Gyroscopic Investing

Hello folks,

I have a PermPort inside of an IRA, and one outside.  For the one outside, I'm not entirely sure how to deal with the tax treatment.  As you probably know, long-term earnings on IAU (or other gold ETFs) are taxed at a 28% "collectible" rate, not the 15% capital gains rate.  Anybody have any thoughts on how to ensure that my 25% allocation in gold is effectively a 25% allocation after taxes?

The best way is to do your rebalancing inside the tax-deferred account for the gold. In the taxable account you should have to rebalance less frequently so taxes can be put off for years at a time.

craigr is exactly right.  With gold, you have a built in tax deferral to the point it almost makes no sense to have it in tax advantaged space unless you just have oodles of tax advantaged space like I do.

I personally don't even try to compensate for the effects of taxes.  It'd just be madness, too many things in different places, and who knows what the laws will be in a year.

All this said, I don't think HB intended it, but in the current environment the PP in its orthodox form is extremely tax efficient.  You wouldn't think so with 25% of it being in LTTs, but it works out pretty well without really trying if you follow the rebalancing rules.

But as an aside, I am curious why this comes up so much. I say that because quite frankly most of us won't pay 28% we'll pay our highest marginal rate provided I am not very mistaken.  Paying 28% is a problem I'd sorely like to have!  If you pay that much good on you.  Seriously I wonder how many people see that figure and don't realize it doesn't necessarily apply to them.

shoestring wrote: But as an aside, I am curious why this comes up so much. I say that because quite frankly most of us won't pay 28% we'll pay our highest marginal rate provided I am not very mistaken.  Paying 28% is a problem I'd sorely like to have!  If you pay that much good on you.  Seriously I wonder how many people see that figure and don't realize it doesn't necessarily apply to them.

Also consider that Long term gain rates are about to go back up to 25% which is within spitting distance of the gold max rate. It may actually be that gold taxes are *lower* than the average long-term tax rates going forward because most people will pay substantially less than the 28% max.

craigr wrote: The best way is to do your rebalancing inside the tax-deferred account for the gold. In the taxable account you should have to rebalance less frequently so taxes can be put off for years at a time.

Craig, thanks.  My question has more to do with what my rebalancing target should be, rather than where the rebalancing should take place.  In the taxable account, I have around 25% of each of the four asset classes.  Good so far.  But the trick is that if gold goes up, I'll lose MORE of it to taxes (when it's all ultimately sold, let's say) than the others.  So do I need to compensate for that by "cheating" and holding a little more gold than 25%, since the effective value is less?

Of course, if the value of gold goes down, the opposite effect might apply.  It gets fairly complicated, it seems.  It certainly would be simplified by a long-term rate hike to 25%, but I can't root for that!

And shoestring, I think this question applies to anyone whose marginal rate is more than the 15% rate for long-term capital gains, even if it doesn't get all the way to 28%.

There is nothing magical or precise about the 25% split between the four asset classes. I think HB was really going for simplicity. So, I think doing calculations to figure out after-tax weightings is kind of missing the point of the four way split.

If it helps you feel more balanced, and thus more likely to stay the course then by all means do it. For what its worth, if I were opening up the pandora's box of tinkering I would probably hold less gold anyways so the after tax effects both me less than you perhaps.

Xan wrote:

craigr wrote: The best way is to do your rebalancing inside the tax-deferred account for the gold. In the taxable account you should have to rebalance less frequently so taxes can be put off for years at a time.

Craig, thanks.  My question has more to do with what my rebalancing target should be, rather than where the rebalancing should take place.  In the taxable account, I have around 25% of each of the four asset classes.  Good so far.  But the trick is that if gold goes up, I'll lose MORE of it to taxes (when it's all ultimately sold, let's say) than the others.  So do I need to compensate for that by "cheating" and holding a little more gold than 25%, since the effective value is less

I wouldn't overanalyze it too much. You can always figure out how much to sell with taxes included to keep it in line if you get to that point.

If you start a PP today it's probably going to be 2-3 years before the first rebalancing event.

I would be inclined to worry about this sort of thing closer to the time that I was actually approaching a rebalancing band.

Another thought, if you are contributing new money to your PP, you could just purchase whatever has the lowest percentage (rather than just put the new funds into the t-bill account).  This would have the tendency of keeping the portfolio balanced automatically, and probably even further defer the need to do a formal rebalance.

msauer wrote: Another thought, if you are contributing new money to your PP, you could just purchase whatever has the lowest percentage (rather than just put the new funds into the t-bill account).  This would have the tendency of keeping the portfolio balanced automatically, and probably even further defer the need to do a formal rebalance.

I think some people do this.

Sometimes it will help, sometimes it will hurt.  In the end, the returns are probably similar.