interested in PP portfolio - some unresolved questions

[foobar]

I am fairly naive when it comes to taxes and investments. I would like to start a new PP portfolio and leaning towards the following allocation:

25% VTI
25% SHY
25% TLT
25% GLD or SGOL

Funds for PP (present and going forward) are in a taxable account. My tax rate is high (33%, CA).

Some unresolved questions:
1) Is it worthwhile to consider RSP in lieu of VTI
2) How complicated tax reporting will be due to periodic interest/dividend?

I also vaguely recall reading somewhere not to reinvest dividends in PP account to avoid
tax complications. Any merit to this?

Any pointers for further reading on tax related issues of PP would be great.

Thanks
Singh.

[BRESLOW]

I am also new to the PP. Look at IAU for the gold portion. The expense ratio is lower. Also check out PRPFX which is a mutul fund, also invested in the PP. I have both so good luck with either or both.  Arnold

[AdamA]

1) Is it worthwhile to consider RSP in lieu of VTI

Probably not, if for no other reason than that the expense ratio is .4% vs. .11% for SPY (I think).

I also vaguely recall reading somewhere not to reinvest dividends in PP account to avoid tax complications. Any merit to this?

I think the rationale for not reinvesting dividends is that you can hold them as cash and use them to rebalance when appropriate.  I don't think it would complicate your taxes that much to reinvest them, though (but I'm not sure).

I am also new to the PP. Look at IAU for the gold portion. The expense ratio is lower. Also check out PRPFX which is a mutul fund, also invested in the PP. I have both so good luck with either or both.  Arnold

If I had to hold my PP in a taxable account I might consider using PRPFX because I suspect it would be more tax efficient than trying to do it myself.  However, you lose some control, and I don't like that it would mean not holding any physical gold.  

Also, keep in mind that PRPFX is a bit different than 25% x 4 PP, and will perform differently.  It holds Swiss Francs, and is lighter on long term bonds. 

25% GLD or SGOL

Whatever you chose, make sure you understand the tax rules for the ETF.  They can differ from ETF to ETF and may involve extra paperwork, so be careful.  

[l82start]

I also vaguely recall reading somewhere not to reinvest dividends in PP account to avoid tax complications. Any merit to this?

I think the rationale for not reinvesting dividends is that you can hold them as cash and use them to rebalance when appropriate.  I don't think it would complicate your taxes that much to reinvest them, though (but I'm not sure).

 it may be a tax loss harvesting thing, if you plan to tax loss harvest it might be simpler to track not having dividend money involved...  (i am not positive about this someone who is more up on taxes will need to confirm or explain it)

[KevinW]

A dividend reinvestment is an automated purchase of shares with a cash value equal to the dividend payout.  So if you have e.g. VTSMX reinvest a $100 dividend, you buy $100 worth of shares.  Usually this is going to be some hideous fraction, e.g. 2.6518 shares.  From now on you have to track the cost basis of those 2.6518 shares, so that when you sell your holding you properly account for the capital gains on the 2.6518 shares separately from all the others.

This is a big accounting mess stemming from a relatively small sum of money.  If instead you sweep the dividends into cash, then you have fewer share purchases, and can choose to buy whole shares to keep the accounting simpler.  If you don't care about the bookkeeping then it doesn't matter.

[moda0306]

I like using loss harvesting and partial rebalances to help with taxes.  It makes it easier for me to swallow having a larger amount in liquid non-tax-deferred accounts.

Series I bonds are a pretty cool option for your non-IRA cash portion as well.  They are tax-deferred and pay better interest (historically) than 1-3 year treasuries.  They're a little bit complicated though compared to your bread/butter st bonds or savings accounts.

I also like the 2.4% (today) 5 year Ally CD with a 60-day interest penalty.  Even with the tax hit it's a pretty solid "cheat" to getting good after-tax return on your cash without breaking the safety of at-least having FDIC protection.

[foobar]

... From now on you have to track the cost basis of those 2.6518 shares, so that when you sell your holding you properly account for the capital gains on the 2.6518 shares separately from all the others.

This is a big accounting mess stemming from a relatively small sum of money.  If instead you sweep the dividends into cash, then you have fewer share purchases, and can choose to buy whole shares to keep the accounting simpler.  If you don't care about the bookkeeping then it doesn't matter.

Based on this I would prefer sweeping dividends into cash and take care of it as part of periodic re-balancing  activity.

I am also new to the PP. Look at IAU for the gold portion. The expense ratio is lower. Also check out PRPFX which is a mutul fund, also invested in the PP. I have both so good luck with either or both.  Arnold

I was looking at 25% x 4 PP due to extra control and possibility of tax harvesting. I also think long term track record of pure PP is better than PRPFX (partially due to lower expenses). However overall it may be a wash because it likely offers better tax efficiency.

I will look at IAU also.

If I had to hold my PP in a taxable account I might consider using PRPFX because I suspect it would be more tax efficient than trying to do it myself.  However, you lose some control, and I don't like that it would mean not holding any physical gold.

How do you acquire physical gold? Does it make re-balancing a little harder since you may have to sell physical gold periodically?

Series I bonds are a pretty cool option for your non-IRA cash portion as well.  They are tax-deferred and pay better interest (historically) than 1-3 year treasuries.  They're a little bit complicated though compared to your bread/butter st bonds or savings accounts.

I also like the 2.4% (today) 5 year Ally CD with a 60-day interest penalty.  Even with the tax hit it's a pretty solid "cheat" to getting good after-tax return on your cash without breaking the safety of at-least having FDIC protection.

Don't know how to acquire I-bonds but will look into it.

Thanks all for comments.
Singh

[6 Iron]

Don't know how to acquire I-bonds but will look into it.

Singh, these can be purchased at most major banks up to 5k/ year for a paper bond, as well as online through treasury direct, max 5k as well per year. I would suggest at a minimum reading this thread.

http://gyroscopicinvesting.com/forum/in ... topic=35.0

[AdamA]

How do you acquire physical gold? Does it make re-balancing a little harder since you may have to sell physical gold periodically?

There are a few different ways to hold gold.  Many people seem to favor a mix of physical gold and a gold etf (the gold etf makes rebalancing a little easier).  

My favorite way to own physical gold is to buy non-numismatic coins (American Eagles, South African Krugerands, Canadian Maple Leafs, etc).  Probably best to buy the one oz coins to keep the premium as low as possible.  You can also buy bullion bars.  They tend to be a little bit cheaper, but, if you ever want to sell them, you may have to pay to have them assayed to prove they're real (you don't have to do this with coins).  
Again...for purposes of the PP, avoid numismatic or collectible coins.  

I think gold ETF's are very appealing to many starting out in the PP.  Be careful before putting too much money into a gold ETF.  I was listening to an episode of the HB show the other day where he was discussing these.  Gold is the one asset in the PP that has no couterparty risk.  Holding gold in an ETF introduces this risk.  Not to say you shouldn't use one, just be aware that this changes the PP a bit, and introduces some additional risk in exchange for convenience.  

Also remember that gold is generally taxed as a collectible when you sell it (much higher than capital gains tax).  Some of the ETF's allow you to avoid this if you keep good records and fill out certain tax forms.

[rickb]

Also remember that gold is generally taxed as a collectible when you sell it (much higher than capital gains tax).  Some of the ETF's allow you to avoid this if you keep good records and fill out certain tax forms.

Actually, none of the ETFs allow you to avoid the collectibles tax, it's only the closed end funds (e.g. GTU or presumably PHYS) that let you do this.  The form you need to fill out (each year you own it, not just when you sell it) is 8621.

The closed end funds often trade at a higher premium (or discount) than the ETFs, but (perhaps perversely) the closed end funds make much stronger guarantees that they don't do anything except buy and hold a published amount of gold (and the amount changes very rarely).  The ETFs are constantly buying and selling gold, allegedly to help the price of the ETF better track the price of gold, but the buying and selling has no obvious correlation to reducing the tracking error.

The bottom line is that there are distinct pluses and minuses, more than just tax treatment, between the ETFs and closed end funds.

[AdamA]

I was using ETF in a very generic sense, and Rick is absolutely correct. 

Also remember that gold is generally taxed as a collectible when you sell it (much higher than capital gains tax).  Some of the ETF's allow you to avoid this if you keep good records and fill out certain tax forms.

Actually, none of the ETFs allow you to avoid the collectibles tax, it's only the closed end funds (e.g. GTU or presumably PHYS) that let you do this.  The form you need to fill out (each year you own it, not just when you sell it) is 8621.

The closed end funds often trade at a higher premium (or discount) than the ETFs, but (perhaps perversely) the closed end funds make much stronger guarantees that they don't do anything except buy and hold a published amount of gold (and the amount changes very rarely).  The ETFs are constantly buying and selling gold, allegedly to help the price of the ETF better track the price of gold, but the buying and selling has no obvious correlation to reducing the tracking error.

The bottom line is that there are distinct pluses and minuses, more than just tax treatment, between the ETFs and closed end funds.

Well put.  I learned this the hard way, so I would emphasize the importance of doing your homework before you invest.  Having said that, I think GTU is a very good way to hold non-physical gold, although I would not use it as a substitute altogether.