr]

Also, I wouldn't spend too much time worrying about the perfect tax placement. Changes in interest rates will affect what it is throwing off more income, and some people even make the argument to shelter stocks first because they have a higher expected return and thus a higher expected tax bill (due to big capital gains 20-30 down the road). There are many arguments to be made about what to place where. Just making using of the space is 90% of the battle. 

The only thing I would not do is use a gold ETF in a taxable account. They sell off chunks of the gold throughout the year and expect you to calculate the tax implications of it! Pretty messy.

[buddtholomew]

Melveyr, does your comment on gold taxation apply to GLD as well? I was not aware of any tax implications if you passively hold the ETF in a taxable account. Are you referring to GTU?

[notsheigetz]

I'm not real crazy about buying physical gold and putting it into a safe deposit box, so if you suggest that, please explain a bit.  Thanks!

I think that's a pretty common sentiment with someone just starting out and used to doing everything electronically. It was mine when I started a couple of years ago. I thought to myself why buy physical gold when I can just buy an ETF online? I also bought ETF's for the LTT and Cash portions but after I found out how easy it was to buy the bonds myself I started thinking about gold too. My thought process changed from why buy physical gold instead of an ETF to why buy an ETF when I can just buy my own gold?

I've recently converted all my ETF gold in my taxable account to physical. I still have gold ETFs in my Roth accounts. One thing to keep in mind if you put ETF's in your taxable account is that if you decide later on to do what I did and go the physical route then you might have to pay the taxman to make that happen. In my case, it wasn't a problem because gold is down but if it goes up you could get a big tax bite.

[melveyr]

Melveyr, does your comment on gold taxation apply to GLD as well? I was not aware of any tax implications if you passively hold the ETF in a taxable account. Are you referring to GTU?

I am referring to GLD, IAU... any gold ETF that charges its expense ratio by selling off gold.

[AgAuMoney]

Melveyr, does your comment on gold taxation apply to GLD as well? I was not aware of any tax implications if you passively hold the ETF in a taxable account. Are you referring to GTU?

I am referring to GLD, IAU... any gold ETF that charges its expense ratio by selling off gold.

^^^  this !

GTU is probably OK, but I'm not sure.  CEF is OK and you can file as a Passive Foreign Investment Corp (PFIC) so when you sell you pay a lower tax rate.  Probably also with GTU.

But I prefer to hold my taxable gold as physical.  Currently all my gold funds are in tax advantaged accounts.

Also my bonds are tax advantaged.  I used to think stocks belonged in tax advantaged, but that has one BIG drawback...

Stocks have the highest expected return, but they also provide a lot of opportunity for tax loss harvesting.  And the more speculative your stocks, the more likely you'll want to harvest losses.

If you have a loss in a taxable account you can take advantage of the loss to recoup some of it on your taxes.  And any extra income you have can be applied to shore up that account.

If you have a loss in a tax deferred or tax free account it is gone forever.  There is no tax loss harvesting and if you are already maxing out your contributions, there is no way to shore up the account to "recover" from losses.