A PP In Every Account

[barrett]

PS, I am trying to lure you away from productive work with the subject title of this thread. Your idea of a PP in every account seems to work easily enough for me except when I start adding physical gold. That asset I can't hold in any of my accounts and owning it causes me to have to fumble around with the LTT, stock & cash allocations in my retirement accounts. How do you get around that if it's not too difficult to put across in a post? Do other people have this issue as well? Thanks for your help.

[Tyler]

I personally have three separate PPs.  One joint taxable, one for my tax-deferred accounts, and one for my wife's tax-deferred accounts.  For the tax-deferred accounts, I use IAU.  Life is just easier that way, and simplicity is one of the reasons I was drawn to the PP in the first place. 

[Pointedstick]

You've actually lured me away from my vacation! But that's okay, this forum is mighty relaxing too. 

I only have physical gold in my taxable PP. My other PP is in my 401k, which blessedly has an awesome Schwab brokerage window. In that PP, I have my gold in paper form: either SGOL or GTU if it's selling at more than a 5% discount. When GTU sells at more than a 5% premium, I sell it and exchange it for SGOL. Free bonus return.

My wife and my other accounts are not PPs. I keep them them full of small-cap value stocks and corporate bond funds to benefit more from prosperous conditions. I find that this combination keeps me contented and happy.

[blackomen]

I have 3 PPs:

1) A Strong-Dollar Hedged PP in my taxable account where most of my wealth is currently held (25/25/25/25 SPY/IAU/TLT/UUP)

2) A 2.66x Leveraged PP in my IRA: (33/33/33 SSO/UBT/UGL)

3) PERM in my other IRA that has about $1500 or so..  I keep it open cause it's with Fidelity and I like their wealth of research reports available.

[barrett]

Thanks everyone for weighing in. At this point most of my assets that are not in my residence are either in retirement accounts or savings bonds. That has worked nicely for a modified PP in every account with the savings bonds sitting outside of the IRAs & making up a bunch of the cash component.

I only experienced the funkiness with setting up my wife's account and trying to balance retirement assets and a bit of physical gold. So far it's not really a big problem but I don't like how out of whack the allocations in each account are. I have a mania for symmetry and I think that's part of what bothers me. Plus, I really like the idea that during retirement we would be able to withdraw from different retirement accounts (two tax-deferred and two tax-free) and not have to concern ourselves with possibly selling a losing asset... grabbing from the cash position and rebalancing as needed. I figure in some years it will be better to withdraw from tax-deferred (depending on side income or SS payments) and some years it will be better to withdraw from the tax-free Roths.

Just trying to look down the road and have options that I like when the time comes.

[TripleB]

Maintaining multiple PPs in each of your investment vehicles seems overcomplicated, expensive from a time and cost perspective, and has an opportunity cost of not maximizing the potential for maximum tax benefits.

Instead, consider all of your investment vehicles/locations as contributors to your giant PP. Your gold coins held in taxable can be all the gold you need (assuming you have enough taxable investment space and aren't holding primarily retirement account assets). Why waste space within a valuable tax shelter that could be deferring taxes on dividends/bond interest on gold, when gold coins are inherently a tax shelter in and of themselves since there's no taxable event that occurs until you sell?

Suppose you have about a 50-50 split between taxable and retirement accounts. Current markets would dictate holding gold and cash in taxable and stocks and bonds in tax-sheltered retirement accounts. The yield on cash is so low that sheltering it in a retirement account is wasteful. Since it's cash, there's no taxable event to "sell" it, buy stocks, and then sell your stocks from within your retirement account to "buy cash", effectively reversing the location of cash and stocks, if interest rates ever rise. The reverse is trickier (if we move from a high interest rate environment to a low-rate one) because you could have capital gains baked into stocks held in taxable that make liquidating those stocks to reverse stock/cash positions cost you money. However, that's a problem for the future.

Suppose you have about a 75-25 split between taxable and retirement account assets. Keep your bonds in the retirement accounts for now, since they are spitting off dividends every 6 months that are taxed. If the interest rate environment changes (gets higher) then shifting bonds into taxable and cash into the tax shelter would be prudent, and can be done "tax-free" in the same manner as the stock/cash location switch. In a higher interest rate environment, it is more important to shield cash in the tax shelter, even though long-term bonds will [almost] always yield a higher rate, because there's the potential for tax-loss harvesting those long-term bonds if they are held in taxable.

The idea of maintaining your own individual PP in taxable, and a second isolated PP in your 401k, and a third isolated PP in your spouse's accounts seems like a terrible idea. The only benefit could be to ensure reduced volatility in any of those account locations. Because if you split across account locations, for example if you held all your bonds in your 401k and everything else in taxable, and interest rates rise, then the value of the 401k will drop. You will be compensated by a rise in your taxable assets, but you essentially lose tax-sheltered space due to the decline in 401k overall value.

That could be a concern but you might actually prefer if your 401k dropped in value and your taxable accounts went up in value because your taxable accounts have post-tax money in them and your 401k has pre-tax money in it so all else equal, $1 in taxable in worth more than $1 in a tax-deferred "traditional" 401k. Thus, if one of those amounts has to drop 20%, I'd rather the 401k drop 20%. Then again, in the case of a Roth IRA/Roth 401k, $1 in there is more valuable than $1 of taxable assets due to the value of the tax shelter.

[Xan]

in the case of a Roth IRA/Roth 401k, $1 in there is more valuable than $1 of taxable assets due to the value of the tax shelter.

This is the primary reason that got me thinking about doing a separate PP in each account (by "account" I mean tax treatment class), which I ultimately did.

Trying to consider investments in taxable, post-tax (Roth) and tax-deferred to be one single PP is (well, seems to me) extraordinarily complex.  Not only that, it depends on knowing the value of a lot of variables in the far, far future, which is obviously impossible.

In order to know I have 25% in each asset class, I need to know what my marginal tax rate will be when I take the money out.  That's decades away (maybe).  Will I be Mr Money Mustache with very low income and have 0% capital gains?  Maybe.  Will I have significant passive income from my successful business?  Maybe.  Will all the rules have changed by that point?  Maybe.  And of course I won't be taking it out in one fell swoop, so things can change midstream.

Assuming I know anything about that future, which I don't, then I would need to come up with formulas to convert taxable, post-tax, and tax-deferred money into some normalized dollar amount, and balance that.  I'd rather concentrate on my career.

I'm comparing apples to apples within each tax treatment class by having a separate PP in each one.

[Pointedstick]

That's basically my exact line of thinking, Xan.

[Tyler]

The idea of maintaining your own individual PP in taxable, and a second isolated PP in your 401k, and a third isolated PP in your spouse's accounts seems like a terrible idea. The only benefit could be to ensure reduced volatility in any of those account locations. Because if you split across account locations, for example if you held all your bonds in your 401k and everything else in taxable, and interest rates rise, then the value of the 401k will drop. You will be compensated by a rise in your taxable assets, but you essentially lose tax-sheltered space due to the decline in 401k overall value.

Maintaining separate PPs works for me exactly for the volatility reason you specify, and is magnified by the special situation that we plan to retire well before normal retirement age.  Our taxable investments will need to support us for potentially 20 years before we'll have access to retirement savings (72t and Roth rollovers aside), so the idea of our taxable account not performing like a full PP in its own right is not practical.  If I planned to retire at 60 I might have a different approach.

Having separate tax-deferred PPs for myself and my wife is simply a marital satisfaction tool.  I am responsible for investments in the family, and part of demonstrating being a good steward of her money is to show that her retirement accounts are performing as expected.  Having hers and mine track differently may leave a poor impression even if, when seen as a whole, the multitude of accounts are fine.  She worked hard for her retirement funds, so maintaining her peace of mind is worth the separate PP.

Also, FWIW, I like my setup now with nearly equal PPs in taxable and tax-deferred accounts (about 60/40) as it provides me with future rebalancing options that I wouldn't have if everything was optimized for present-day tax efficiency.  For example, I'd much prefer to sell IAU in my IRA than in my taxable account to avoid large capital gains taxes, even though it's more advantageous to present-day tax bills to have all my gold in taxable.  I anticipate that flexibility will help keep me in preferred tax brackets some years.

[blackomen]

How would you rebalance if you had bonds and gold in IRAs and Stocks in taxable and one craters while the other shoots to the moon?  Being able to deal with that problem is a main reason I use the PP, and separating assets in taxable and tax-free defeats the purpose.

[Tyler]

Good point. Practically speaking, you'd have to start buying the other assets and would end up with stocks/bonds/gold/cash on both sides of the retirement account wall anyway. Just going ahead and maintaining separate PPs would be simpler in the long run.

[barrett]

Tyler, the situation you have laid out with your wife's PP investments is the exact same one that I find myself in with my wife. Actually, she doesn't even take much interest in it but she might ask how it's doing if I say something like "Good God, the stock market is tanking today!" I actually say stuff like that in an attempt to spark a modicum of interest! I am probably more concerned about protecting her hard-earned money than my own even though it's all part of the same general pie.

What Xan posted about all the tax & life unknowns down the line has been a consideration of ours (well, mine!) as well. I figure that if I can keep all our accounts at least close to proper PPs, then we have more options when we really need that money... I mean options that don't force us to change our investment philosophy.

Wish I were as young as some of you whippersnappers but that's a different issue.

[sophie]

I agree with TripleB that including both tax-advantaged and taxable assets in the PP can be very useful.  You can protect dividends and gains in tax-deferred or tax-free accounts, keep physical gold in taxable for its many benefits (including avoiding ETF expenses), pick assets to keep in taxable to let you tax-loss harvest, and keep cash exactly where it does you the most good.

This is kind of the opposite of the thread where I was whining about retirement accounts with no access to gold busting my rebalance plans, but not precisely. Depending on your tax situation, these kinds of balancing acts are too potentially beneficial to ignore.  I do suggest, though, keeping the PP limited to accounts where you can potentially buy all four assets, and only include retirement accounts if they are < 25% of your PP and aren't expected to grow faster than your other savings.

It's not that difficult to manage a spread-out PP...there are spreadsheets stickied somewhere that can help with the bookkeeping.

[barrett]

I do suggest, though, keeping the PP limited to accounts where you can potentially buy all four assets, and only include retirement accounts if they are < 25% of your PP and aren't expected to grow faster than your other savings.

Sophie, can you explain what you are getting at with the last part of this? I am not sure what you mean starting with "...only include retirement accounts..". My retirement accounts are a huge part of my PP and I expect them to grow faster than my other savings simply because I am at the very least deferring taxes for another several years. Thanks.

[sophie]

Sorry my wording may have been a bit confusing.

I meant, retirement accounts in company plans with restricted investment options that exclude one or more of the PP assets (usually gold, sometimes also bonds).  ESPECIALLY if you expect your contributions to these accounts to outstrip your PP contributions in taxable and to retirement accounts that you hold independently e.g. Roth IRAs.

It makes rebalancing into those excluded assets impossible, and those rebalances are one of the key features of the PP that give you those solid, even returns.

[barrett]

Thanks for clarifying, Sophie. I have been self employed all my life and don't need to worry about a company plan besmirching my PP allocations!

[sophie]

Lucky you!!!!

[TripleB]

in the case of a Roth IRA/Roth 401k, $1 in there is more valuable than $1 of taxable assets due to the value of the tax shelter.

This is the primary reason that got me thinking about doing a separate PP in each account (by "account" I mean tax treatment class), which I ultimately did.

Trying to consider investments in taxable, post-tax (Roth) and tax-deferred to be one single PP is (well, seems to me) extraordinarily complex.  Not only that, it depends on knowing the value of a lot of variables in the far, far future, which is obviously impossible.

In order to know I have 25% in each asset class, I need to know what my marginal tax rate will be when I take the money out.  That's decades away (maybe).  Will I be Mr Money Mustache with very low income and have 0% capital gains?  Maybe.  Will I have significant passive income from my successful business?  Maybe.  Will all the rules have changed by that point?  Maybe.  And of course I won't be taking it out in one fell swoop, so things can change midstream.

Assuming I know anything about that future, which I don't, then I would need to come up with formulas to convert taxable, post-tax, and tax-deferred money into some normalized dollar amount, and balance that.  I'd rather concentrate on my career.

I'm comparing apples to apples within each tax treatment class by having a separate PP in each one.

There's no need to make things complex. I see your point, and on the surface it's valid, but considering the fungible nature of money, it's a non issue.

Consider one example of a person with 50% of their money in a 401k, tax-deferred, and 50% of their money in a Roth IRA. Your argument is that you will have to pay taxes on the 401k money, so you need to reduce the total value of the account because you shouldn't consider the pre-tax value, only the post-tax value, since you only actually receive the post-tax value when you distribute.

What you're forgetting is you can swap up assets within the 401k, at any time, before making the distribution. Thus, while your point is valid on the total amount of the 401k not being available, it only matters if you want to calculate the total value of your overall portfolio, after taxes.

Suppose you elected to keep all of your bonds and cash in your 401k and all of your stocks and gold (via ETFs) in your Roth. At any time you can sell bonds within the 401k, and buy gold ETFs for the same amount with no taxable event. There's no need to reduce the holding value by your tax rate because you can easily shift the assets around within the separate accounts, through a non-taxable rebalance event, at any time.

There is more merit to the idea of considering the post-tax value of taxable holdings, because you can't rebalance them in without creating a taxable event. However, once you start selling those stocks, you'll have to pay taxes, but you can easily re-balance from within your tax-shelters to buy more stocks, and get back to 4x25 without any taxable-event. So it doesn't really matter that the stocks in your taxable brokerage account have a 50% cost basis and you'll have to pay capital gains tax on half the amount, because once you sell it, you just sell bonds/cash/gold within your 401k/IRA to buy more stocks, and you're back to the correct split without needing to worry about complex calculations.

This only works if you have a decent chunk of your assets in tax shelters. If you have 95%+ of your money in taxable brokerage accounts, then you're screwed because you can't re-balance in a tax-free manner anymore. Then again, if you're maxing out your retirement accounts each year to the IRS limits, and your additional savings beyond that maximum of $23k+/year are so high that the $23k/year only represents 5% of your total annual savings, then you probably don't need to worry about money because you're earning enough to save $500k/year after taxes. For regular people, if you do the right thing and max out your retirement accounts first, you'll easily have plenty of flexibility to rebalance from within your retirement accounts to get back to 4x25 and not need to concern yourself over the tax-basis of each account.

[rickb]

For regular people, if you do the right thing and max out your retirement accounts first, you'll easily have plenty of flexibility to rebalance from within your retirement accounts to get back to 4x25 and not need to concern yourself over the tax-basis of each account.

... as long as your retirement accounts offer a reasonable set of investments or, ideally, a brokerage window.  And if they don't, then when you retire you can roll these accounts into IRAs at a brokerage.  Check with your financial adviser before doing this since there are situations where it creates complications, see (for example) http://www.marketwatch.com/story/the-pr ... 2014-01-24.

[Xan]

TripleB,

My argument isn't that I have to reduce the value of the account.  The problem I'm pointing out is that you can't ever have a 4x25 PP split across multiple different tax treatments.

Let's say for the sake of argument that I'm implementing a 3x33 cashless PP.  (I'm not, but having three asset classes will make this simpler.)  I follow your scheme: I put bonds in my Roth, stocks in my traditional IRA, and hold gold in taxable.  I have $10,000 in each.

I have a balanced portfolio, right?  Except I don't.  $10,000 in taxable isn't the same as $10,000 in a traditional IRA which isn't the same as $10,000 in a Roth.  And in order to get them balanced, I would need to know the future, which I don't.

[rickb]

TripleB,

My argument isn't that I have to reduce the value of the account.  The problem I'm pointing out is that you can't ever have a 4x25 PP split across multiple different tax treatments.

Let's say for the sake of argument that I'm implementing a 3x33 cashless PP.  (I'm not, but having three asset classes will make this simpler.)  I follow your scheme: I put bonds in my Roth, stocks in my traditional IRA, and hold gold in taxable.  I have $10,000 in each.

I have a balanced portfolio, right?  Except I don't.  $10,000 in taxable isn't the same as $10,000 in a traditional IRA which isn't the same as $10,000 in a Roth.  And in order to get them balanced, I would need to know the future, which I don't.

You're missing the point - which is that (assuming you can invest in any of the 3 investments in each account) when you make a withdrawal from, say, your traditional IRA account, you can actually sell 1/3 of your withdrawal from each account, sell another 2/3 of your withdrawal from your IRA account, and buy 1/3 of your withdrawal worth of stocks in each of your other accounts.  You're still balanced.  And you've withdrawn however much you wanted to withdraw. Over time, you'll end up fragmenting your investments across your accounts.  But when you did this, did you pay tax on only your stocks, or did you pay tax on 1/3 stocks, 1/3 bonds, and 1/3 gold?

If any of the investments are available in any of the accounts (which must be true if you can create a PP in each account), then whenever you want you can convert them all to cash, withdraw whatever you want from wherever you want, and convert the cash back to your balanced portfolio with whatever investment you want wherever you want.  Of course, you wouldn't actually do it this way - but it demonstrates the point.  Stocks, bonds, and gold all have a particular cash value.  This cash value is fungible between your accounts. 

[Xan]

I'm not talking about withdrawing, per se.  I'm talking about staying balanced for the decades between now and withdrawal.  I want to have equal amounts of (in my example) bonds, stocks, and gold, and if each one is in a different tax treatment, then I have no idea whether the amounts I hold are the same or not.

[rickb]

I'm not talking about withdrawing, per se.  I'm talking about staying balanced for the decades between now and withdrawal.  I want to have equal amounts of (in my example) bonds, stocks, and gold, and if each one is in a different tax treatment, then I have no idea whether the amounts I hold are the same or not.

Seems like you're still not getting the point.

The tax you'll have to pay affects your overall after-tax net worth - but not how balanced you are.  Each account, regardless of what's in it, has a (pre-tax) cash value.  Your after-tax net worth is the total of all the cash values (which we're assuming are balanced) minus the tax you'll have to pay to withdraw this cash value (from all accounts). 

Let's say you have $G in gold, $S in stocks, and $B in bonds in an IRA, Roth, and taxable accounts (respectively).  Your total, after-tax net worth is

$T = ($G + $S + $B) - (taxdue(IRA) + taxdue(Roth) + taxdue(taxable))

This is looking at it as balanced.  The summands of the pre-tax total (left term) are equal, and the total taxes due (right term) are a function of how much is in each account regardless of what investment is in the account.  These tax amounts might not be equal per account, but so what?  If each investment is available in each account you can rebalance across accounts whenever you want, for example as you actually withdraw.

You seem to want to look at this way

$T = ($G - taxdue(IRA)) + ($S - taxdue(Roth)) + ($B - taxdue(taxable))

This is looking at as unbalanced.  The summands are the after-tax value in each account and these won't be equal due to different tax treatments.  But since you end up with the same $T in each case, you're free to look at it either way.  The total tax reduces your net worth by the same amount whether you subtract it per account or not.

Edited to make the signs correct in the balanced $T equation

[Xan]

There's no argument that the total is the same either way.  Of course it is.

What I'm claiming is that you're out of balance doing it that way.  You're overweight on the assets that have less tax due and underweight on assets that have more tax due.  When I have some time later I'll see if I can come up with an example.

[TripleB]

There's no argument that the total is the same either way.  Of course it is.

What I'm claiming is that you're out of balance doing it that way.  You're overweight on the assets that have less tax due and underweight on assets that have more tax due.  When I have some time later I'll see if I can come up with an example.

Xan,

I'm with you on being confused to this point in the past. I only recently realized that this thinking is flawed and it really doesn't matter what the tax basis of your investments are because you're still 4x25 balanced.

Suppose you have 4 separate accounts, and for simplicity, rather than call them by specific entities such as a 401k, let's use the term tax basis. Thus, each of your 4 separate accounts has a different tax basis, or how much you need to pay in taxes when you withdraw money from it. The tax basis might range from $0 in the case of a Roth IRA to 15% in the case of taxable long-term capital gains to 40%+ in the case of a 401k depending on your marginal state/federal tax rates.

None of that matters. As long as you're holding a 4x25 split in the total nominal amount, you're balanced because you're actually literally holding 4x25. So if stocks rally and go up 50%, you actually capture that 50% in the 1/4 of your portfolio that is holding stocks, whether those stocks are held in a Roth IRA, taxable account, or a 401k. You still got the exact same gain.

The confusing issue that comes into play is when you decide to sell those stocks for an withdrawal event. Depending on which location they are held, you have a different tax basis and have to pay taxes. However, what you could do, depending on where they are held, is "liquidate" cash asset that's held in a tax-shelter and buy stocks with that within the tax shelter. If you do this at the exact same time that you sell your stocks, then you maintain a 4x25 split and you've extracted the cash from your tax-shelter without actually touching that specific tax-shelter.

Since each dollar is fungible, it doesn't matter whether the stocks are held in a Roth, taxable, or tax-deferred account, because you can exchange those stocks for another asset, at any time, and if good planning is used, with no taxable event. Because each asset could fluidly be moved from one location to another, it wouldn't be reasonable to penalize certain locations (such as a 401k) and reduce the value of the underlying assets.

There is some validity to tracking the tax basis of your accounts, but except in extreme cases such as your Roth IRA is less than 5% of your total assets or your 401k is less than 5% of total assets or you need to liquidate 100% of your assets instantly, it's my opinion that it's safe to ignore the location of the assets when maintaining a 4x25 balance across accounts.