Gyroscopic Investing

I'm in the process of establishing a PP.  I have to buy 20k more in LT Treasuries for which there's no room in a tax-sheltered account.  However in my VP,  I have some SLV and XLE in an IRA that together come close to this amount. I'm trying to decide whether to sell these two ETFs and buy them again in a taxable account to make room for the LTTs (which I can buy at auction through TD Ameritrade for a $25 fee). Is it worth the trouble and fees?

Thanks.  I really appreciate the reactions/advice the experienced people here.

I might use the tax deferred space for the LT bonds.

The long term bonds have the potential to be much longer term holdings than the SLV and XLE.

I don't know what your time frame is for holding SLV and XLE, and that could have a bearing on things as well.

Although there are good arguments for having either of these assets in tax deferred space (LT bonds throw off income and SLV throws off 28% tax rates), I would probably put the asset that throws off the most income in the tax deferred space if I had to choose, and that would obviously be the LT bonds.

Thanks, MT  That advice fits well with how I'm feeling lately--that I want the great majority of assets within the pp.  I'm going to sell the two ETFs and think some more about whether I want to re-buy them in a taxable account at all. 

Clive wrote: http://www.invescopowershares.com/pdf/P ... -IVG-1.pdf

indicates that PLW (1 to 30 year Treasury Ladder) is tax free (Expense Ratio 0.25%)

There is no mention of tax-free in the description and overview of the ETF — only the heading above it in that one file suggests the tax free status. I have a feeling the designer of that pamphlet simply made an error.

http://www.invescopowershares.com/produ ... ticker=PLW

I suspect the designer may have been confused because Treasury coupons are typically exempt from state and local taxes.

Clive wrote: http://www.invescopowershares.com/pdf/P ... -IVG-1.pdf

indicates that PLW (1 to 30 year Treasury Ladder) is tax free (Expense Ratio 0.25%)

Clive,

What a great find!  It seems that as long as this fund doesn't pay out the coupon payments as dividends, and instead reinvests them back into new treasuries, it could be the perfect vehicle for tax optimization in a taxable account.  The expense ratio is reasonable, and as long as you don't sell very often (for rebalancing purposes) you can avoid capital gains taxes.

Anyone else care to chime in on this?  It obviously doesn't have the "leverage" (is that even an appropriate term for fixed income?) that a fund like TLT would have, but if you avoid the dividend payments and use 50% as Clive suggested, it could be a great proxy for 25/25 SHY/TLT.

Storm wrote:

Clive wrote: http://www.invescopowershares.com/pdf/P ... -IVG-1.pdf

indicates that PLW (1 to 30 year Treasury Ladder) is tax free (Expense Ratio 0.25%)

Clive,

What a great find!  It seems that as long as this fund doesn't pay out the coupon payments as dividends, and instead reinvests them back into new treasuries, it could be the perfect vehicle for tax optimization in a taxable account.  The expense ratio is reasonable, and as long as you don't sell very often (for rebalancing purposes) you can avoid capital gains taxes.

Anyone else care to chime in on this?  It obviously doesn't have the "leverage" (is that even an appropriate term for fixed income?) that a fund like TLT would have, but if you avoid the dividend payments and use 50% as Clive suggested, it could be a great proxy for 25/25 SHY/TLT.

Not sure what you mean. It pays a dividend every month!

SEC 30 Day Yield 3.13%
Distribution Yield 3.49%
12 Month Yield 3.16%

Even if they did reinvest the dividends somehow, the fund would still owe taxes. And they'd just pass those taxes on to their investors.

This does seem a little too good to be true.  Think of all the millionaires w/o IRA's that would eat this up... I can't imagine this would have gone unchampioned in this forum for this long.

If somebody gets final word on this don't be afraid to speak up.

See Page 6 of the prospectus, here: http://www.invescopowershares.com/pdf/P-PS-PRO-9.pdf

Tax Information
The Fund’s distributions will generally be taxed as ordinary income or capital gains. A sale of Shares may result in capital gain or loss.

Also, the fund is not purely Treasuries at times. They only have to maintain at least 80% Treasuries.

This is not a tax free ETF.

Gumby,

Maybe I'm not up on the lingo like I should be, but this doesn't seem to tell me much.  What qualifies as a "distribution?"  An interest payment to the fund, or a distribution of the fund to the investor?

Could you expand on your conclusion a bit?

moda0306 wrote: Gumby,

Maybe I'm not up on the lingo like I should be, but this doesn't seem to tell me much.  What qualifies as a "distribution?"  An interest payment to the fund, or a distribution of the fund to the investor?

Could you expand on your conclusion a bit?

Distributions are a broad term to denote any payments to shareholders — whether that be dividends, sales of assets, etc.

Moda, do you see anything in that prospectus that indicates that the ETF is tax free? I see zero evidence. If this were a tax free fund, it would have the words "Tax" and "Free" in the name of the fund — like they do with the "PowerShares VRDO Tax-Free Weekly Portfolio" fund.

This is not a tax free fund. The fund pays you a dividend each month. You pay taxes on those dividends. (You should not have to pay state and local taxes on the majority of those dividends).

No I don't... though I have no experience in how a prospectus might disclose that information, but yes, you'd think they'd advertize the hell out of this thing, and muni-bond holders country-wide are being absolutely duped if something like this actually exists.

moda0306 wrote: No I don't... though I have no experience in how a prospectus might disclose that information

Well, they would have to disclose something about it in the prospectus. PRPFX is a tax advantaged fund — which means they take efforts to reduce your taxable income by deferring distributions till the end of the year. Take a look at PRPFX's prospectus and you'll see a whole section disclosing the implications of their tax strategy.

What keeps them from not paying distributions if that's all it takes to avoid the taxpayer having to realize taxable income... or does it not take a distribution.

I honestly have almost nil experience or history with tax-planning within actual funds or how the tax laws around these work.

moda0306 wrote: What keeps them from not paying distributions if that's all it takes to avoid the taxpayer having to realize taxable income... or does it not take a distribution.

I honestly have almost nil experience or history with tax-planning within actual funds or how the tax laws around these work.

I haven't read the PRPFX prospectus, but I would guess that there are legal or practical reasons.
1) They do have to sell components once in a while.
2) LT Treasuries pay interest.
3) I know that real estate trusts have a legal obligation to pay out something like 95% in dividends.
Put those three together, and I'm not surprised that there is *some* distribution that needs to be made, even for something so different from a REIT.

Vanguard's smallcap index fund pays dividends and has capital gains -- the latter coming from the occasional change in components and adjusting weightings, I suppose. I'm sure investors in smallcap would like to have zero distributions, like holders of Apple stock have, but ...
Just a guess, though. I'm sure someone here knows.

Well, I just found this in the June 2010 PRPFX Prospectus:

Dividends and Tax Planning
Each Portfolio distributes its net investment income and net capital gains, if any, to its shareholders as dividends only once a year and intends to continue to satisfy the distribution requirements necessary to qualify for treatment as a RIC. Under the Code, a Portfolio is required to pay as dividends for each taxable year at least 90% of its investment company taxable income (which generally consists of net investment income, net short-term gain, and net gains and losses from foreign currency transactions) to qualify for such treatment.

earlier in the same document:

Tax status. Each Portfolio intends to pay dividends each taxable year to enable it to continue to satisfy the distribution requirements necessary to qualify for treatment as a regulated investment company under Subchapter M of chapter 1 of the Internal Revenue Code of 1986, as amended (“Code”?) (“RIC”?). If a Portfolio were to distribute to its shareholders less than the minimum amount required for any year, which the Fund considers unlikely, the Portfolio would become subject to federal income tax for that year on all of its taxable income and recognized gains, even those distributed to its shareholders.

Gumby wrote: Not sure what you mean. It pays a dividend every month!

SEC 30 Day Yield 3.13%
Distribution Yield 3.49%
12 Month Yield 3.16%

Even if they did reinvest the dividends somehow, the fund would still owe taxes. And they'd just pass those taxes on to their investors.

I see.  I'm not sure how you found the dividend payments, but I see how that would increase your taxable (short-term) income significantly.

Question (apologize for the noobishness):  Why couldn't a fund maintain a low tax basis by capturing long-term capital gains instead of short-term capital gains just like an individual investor?  Perhaps having a bond ladder of 1-30 year treasuries would preclude this, as you might be receiving coupon payments every 6 months, but I'm curious if mutual funds and ETFs have the same or different tax rules than individual investors.

Storm wrote:I'm not sure how you found the dividend payments, but I see how that would increase your taxable (short-term) income significantly.

The dividends are listed on the right side of the ETF's official overview page under "Yield":

http://www.invescopowershares.com/produ ... ticker=PLW

And if you look at a historical chart of the ETF on your favorite finance website, you'll notice little dividend payments each month.

Storm wrote:Question (apologize for the noobishness):  Why couldn't a fund maintain a low tax basis by capturing long-term capital gains instead of short-term capital gains just like an individual investor?  Perhaps having a bond ladder of 1-30 year treasuries would preclude this, as you might be receiving coupon payments every 6 months, but I'm curious if mutual funds and ETFs have the same or different tax rules than individual investors.

See: http://www.smartmoney.com/invest/strate ... nds-17616/?