Placement of cash (vs other PP assets)

[sophie]

Hey all,

I got an interesting question from one of the forum members and thought I'd answer it with a new thread. If only because I don't necessary have the best answers and it's certainly a topic ripe for discussion.

Like everyone else, I loaded up on cash in my taxable accounts and my Roth account with stocks, because cash was returning almost nothing (thus not generating taxable income) while stocks had the best outlook for increasing their value.

Because of all the personal and work issues I've been dealing with the for the past few years, I hadn't taken a good look at this policy and had just let things ride...in part because I felt like I had to make sure to have easy access to cash in case my mother ran short for her very expensive Alzheimer care costs. But then came my 2023 tax filing. Those interest payments (and the high tax rate they command) really add up. I definitely now have to DO SOMETHING. Many others I'm sure are in a similar situation.

To start with, I have (and you all do as well) 4 types of accounts: 1) taxable, which comes with preferred treatment of qualified dividends and capital gains, 2) tax-deferred savings, which is treated like ordinary income, 3) accounts where the capital is post-tax and the gains are taxed as ordinary income, i.e. nondeductible IRAs and savings bonds, and 4) tax-free savings vehicles, i.e. Roth and HSA accounts.

If you have a PP or GB that includes your emergency fund and sprawls over all four types of accounts, you have a good opportunity for some tax arbitrage. This involves attempts to predict the future to some extent, which means you could get it wrong, but what you ideally want is for taxable and tax-free accounts to grow the most, and for tax-deferred accounts to take as many of the losses as you can manage.

Anyway, the question was about cash vs. stocks. Harry Browne's simplified guidance on the matter suggested that cash and bonds (i.e. Treasuries of all stripes) are best in tax-sheltered accounts, while stocks are the best option for taxable. Between 2008 and 2 years ago, that was not necessarily the best plan, but it's good advice now. Here's some additional thoughts on that:

Stocks are optimal for taxable, because of the preferred tax treatment of gains/dividends, and also because you can take advantage of tax loss harvesting. Many have pointed out that this only defers tax costs, but that's not quite true. If you can get enough capital losses in any one year, you get to offset up to $3,000 in ordinary income.

Gold is good for taxable because it doesn't generate interest or dividends, but I'd only hold it in physical form. I've got most of mine at Texas Bullion Depository. Keep track of the depository's fees for when it comes time to sell. Or - this only just occurred to me, can you claim those fees as a capital loss every year?? Damn, didn't think of that before.

At current interest rates, you can argue that cash is best held anywhere but taxable. Roth and HSA accounts are good, obviously. US Savings bonds are good too, if you expect to benefit by deferring taxes on the interest. This is only true if you are less than 30 years from retirement, and also if you can avoid selling them until after retirement. It may be a BAD idea for a young person just starting out on a 30-40 year career, because their tax bracket is likely to be higher in 30 years than currently.

Cash can work well in tax-deferred accounts too. You won't be hurt by the tax costs because they are exactly the same as if you kept the cash in taxable, as long as your tax bracket doesn't change. And, if you think cash has less future growth potential than the other PP assets, that's good too because you want the least amount of growth in those accounts. That isn't necessarily true in the short term, but over the long term it almost certainly is.

Anyway, there's a Boglehead Wiki page on "placing cash needs in tax-advantaged accounts", that suggests the following strategy: Swap cash vs. stocks in your taxable vs. Roth IRA accounts. To do this, you sell stocks in the Roth to raise the cash you need, and use the cash in your taxable account to buy an equal amount of stocks (beware of wash sales). Then buy those T bills or whatever you want in the Roth. If/when you sell stocks to raise cash, you compensate by buying stocks with the cash in the Roth.

Couple of gotchas to be aware of. First, be aware of restrictions on Roth cash withdrawals. This is why that Bogleheads wiki recommends keeping at least twice the amount in taxable stocks as what you think you need for emergency funds, because of the possibility of having to sell stocks after a big market drop. Second, beware of funds which throw off a lot of capital gains. I've found that small cap value and Fidelity Zero funds are the worst offenders, so check prospectuses carefully and do this only with the most tax-efficient funds or individual stocks (if you're so inclined).

Finally for those with very high tax brackets, there's the option of municipal money market funds. These are NOT a good idea if your Federal tax bracket is below 32%, because the tax-equivalent yield is not as good as just buying a T bill and paying the taxes. They're also technically not as safe as T bills, so you want to limit what you put in them. But, they could be just the thing for the cash that you decide you really do need to keep in taxable.

Anyway as you can see...this can get complicated! Appreciate further thoughts, and also what have others on the forum done to protect interest from getting killed with taxes?

(Gold stuff moved to Gold Storage thread — > https://www.gyroscopicinvesting.com/for ... =5&t=13173 )

[dualstow]

What an interesting thread, Sophie. Wish I had a high enough tax bracket to have to worry about it.

(Noncash: I’m out of date. I thought you kept your gold at Perth Mint. But, I remember there were a couple concerns there).
( copied to Gold Storage thread)

[sophie]

Oh well - first world problems eh dualstow???

I got out of Perth Mint. Too many red flags going up. The TBD is working out beautifully and I don't need to deal with FATCA. Cost is minimal and I get to buy gold bars instead of coins.

[seajay]

Hi Sophie.

I don't like lending to someone who gets to set/revise the rules/terms/conditions. Opted to shift 'bond' risk (which for me includes 'cash' (short term bonds)), over to the stock side as per Larry S. advice. Would rather hold cold/hard cash and some stocks rather than bonds or having cash on deposit that may not be fully returned. Where gold can also be considered as cash-in-hand.

50/50 BRK/Gold - generates zero dividends/interest.

Which led me to the Talmud preference, around a third in each of land/properties, stocks, gold. For me, domestic London properties, US stocks, gold, for a combination of diverse currencies and assets. Imputed rent is ... tax exempt. When you sell your primary home/property that is also largely tax exempt. For farmers the land/property can also be passed on free of death-duties/estate tax/inheritance tax. Gold in-hand ... is gold in someones hand, but take care not to lose it in a boating accident - as that seems to be a very common risk/loss.

For liquidity, its relatively infrequent to have both stocks and gold down, more often one or the other can be sold in the case of emergencies without having sold-when-down. If the emergency does coincide with a both down time then credit-cards might defer having to sell at that precise time.

[dualstow]

BRK as in Berkshire? If so, that really is risky (as fine as Berkshire is). Why not buy the whole market?

[dualstow]

No worries. I’ll copy it to the gold forum later. ( done )

Cash: looks like these high interest rates aren’t going to last anyway.

[sophie]

Cash: looks like these high interest rates aren’t going to last anyway.

You may be right - but it's so thorny trying to predict the future. Actually you ARE right given a long enough time horizon. How long? Who knows!

It's probably a good idea to make sure anything you do is reversible in case we end up back in ZIRP land. Meanwhile, I put some money into a muni fund, reduced other cash holdings by shifting stocks into taxable, and bought T bills in the Roth. Just don't want to see another monster tax bill because of interest.

[ArthurPooh]

Thank you for your response, Sophie. I would be interested in your thoughts about the political factors, but I understand why you might not want to elaborate.

[seajay]

Thank you for your response, Sophie. I would be interested in your thoughts about the political factors, but I understand why you might not want to elaborate.

At one time, not sure if it still holds, Australia prepared for a currency run such that all of the legislation to lock gold within the country, no exporting it, and being compulsory purchased at a price level it set, was just a Prime Ministers signature away. Or something along those lines.

Strange/risky Oz politics dynamics was enough for me to avoid Perth Mint.

[barrett]

Cash: looks like these high interest rates aren’t going to last anyway.

You may be right - but it's so thorny trying to predict the future. Actually you ARE right given a long enough time horizon. How long? Who knows!

It's probably a good idea to make sure anything you do is reversible in case we end up back in ZIRP land. Meanwhile, I put some money into a muni fund, reduced other cash holdings by shifting stocks into taxable, and bought T bills in the Roth. Just don't want to see another monster tax bill because of interest.

Sophie,

Was going to suggest munis but I see you have already made that move. It's obviously worth looking at the actual dollar amount that holding T-Bills in taxable accounts pushed up your taxes for 2023. I don't think a lot gets by you but it seems to be a normal human tendency to create somewhat false narratives in our heads. For example, much of the increase in one's tax bill could actually be coming from higher work earnings. It's really the marginal tax rate on that Treasury interest you should be concerned about.

I'd be surprised if you hadn't already thought of your issue in this way, but you've obviously had a lot going on caring for your mom.

You are already maxing out contributions to tax-deferred accounts, right?

[jhogue]

Sophie:
Tax advice is tricky, individualized, and the future is impossible to predict, but here are a couple of strategies to consider that can reduce your “monster tax bills” due to interest in taxable accounts in the near term:

1. Consider taking one or a series of Roth IRA conversions. Use part of your pile of current interest to pay off the present tax bill for the conversion. Pay those taxes NOW and the amounts converted are FORVER tax free.

2. You and your mother (with you acting on her behalf) might consider Harry Sit’s “gift box strategy” by buying each other extra I-bonds but not immediately delivering them. As you know, I bonds are federal tax deferred and state and local tax exempt. Since you live in New York you should take full advantage of that tax break.

See: Harry Sit: The Finance Buff https://thefinancebuff.com

[sophie]

Some interesting ideas, responses here:

I bond swapping: One piece of sage advice for those of you who are POA's for elderly family members: be very careful about making creative financial moves with the person's money. POA's can and often are sued by other heirs if they suspect you might have played fast and loose with the money under your control.

Roth IRA conversions: I thought about that and ran some numbers, but no...it would cost me more to do it now.

Amount of interest & tax: I'm quite well aware of how much I earned in interest in 2023, as anyone should be who knows how to look at tax documents. It was a lot. Hence the thread.

One thing about munis is that you have to compare the yield to whatever it is you're currently invested in, e.g. T bills, minus the tax owed. So for example I bought a New York money market fund paying 3.99%. I compared this to my net from T bills (the T bill interest rate minus federal tax at my marginal rate). In prior years, buying the T bills and paying the tax was the clear winner. Now (a couple of substantial raises later) the reverse is true.

The real win, though, is swapping cash (fully taxed at ordinary income rates) for stocks (dividends smaller than interest payments, gains not realized until sale, both taxed at capital gains rates) or gold (no dividends, collectible tax rates on the gains when sold). So the muni fund is only for the cash you decide you REALLY want to keep in taxable - sock the rest into tax-advantaged accounts.

If you do have an elderly mom with an expensive disease (and Alzheimer's is THE most expensive by far as it's uninsurable), and assets that would be very costly to sell like real estate or highly appreciated stocks, there's another good place to park your cash: loan it to her, using an IRS intrafamily loan setup. The loan will be a lien on the estate. Theoretically. I plan to run this by an attorney to make sure though. It's a big reason why I wanted to hang on to my taxable cash this past year.

[ArthurPooh]

At one time, not sure if it still holds, Australia prepared for a currency run such that all of the legislation to lock gold within the country, no exporting it, and being compulsory purchased at a price level it set, was just a Prime Ministers signature away. Or something along those lines.

This actually happened in 21th century? It would surely be a good argument against the notion that FDR-style gold confiscation is no longer a possibility.

[Hal]

At one time, not sure if it still holds, Australia prepared for a currency run such that all of the legislation to lock gold within the country, no exporting it, and being compulsory purchased at a price level it set, was just a Prime Ministers signature away. Or something along those lines.

This actually happened in 21th century? It would surely be a good argument against the notion that FDR-style gold confiscation is no longer a possibility.

Here is an article by Bron Suchecki from the Perth Mint on the topic.
https://goldcoastbullion.com.au/gold-si ... -australia

My personal view. Any Government can craft legislation to confiscate any asset class. With Australia I think it is much more likely they will go for the Superannuation retirement accounts first as that's where a large pool of funds exists. https://www.superannuation.asn.au/resou ... per-stats/
It may be just simply requiring these retirement accounts hold a certain amount of Government mandated assets coupled with stricter withdrawal criteria.

Bottom line: I would not hold all my assets in one country, and not all the Gold in one overseas country

PS: Suggest reading this -> https://blog.oup.com/2013/11/unknown-fi ... isis-1914/

[ArthurPooh]

Thanks for the interesting articles, Hal. I'm somewhat relieved by realizing this is all about a relatively old law from a time when governments still have thought of gold in monetary terms. I certainly agree with an argument that any government could potentially confiscate gold.

I'm inclined to disagree on the superannuations being the first thing in line. The pension problem is a recurring nightmare of every Western (and quite a few non-Western) government. Moreover, since most Australians have one, such a move would be widely unpopular. In contrast, foreigners holding gold at Perth Mint cannot vote in Australian elections couldn't expect any tears to be shed over their plight. It would be easy to make them sell it for Australian dollars to "stabilize the economy", then apply a special one time tax on "profiteers", then deposit the rest in a special non-interest-bearing account that can be accessed only in person; this is more or less how Russia dealt with foreign investors from "unfriendly nations".

Not that I think gold confiscation is likely and I'm still going to keep some at Perth Mint. Just speaking of relative probabilities.

I'm also somewhat skeptical of the claims of possible Westralian secession, for the same reason I don't think superannuations are in danger: everyone is just so old. Before 2022, probably less than 10 000 people were fighting over Donbass - the rest of some 6 million inhabitants were likely too busy watching their favorite Soviet shows on TV to bother. Since the official invasion average age of the fighter has been in the ballpark of 40 years old. I just cannot imagine Australians fighting it out over gold with even less favorable demographics. (but again, my knowledge of Australian society is rather poor and mostly made of stereotypes picked up from Koala Brothers cartoon and Thorn Birds novel)

[Hal]

Heh, heh! Agreed. Absolutely no chance of Western Australian succession. Why that would mean cancelling our BBQ's

Also not concerned about straight out confiscation of Gold/Superannuation....but...I was advised by a few older folk that the Government mandated holding Gov't Bonds in retirement accounts during the high inflation period of the 1970's

For stereotypes, you can't go past the old 50's movie "On the beach" with Ava Gardner (complete with Waltzing Matilda intro)
https://www.youtube.com/watch?v=EMzEWpKKOZs

[ArthurPooh]

Thanks for the movie recommendations. Very interesting about the required holdings of government bonds, I thought only banana republics emerging markets did that sort of thing. In my country the supers' rough equivalents are explicitly required to invest vast majority of their funds into local assets - i.e. buy government debt and pump unprofitable state-owned enterprises or big banks that sponsored the relevant legislation.

[seajay]

A concern IMO is that of the 120+ paper to gold ratio https://usdebtclock.org/gold-precious-metals.html

In any situation when there are 120 claims on paper to each single item (ounce of gold) there is a risk of a gold-rush, panicked rush to have paper gold delivered as physical gold and where there is insufficient physical gold to cover that demand. Contagion from initially starting small and in one country, rapidly going global, and where rushed state "measures" are imposed - such as exporting of gold being prohibited and/or the state claiming (compulsory purchasing at a price it defines) all investment gold within its realm.

With gold in someone else's vault, that's assigned in your name, at least any confiscations will be a smooth/simple/straightforward transition. With gold in-hand and you run the risk of being mugged on your way to hand it in, or it falling overboard during sea/river/lake transportation, or suchlike.