Use of tax-free accounts for PP rebalancing

General Discussion on the Permanent Portfolio Strategy

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fnord123
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Use of tax-free accounts for PP rebalancing

Post by fnord123 » Mon Apr 26, 2010 6:31 pm

Compared to a purely passive approach (e.g. "just shovel money into the market and/or bonds until you retire"), the PP is more active, in particular, it that it uses yearly and/or band-based rebalancing.  This can cause tax liabilities to be triggered every year.

Something I've started doing with my PP that I thought I would share is take advantage of tax-free accounts for my PP wherever possible to reduce the tax impact of rebalancing.

Tax-free accounts
  • Roth IRA - If a person is under the IRS income limits, they can contribute to a Roth IRA every year using post-tax income.  This is a great place to put PP holdings for rebalancing use, as all gains are tax free.  Due to a loophole in current tax laws, even people over the income limits can roll over current IRA money into a Roth IRA, and can even contribute post-tax $ into a regular IRA, then immediately convert to a Roth - note that there are tax implications here, so this is not something that people should do without a lot of research first.  In any case, once one has in a Roth IRA, one can rebalance with it freely and not worry about paying any taxes.
  • Health Savings Account - I've read that at least TD Ameritrade can be a HSA custodian and allows use as a brokerage.  This means one could move a HSA there and then rebalance using it (within broker-tradeable securities) and pay no taxes on any dividends, interest income, or capital gains.  I intend to start doing this, paying for current medical bills with post-tax cash and deferring reimbursing myself using the HSA money - I also plan to keep a file of all the out-of-pocket medical expenses to make sure I can later make withdrawals penalty free.
[br]Taxes are complicated stuff, so just take the above as something one person is looking at - do not take it as advice or a suggestion!  

Does anybody have other ideas on how to do tax free PP rebalancing?
Last edited by fnord123 on Mon Apr 26, 2010 6:33 pm, edited 1 time in total.
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