How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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sophie
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Re: How do you invest the Cash portion?

Post by sophie » Sun Dec 15, 2019 9:35 am

Kbg wrote:
Sat Dec 14, 2019 11:49 pm
I never understood the bonds in tax advantaged accounts thing and particularly Roths. I’d much rather shelter higher growth rates and pay taxes on lower growth items unless one is going to buy and hold for a really long time on something that doesn’t pay a dividend like BRK stock.
I've flipped around quite a bit on this and would love to trigger a discussion. My favorite investment for tax-deferred accounts is cash, followed closely by bonds, then gold. "Deep" gold is best in taxable, followed by stocks. I try to maximize stocks in the Roth and HSA.

I made these choices with 2 goals in mind. First, tax-deferred accounts will eventually get slammed by ordinary income tax rates, so you want to make sure you're not trading that for a preferred tax rate (i.e. the capital gains rate). Second, a dollar's growth in a Roth IRA is worth a lot more than a dollar of growth in a tax deferred account. While I can't predict which asset will increase the most in the short term, over time spans of 10-15 years or more I am pretty confident that cash and bonds will underperform stocks. Basically, I want my tax-deferred accounts to shrivel up and die while my Roth skyrockets.
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ochotona
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Re: How do you invest the Cash portion?

Post by ochotona » Sun Dec 15, 2019 10:16 am

You got, Sophie!
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Kbg
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Re: How do you invest the Cash portion?

Post by Kbg » Sun Dec 15, 2019 4:47 pm

Own it and sorta farm it. We plant and water hay which we sell to someone who fertilizes and cuts/hauls.
Last edited by Kbg on Mon Dec 16, 2019 9:40 pm, edited 1 time in total.
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dualstow
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Re: How do you invest the Cash portion?

Post by dualstow » Sun Dec 15, 2019 5:27 pm

sophie wrote:
Sun Dec 15, 2019 9:35 am
"Deep" gold is best in taxable,
How far down do I have to bury it?


No, I guess deep gold is physical coins, not meant to be traded?
You may have some 30-year treasury interest as of Saturday. Vanguard’s transaction history is finally showing it, too.
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sophie
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Re: How do you invest the Cash portion?

Post by sophie » Mon Dec 16, 2019 7:47 am

dualstow wrote:
Sun Dec 15, 2019 5:27 pm
sophie wrote:
Sun Dec 15, 2019 9:35 am
"Deep" gold is best in taxable,
How far down do I have to bury it?


No, I guess deep gold is physical coins, not meant to be traded?
I guess we should explain our lingo a bit better!

I've been using "deep" to describe the assets that you're unlikely to have to sell to rebalance. It would suck to have to rebalance from taxable gold, although I don't really know to what degree that should drive my investment choices. Many on the forum advocate keeping some gold ETFs in tax-deferred for that reason though.

Off the initial topic though...I'm genuinely interested in what people think about distributing assets among different types of account. The Bogleheads forum has a lot of posts about keeping bonds in tax-deferred, and loading up Roth and taxable with stocks. Same idea.
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Re: How do you invest the Cash portion?

Post by dualstow » Mon Dec 16, 2019 7:51 am

sophie wrote:
Mon Dec 16, 2019 7:47 am
Off the initial topic though...I'm genuinely interested in what people think about distributing assets among different types of account. The Bogleheads forum has a lot of posts about keeping bonds in tax-deferred, and loading up Roth and taxable with stocks. Same idea.
When Harry wrote ‘Best Laid Plans” and even “Fail-Safe Investing”, cash was actually earning something. These days I’m happy to hold it in taxable.
You may have some 30-year treasury interest as of Saturday. Vanguard’s transaction history is finally showing it, too.
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sophie
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Re: How do you invest the Cash portion?

Post by sophie » Mon Dec 16, 2019 8:01 am

dualstow wrote:
Mon Dec 16, 2019 7:51 am
sophie wrote:
Mon Dec 16, 2019 7:47 am
Off the initial topic though...I'm genuinely interested in what people think about distributing assets among different types of account. The Bogleheads forum has a lot of posts about keeping bonds in tax-deferred, and loading up Roth and taxable with stocks. Same idea.
When Harry wrote ‘Best Laid Plans” and even “Fail-Safe Investing”, cash was actually earning something. These days I’m happy to hold it in taxable.
Same here.

It just occurred to me that low interest rates are actually a boon for investors, in a way, because of the difference in tax treatment between capital gains & dividends vs interest. Because interest rates are low, investors are saving less in cash and putting relativey more into the stock market, especially dividend payers - at least that's my personal opinion. As I remember, when interest rates dropped below the average dividend return, there was suddenly a ton of interest in dividend stock portfolios.

Which btw is another reason why I was attracted to the idea of building up a collection of individual stocks: stock funds spin off capital gains and dividends every year, and the dividends mostly aren't qualified so they get taxed like interest. With individual stocks, I have total control of the capital gains, and all dividends are qualified.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Mon Dec 16, 2019 8:17 am

dividends are never a proxy for interest ..... they both serve different purposes and work differently and one should never be used to replace the other
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Re: How do you invest the Cash portion?

Post by Kbg » Mon Dec 16, 2019 10:04 pm

On Sophie’s question.

This is a question that is logically answered objectively through basic math. Mathematically everyone should know that a taxed deposit and a taxed withdrawal at the same tax rate ends up being exactly the same. If one can defer taxes and know the withdrawal is going to be at a lower tax rate then the calculus is a no brainer.

The problem is things get very complex when you get to RMDs, Medicare premiums and passing things on to the next generation. Thus, in reality one needs to make a significant amount of assumptions. Given the complexity, I decided to make a very basic assumption which is assets that are likely to compound at a higher rate historically will continue to do so. Thus, my ROTH gets priority for growth assets and I will pay the taxes on lower growth assets as needed. For me personally, I’m blessed that my before and after tax rate could end up not changing that much. I’m literally on the edge and have no idea if I will drop or not to a lower rate (when RMDs start).

As was noted elsewhere...if you end up trading almost at all in a taxable the strategy of putting dividends and interest investments in tax deferred accounts loses luster quickly. So for me, I manage portfolios at the account level rather than trying to manage at a “macro portfolio mix” level. In other words I have a mix in taxable and deferred and lean heavy on growth in the ROTH accounts.

However, to be clear there is a mathematically “correct” answer on this question according to the assumptions one makes. If your finances are complex you probably need a financial planner to help you through it all though. I’ve been a DIYer my whole investing life but I think I’m getting to the point I need the professional planning part. (But not the investment mngt)
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Re: How do you invest the Cash portion?

Post by sophie » Tue Dec 17, 2019 8:21 am

Kbg, I suspect we all have access to the information we need to optimize tax strategy. I wouldn't expect that a financial planner would be any better at that than you are. Professionals are not incentivized to spend lots of time figuring out complexities, they'll tend to use simple one size fits all rules.

Developing a spreadsheet simulator to estimate taxes AFTER retirement would be dead useful. iORP is the closest thing to an online source, but it seems to make some simplistic assumptions. It always wants you to spend every taxable penny and Roth convert your entire 401K before taking SS.

In addition to dealing with marginal tax brackets in retirement, here's the fiscal parameters I know about (in part thanks to this board):

top of 12% tax bracket - limit for avoiding taxes on qualified dividends and capital gains
Saver's credit (< age 65)
Obamacare (< age 65) - 4x poverty level.
Medicare premiums - (> age 65) - don't remember what the threshold is.
(if you live in NY) - $85,000 income for enhanced STAR rebate, $50,000 income for SCHE (rebate of 50% of property taxes) (> age 65)

Any to add to this?
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Re: How do you invest the Cash portion?

Post by vnatale » Tue Dec 17, 2019 10:55 am

sophie wrote:
Tue Dec 17, 2019 8:21 am
Kbg, I suspect we all have access to the information we need to optimize tax strategy. I wouldn't expect that a financial planner would be any better at that than you are. Professionals are not incentivized to spend lots of time figuring out complexities, they'll tend to use simple one size fits all rules.

Developing a spreadsheet simulator to estimate taxes AFTER retirement would be dead useful. iORP is the closest thing to an online source, but it seems to make some simplistic assumptions. It always wants you to spend every taxable penny and Roth convert your entire 401K before taking SS.

In addition to dealing with marginal tax brackets in retirement, here's the fiscal parameters I know about (in part thanks to this board):

top of 12% tax bracket - limit for avoiding taxes on qualified dividends and capital gains
Saver's credit (< age 65)
Obamacare (< age 65) - 4x poverty level.
Medicare premiums - (> age 65) - don't remember what the threshold is.
(if you live in NY) - $85,000 income for enhanced STAR rebate, $50,000 income for SCHE (rebate of 50% of property taxes) (> age 65)

Any to add to this?
I always use the annual Forbes article regarding Medicare for the premium thresholds. And, I actively manage my end of year self-employment receipts so as to not have to pay any additional amounts.

https://www.forbes.com/sites/ashleaebel ... 690a912d73

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Sun Dec 22, 2019 8:26 pm

anato wrote:
Wed Sep 11, 2019 2:14 pm
vnatale wrote:
Tue Sep 10, 2019 7:20 pm
1) I Bonds. The limit is $10,000? Plus, if you overpay your taxes by $5,000 you can purchase another $5,000 with your tax refund? Is that what you do?
Yep, I try to overpay taxes. Then $10k for each one of me, my wife and 2 kids... so plenty of room there. It would mean my additional contributions for the year are north of $200k (never happened :-\)

Therefore as a single person this is what I can do for 2019 and 2020?

1) For 2019 meet any deadlines to outright purchase $10,000 of iBonds by December 31, 2019?

2) Between now and April 15, 2020 (or, October 15, 2020, if extending tax return to that date?) overpay my 2019 estimated taxes by $5,000 so that it generates a refund to purchases an additional $5,000 of iBonds in 2020?

Vinny
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