Weird Question

[ahhrunforthehills]

.

[dualstow]

Hmm, it feel like apples to oranges, but I guess I like 2 the least. I like 1 and 3.
For one, I own the admiral shares with an expense ratio of .05%. If you meant to type .03%, I guess you have institutional shares or something? In a retirement account?

3 sounds intriguing. I wouldn't mind exchanging my GTU shares for the metals at Perth.

[Benko]

3. Physical metals at Perth funded with PRETAX dollars.


but then again I'm probably going to change my form of gold holdings to this anyway.

[ahhrunforthehills]

.

[ahhrunforthehills]

.

[D1984]

I wish they were typos   #1 and #2 are offshore funds that are technically unavailable to US investors. 

The higher expense ratio sucks, but the trade-off is the ability to invest with pretax dollars and have total tax deferment on all dividends, gains, and income.  And this is not some government program with a cap or required distributions/penalties. 

What would be your guy's second pick? 

I am in the highest tax bracket, so I tend to get slammed with Treasury interest in my traditional portfolio.  But I realize that the Treasury Mutual Fund doesn't really fit the mold.

I'm assuming these aren't available to US investors thanks to FATCA and the like? What country are the funds domiciled in and are they denominated in USD?

Even if it wasn't for laws like the above, though, wouldn't a US investor in such a vehicle still be required to pay taxes (on any dividends received by the fund or long/short term capital gains within the fund) since such a fund would be a PFIC under US tax law anyway? I mean, the US investor would really have only two choices: One, take a QEF election....but that would mean that any dividends or cap gains would just flow through to his personal return which would be no different than investing in a US based partnership that owned the S&P 500 (and in fact might be WORSE than investing in a US-based S&P 500 mutual fund because of the expense ratio and because of the fact that at least the mutual fund can retain--free of tax--a few percent of its earnings without them flowing through to the investor). On the other hand, if said investor in the PFIC didn't make a QEF election the imputed income (and the taxes due) would just compound with interest year after year.

The only exception would be if the shares in the offshore fund were owned by a tax-exempt/deferred like an IRA or qualified plan but if that's the case, why bother paying a sky-high expense ratio (well, sky-high for an index fund) when you already have tax deferral/exemption to begin with (and it can even be pre-tax if it's a regular non-Roth 401K or a deductible IRA) thanks to the fact that the money is in a tax-sheltered plan? UBTI isn't even an issue here (dividends and cap gains aren't "active" income ) so why invest in such a vehicle through a tax-deferred plan on a pre-tax basis?

[ahhrunforthehills]

.

[Pointedstick]

How, uh, would a mere mortal hypothetically get in on this hypothetical sweet-looking deal?

[ahhrunforthehills]

.

[whatchamacallit]

So you only pay taxes on the gains over the investment?

Keep it out of your PP, pick #2 to preserve tax free investment.

Edit: If I understand what your saying, you are getting paid tax free. At what point can you sell the investment? Sell as soon as you can and rebalance your taxable PP with the tax free money you received.

Edit 2: Never mind. It sounds like you are just deferring income. I wouldn't pick any of them then because it doesn't sound like you could rebalance without paying tax.

[hoost]

I'll throw out that the Treasury fund could be counted as a half cash/half bonds investment due to the duration.

How easy would it be to get the gold out if you needed it?  Given that it's held by a company, and not in your name, I would think that would add difficulties if you needed to get it out, so that automatically goes to 3rd place for me.

I think I'd actually put the Treasury fund first, counting it as 12.5% cash/12.5% bonds, and hold the other 12.5% of each in whatever other vehicle you have.  That way you don't have one asset class entirely caught up in this scheme.  I would imagine that would make rebalancing difficult.

Could you hold all 3 in equal balance (25% stock, 25% gold, 50% intermediate bond)?  That may be the best solution.

[Pointedstick]

Question: if you already have a business, couldn't you do materially the same thing via a SEP-IRA? You could roll portions of it over into a Roth IRA for the same tax hit of your regular income tax rate, and then any principal withdrawals are tax-free.

[D1984]

Excellent points D1984.  Not too many people speak international taxation  

The Vanguard funds would be domiciled in Ireland in USD.  Investments would be held by a Controlled Foreign Corporation.  If investments are held by a Controlled Foreign Corporation, PFIC rules do not apply. 

So traditionally a US investor would:

make money [pay half in taxes], invest money [pay full income taxes on treasury income, or cap taxes on S&P dividends], eventually sell investments [pay more taxes]

A CFC (assuming sales greatly exceeds investment income) would:

make money, invest money [albeit it at a slightly higher expense ratio), reinvest dividends/income, eventually sell investments [paying taxes on the gains at the regular income tax rate].

As I do not require the money in the CFC for living expenses, the taxes I would pay for a distributions from the CFC is a pretty big non-issue.

I wouldn't say I speak fluent "international taxation"....more like I know just enough about it to be dangerous   I'm afraid I'm not this forum's resident CPA...that would be moda0306.

I am rather curious about something you said, though (four things, actually..I apologize in advance if these are dumb questions):

One, doesn't Ireland have a 12.5% corporate tax? Is this Irish corporation set up somehow in a way that avoids that tax (visions of Dutch or Luxembourgish "sandwiches" spring to mind)? 12.5% beats 35% but paying it still sucks.

Two, is this essentially pre-tax because the sales profits are booked pre-tax in the CFC, rather than because income earned elsewhere (say from a W-2 type job) is contributed to the CFC pre-tax?

Three, how does the owner (or owner/s, if it has more than one US owner) avoid the dividends/short-term cap gains/long-term cap gains that the CFC realizes from being passed through as foreign base company income? My (admittedly very limited) understanding of the CFC regs and anti-deferral sections of the Code was that CFCs passed through taxable income of most kinds (i.e. if you owned, say, 20% of the CFC and it had 100K of income that year then you had an extra 20K of taxable income whether you received any money from the CFC or not) whether there was a distribution/dividend paid from them or not. Is there some special rule of subpart F that creates an exception for certain types of CFC income? Even if there was, could it be made to apply to a CFC that was wholly or almost wholly used for investment purposes rather than for a mix of investment and an actual active business (which in the case mentioned by the OP would be whatever OP's CFC was selling that produced income that "greatly exceeded investment income" as per your turn of phrase)?

Fourth and finally, couldn't a US investor avoid all of this complicated nonsense simply by renouncing (before he/she hit the $2 million asset or circa $140K 5-year average net income tax limits for being a "covered expatriate" under the HEART Act and 877A) and getting another citizenship in a more tax-friendly nation and then opening up the corporation in a low/no-tax domicile?

[MachineGhost]

Next would come the joy of opening up financial accounts in other countries who want absolutely nothing to do with you because the company's owner is an American (even if every employee including officers is a non-American).

Use a foreign grantor trust to displace the American ownership?

[ahhrunforthehills]

.

[hoost]

To me, it seems most logical to try to match up the duration.  TLT has an average duration of 16.88 years (avg maturity = 27.51 yrs); SHV is 0.39 years.  That averages out to 8.635 years.

I'm not sure exactly which Vanguard fund you're looking at, but from the Vanguard website, VFITX seems to be the most similar and has a maturity of 5.6 years and an avg. duration of 5.3 years.

I'll post my rationale here for others to critique in case I made a mistake.

Assuming you want to have all of your cash allocation within this account, and hold the extra bonds outside, you have the following two equations for your 50% allocation to cash and bonds:

5.3*x + 16.88 * y = 8.635
x + y = 1

Solving, I find that x = 71% (of your 50% allocation, so really 35.5% of your total portolio), which represents your Intermediate Bond fund, and thus, y = 29% (14.5% of your total portfolio), which appears to be the same conclusion you've drawn.

That makes sense to me, if that's the way you want to go about it.

Although, given that the investments will be held within the company, the company is domiciled abroad, and you don't plan to take withdrawals, it may make more sense to implement a full UK-PP within the account and keep it separate from your US-based PP.  That's probably what I would do.

Regarding the 50% 5-year allocation, I think you see a slightly larger drawdown with the "bullet" allocation versus the "barbell" that the PP uses, but otherwise the returns seem to be about the same.

I'll personally be running a hybrid between the two with my 401k, although I haven't fully implemented it yet so I can't speak from experience to its behavior.

[MachineGhost]

According to the Simba Spreadsheet (1972-2012 backtest)... there isn't really any difference between 50% in 5 year treasuries vs 25% cash /25% long term treasuries.

I had noticed that from the spreadsheet too.  Earlier, I had learned that past 5-years of maturity you get the other 5% of the missing return but only for an inversely huge increase in risk.  So 95% was good enough.

What I eventually came up with is to use I-Bonds up to the limit and the rest into a 5-year CD ladder at a AAA-rated bank for the ST 25% and then place the other 25% in the traditional Treasuries or Zeros.  That way you historically beat the regular barbell with no more effective systemic risk.  Certainly less than holding assets indirectly at a brokerage (MF Global or PFG anyone?) or in ETF's.