I am sometimes amazed at the charlatans that offer 401ks to small companies.
My wife was at a startup where the 401k was through some company I never heard of, and there wasn’t a single index fund offered. All the offerings were 1%-ish on fees.
Once she left that company priority one was to get the money over to her IRA. Something which, by the way, the made as difficult as possible.
Probably a wise approach. The publicly available information is only a small part of the picture.
For example, I then held a few stocks from ‘Business development’ (BDC) companies, which supposedly operate by making loans to smaller companies trying to grow their businesses.
Now you wouldn’t think that this sector would have much to do with mortgages, surely?
But when it turned out that a lot of investment ‘instruments’ were actually packaged worthless subprime mortgages, many of those BDCs crashed to zero very quickly.
Something was going on under the table that was technically legal at the time but didn’t have to be disclosed under the existing ‘rules’.
Money is, in essence, just a fiction that we’ve all created, as a useful mechanism for exchanging labor.
If you think purely in the terms of that fiction, everything can crash and burn and havoc reins free. But the reality is that we could all just ignore our money, go in to work, do our job, keep the lights on, and deliver food around. Money is nice for helping to organize all of that but it’s not necessary. All that’s necessary is the understanding that if we don’t go to work then the food stops and you and I and everyone dies.
On the day that the money system gets so thrown out of wack that the numbers simply don’t match the daily experience, the governments of the different nations will just pass a law to reset the local currency or whatever. It’s a fiction. You can just arbitrarily do whatever you want with it to get it back to where it should be. If all the factories and farms and laborers are all still there and able to do everything, then there’s no genuine issue that’s not imaginary. Just imagine up new exchange rates for the money, force prices back down to a sane number, exclude nations that are issuing nonsense financial numbers from your exchange systems, etc. The money can be made to match the reality on the ground - or close enough to it, that you can get it back to where the market doesn’t have to go completely insane to mend it back to something reasonable.
What freaks me out a little bit is that most of us don’t actually have money. We have data on a server somewhere.
From your vantage, a server might appear like some ethereal fantasy. But there really is a physical device, with a physical storage medium. The owner is likely (by law) taking periodic backups and (in the US) storing that in a subterranean archive.
People work pretty hard to ensure that your financial numbers are eternal.
Plus, we’re talking about market confusion, not mass EMP warfare.
Somebody wittier than me could probably improve this attempt at sagely advice:
“Never attend a free retirement seminar where there’s complimentary food”.
I guess you’re in the camp of those who think that there are enough negative feedbacks that the system will self-correct.
I hope you are right. The global economic system is so complex that I’m sure nobody can really understand it or model it.
Yes, you are correct. You can buy and sell assets within a qualified retirement account without worrying about basis and capital gains. And you are taxed as if it is ordinary income when you withdraw your money. (As long as it isn’t an early withdrawal, of course.)
But you are going to pay the CG tax at some point, correct? I don’t see how it might benefit a person to shift the basis from one investment vehicle to another.
Anyway, that’s probably a discussion for a different forum. Interesting concept, however.
Of course the IRS is going to get its pound of flesh sooner or later.
But we have been discussing whether it would be prudent to move assets to less volatile instruments to reduce risk.
And unless your assets are in tax-deferred accounts, a move is considered as a sale followed by a purchase. The IRS treats that sale as a taxable event when it happens.
Yes, that’s precisely what I said in my earlier post. And I asked why it would be advantageous to defer capital gains, as suggested by @OldOlds.
Anyway, as I also stated earlier, that discussion probably does not belong in this thread.
Back on topic, I am of the opinion that bonds are a good thing in which to invest right now. If, of course, you plan to hold them to maturity.
Seems obvious to me.
If I own $10K of ABC that has appreciated and I could swap it for $10K of XYZ, and keep the same basis in XYZ as I had in ABC, then I would owe zero CG tax now. I’d owe more tax later when I finally sold the XYZ, but meantime the money I did not have to send to now IRS is earning growth, interest and dividends for however many years.
Carried far enough along, I could just keep swapping stock for stock and deferring CG taxes until I died and my heirs got the full step up in basis with me having paid $0 in CG taxes over the entire course of my lifetime. How nice for me. And for them. Not so nice for IRS who’d have gotten no revenue from me.
That’s the advantage.
I have both 401k and after-tax accounts. I faced a tradeoff in deciding on the asset blend in each.
On the one hand, you don’t want the retirement account to be too stock-heavy.
But you want enough stocks in it that you can move things around without having to pay capital gains taxes.
I decided to focus on more conservative stock and stock/bond funds in the after-tax accounts. To decrease the likelihood that I would need to pay capital gains taxes if I moved things around.
My 401k has about 25% in S&P funds, which is enough to respond to corrections.
I guess I’ll see how that works out over the next few years.
Maybe I’m missing something obvious, but ISTM that your money would have done the same thing if you had left it in stock/fund ABC. Even if there’s a tremendous growth difference between the two, you haven’t gained anything beyond deferring when you pay the tax.
The underlying assumption is the person wants to buy XYZ and wants to sell ABC to fund that purchase. IOW, their estimate is that XYZ will be more profitable in the future than ABC will be. Or they need to rebalance e.g. large cap for small, or whatever. They want to keep the value that ABC represents in the market, but not in that particular bit of the market.
The whole point is that CG tax represents a drag on altering your investment posture that the other poster wishes would go away. Conversely, in a traditional or Roth IRA or 401K those same moves are tax-frictionless.
Quite right. But paying the same dollar amount of tax later is always better.
Inflation, time value of money, opportunity to borrow against a larger balance all work better when you pay the same dollars of tax later, not earlier. And best of all there’s stepped up basis at death. Then there’s no CG tax whatever.
I’m not suggesting a new loophole, however. I’m suggesting a reform that would (say) allow money 100% re-invested within 2 days to stay at the original basis. Personally I don’t think the basis should reset when it goes to one’s heirs*, so I’d happily give that up in exchange.
*There should just be a simple, flat amount that’s tax exempt when inherited.
There is the possibility (quite remote, in my case) that your income level might rise such that your CG rate is now 20%, rather than 15%.
In general I agree w your sentiment. As you can see from my earlier posts.
But …
This would in effect is make all the rich investment banks and bankers totally tax-exempt. it’s bad enough they have tricks to pay low CG tax rates on what’s really ordinary income. But tax-exempt everything they do? Probably not a great idea.
Yeah you could limit it to individuals, not businesses. You could put some sort of annual cap on it. etc.
Or simply change the tax law so the first e.g. $100K of CG per year is totally untaxed and the current CG taxes and rates apply only to the excess. The lower you place that threshold, the more the benefit is aimed only at the small investor with a modest portfolio. For some moderately fat cat who routinely has $500K of CG per year, getting that cut to $400K taxable is a gift, but one worth only $15K-$20K. Hell, they probably spend that in property tax payments every month.
The point there being that it would enable a large alteration in small investor behavior while not much changing the tax and hence behavior landscape for the rich. To the degree the small investor can have all their investments optimized without tax drag considerations should collectively result in more wealth building for the small investors as a whole.
Sorry, I guess I inadvertantly introduced a bit of a red herring.
The main point of the OP was reducing risk by moving assets to less volatile instruments.
The fact that this is likely to result in capital gains tax is an unfortunate side effect.
Holding to maturity is a key point there. Bonds and bond funds do of course fluctuate.
So if you are thinking of them as something you may trade, I would not be a fan of bonds at the moment. Given that you can get pretty much as good a rate from a money market fund as from bonds in the current interest rate environment, why take on the risk?
Agree that bond trading is not a winning game for smallholders. Bond holding certainly can be.
I’ve got a chunk of money in a money market (“MM”) fund and also a chunk of money in a now 2-year treasury bond ladder that I’ll extend by two additional years sometime this year. So by year end it’ll be a 3 year bond ladder. It started out longer, but we’ve been eating the early dates and not extending.
Anyhow, the whole tradeoff between buying e.g. a 2-year treasury and putting the same dollars in a MM fund is what happens to MM rates over the next 2 years. Regardless of duration, the bond yield to maturity is fixed the moment you buy it, whether at a premium, par, or discount to face. OTOH, the money market rate might drop to darn near nil or the money market rate might spike over the same timeframe. The risk of a losing decision runs two ways, not one.
Right now, MM rates are comparable to 2- or even 5- year bond yields. That’s often not true, and the MM is usually the lower yielding investment. So is the fact that right now MM rates are anomalously relatively high a sign they’re going to regress to the mean? Or a sign they’ll be staying up for [reasons]?
Hellifino. But that’s the decision your tea leaves need to help you make.
If we are concerned about political risk there’s another factor to consider.
MM funds are essentially commercial paper. During the great rout of 2008 they were going to “break the buck” until the Feds stepped in and did something that was quite argualbly illegal in promising to support the system. Had that happened, the contagion that “all paper assets are worthless” would have spread into MMs and probably taken down the whole banking system. Does the current regime have the nous and discipline to do the right thing if that situation recurs?
Conversely, the US Treasury is looking kinda wobbly & confused right now too.
So which of these assets really has better insulation from which political risks? Is the difference enough to matter? Time to consult your tea leaves again.
I am enamored of SPHY. It’s a nice high yield corporate bond fund that’s delivering around 7.5%
My MM (SPAXX) is down to 4%, which really isn’t giving me much above inflation.