Taxable PP for Emergency Fund

[MWKXJ]

Hello,

Background information:

Age: 37
Wages: $70,000 pre-tax
Emergency fund: $9,000 - Cash and T-Bills
Roth IRA: $27,000 - Independent PP through Vanguard
457b: $101,000 - Independent PP through Schwab brokerage window

I'm considering creating a separate PP in a taxable brokerage account just for my emergency fund.  In other words, my emergency fund would consist of an independent PP holding cash, gold, stock, and bond ETFs.  Currently my deep emergency fund cash is saved in a ladder of 29 day t-bills through Treasury Direct which earns nearly no interest.  My retirement PP accounts, on the other hand, have been in tax-deferred accounts, so I am inexperienced with just how much I stand to lose to taxes when withdrawing from a taxable PP.  Would the tax penalties incurred when selling ETFs in taxable make using t-bills preferable?

I figure that using a separate PP for the emergency fund will compound more quickly over time than using just Treasury securities, be more readily available than 29-day t-bills, and provide a good experience in managing a taxable PP.  Historically, several years pass without having to dip into my emergency fund, and when I do, it's typically for less than $1000.  I've budgeted $4800 into my emergency fund in 2014 and target having 3-months of pre-tax salary on-hand in my emergency fund.

So, what are your thoughts on a separate taxable PP for an emergency fund?

[Ad Orientem]

As long as you have at least six months of essential living expenses in actual cash or a very near equivalent then putting the rest into a taxable PP sounds OK to me. But remember that while the PP has been remarkably stable over the intermediate term it has experienced rare instances of near term volatility. During the dark days of 2008 the PP actually saw a peak to trough decline that was quite steep before the LTTs kicked in and smoothed everything out. In other words the PP is not cash and it can, and on rare occasions has, experienced serious near term declines. You don't want to get caught in a situation where you may have an urgent need for cash while your PP - Emergency Fund is also taking a hit.

[MWKXJ]

Thanks.

My "needs" budget is roughly $1,500 per month, including mortgage.  The $9,000 onhand already covers six months worth of essential living expenses.  Extra emergency fund savings will go into a new PP account.  By the way, I'm padding our emergency fund because of my wife's multiple sclerosis.  The local health providers frequently deny insurance coverage and put us through months of wrangling before payment issues are sorted out.  Eventually their errors will bite us, or, we will entail a large medical expense that is unplanned for.

Regarding contributing to a taxable PP account, I've heard that re-balancing by buying the cheapest assets is recommended in this scenario as it prevents the 35/15 re-balancing bands from being reached and thus incurring taxes when selling down assets.  I plan to use the following calculator: http://optimalrebalancing.tk/ when re-balancing.  Do you have any other tips for avoiding taxes in a taxable PP?

Also, from what I've read one should withdraw from cash first when drawing down a PP.  When drawing down, if the 15% lower band is hit, the portfolio is rebalanced.  Is this correct?

Thanks in advance.  I have no experience investing through a taxable brokerage and want to keep it as inexpensive as possible.  At the same time I'm eager to learn.

[Ad Orientem]

Regarding contributing to a taxable PP account, I've heard that re-balancing by buying the cheapest assets is recommended in this scenario as it prevents the 35/15 re-balancing bands from being reached and thus incurring taxes when selling down assets.  I plan to use the following calculator: http://optimalrebalancing.tk/ when re-balancing.  Do you have any other tips for avoiding taxes in a taxable PP?

You might also have dividends put into the cash component. That will also help delay rebalancing.

Also, from what I've read one should withdraw from cash first when drawing down a PP.  When drawing down, if the 15% lower band is hit, the portfolio is rebalanced.  Is this correct?

Yep.

Thanks in advance.  I have no experience investing through a taxable brokerage and want to keep it as inexpensive as possible.  At the same time I'm eager to learn.

No problem and good luck.