Classic HBPP mandates keeping 25% in each asset. That sounds simple and should be fairly easy to maintain if all your PP assets are in the same type of account tax-wise. But what about the portfolios spread over pre-tax, post-tax and taxable accounts? For example, if stocks and cash are in 401(k) and LTTs and gold in a Roth IRA should any %% adjustment be made to ensure that the size of each bucket, when brought to the same tax status (pre-tax or post-tax), would be the same?
That is, if someone is expecting to be in the 25% tax bracket at retirement their PP should roughly look like:
28.57% stocks
28.57% cash
21.42% bonds
21.42% gold
This is just a simple scenario, of course bringing taxable accounts and physical gold into the equation would complicate things.
What do you think?
Adjusting PP bucket size based on tax status
Moderator: Global Moderator
Adjusting PP bucket size based on tax status
"Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve."
- Talmud
- Talmud
Re: Adjusting PP bucket size based on tax status
What you're asking isn't specific to the PP. It's a consideration for any portfolio that has a set asset allocation. While your point is valid, it turns out that it doesn't matter enough to consider it in your calculations.
If you want to be really accurate then don't look at the nominal value of the account, look at what you actually realize upon liquidation.
For example, if you have $200k of stocks in taxable accounts, with a $100k cost basis, then you must pay 15% capital gains tax on the $100k of earnings, so you really only have $185k.
However, you might have some tax credits to consider. Imagine you only have to withdraw $10k per year from these stocks. You might be able to use your standard deduction/personal exemption against it, if you have no other income in that year. So you might actually have $200k.
With 401ks, you don't know what your income tax rate will be when you retire, so you will have to estimate.
My advise is to just ignore it.
If you want to be really accurate then don't look at the nominal value of the account, look at what you actually realize upon liquidation.
For example, if you have $200k of stocks in taxable accounts, with a $100k cost basis, then you must pay 15% capital gains tax on the $100k of earnings, so you really only have $185k.
However, you might have some tax credits to consider. Imagine you only have to withdraw $10k per year from these stocks. You might be able to use your standard deduction/personal exemption against it, if you have no other income in that year. So you might actually have $200k.
With 401ks, you don't know what your income tax rate will be when you retire, so you will have to estimate.
My advise is to just ignore it.