Generate Capital Gain to buy IBonds?

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Generate Capital Gain to buy IBonds?

Postby Brian2d » Thu Mar 14, 2013 11:52 pm

I have the option to do 1 of the following

1. Invest about 10,000 in Short Term Investment Grade in my Roth IRA.
2. Sell 10,750 in stocks, buy 10,000 worth of ibonds, and take invest the 10,000 in the IRA in Equity funds.
This option would generate about 3,000 in capital gains, which I figure would lead to about $750 in taxes (15% federal, 10% local-almost all would be LTCG)

Either way, I get to the same asset allocation.

I have to decide if the advantage of ibonds is worth generating this capital gain. I do not want to increase the value of my taxable accounts as I would prefer to maximize my 401K contributions (which are not yet at the max, though they're getting close). I have already made a Roth IRA contribution for 2012 and did backdoor Roth for 2013, as my income may or may not be over the limit.
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Re: Generate Capital Gain to buy IBonds?

Postby BL » Fri Mar 15, 2013 12:31 am

How many years of sub-2% I-Bond interest would it take to gain $750?
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Re: Generate Capital Gain to buy IBonds?

Postby STC » Fri Mar 15, 2013 9:54 am

If you goal is to max out your tax advantaged space, AND you are comfortable with your emergency liquidity position, AND you do not have enough income to do "all of the above," then:

- Max Pre-Tax 401k
- Contribute to post-tax 401k > roll over to tIRA > roll that over to rIRA

Dont eat the capital gains, unless you need a better emergency fund. And set up your asset allocation in the accounts according to your IPS...
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Re: Generate Capital Gain to buy IBonds?

Postby Bharat » Fri Mar 15, 2013 10:13 am

STC wrote:If you goal is to max out your tax advantaged space, AND you are comfortable with your emergency liquidity position, AND you do not have enough income to do "all of the above," then:

- Max Pre-Tax 401k
- Contribute to post-tax 401k > roll over to tIRA > roll that over to rIRA

Dont eat the capital gains, unless you need a better emergency fund. And set up your asset allocation in the accounts according to your IPS...


I am assuming that this feature is available only in some of the 401Ks. Does anyone know if ADP 401K service offers it? And is there a limit to amount that you can add post tax in 401K and rollover?
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Re: Generate Capital Gain to buy IBonds?

Postby STC » Fri Mar 15, 2013 10:20 am

Limit in post tax would be $33,500 per year, after the $17,500 in pre-tax.
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 10:44 am

To the OP - If you're in the 15% federal bracket and you realize a [mostly] LTCG, how much federal tax is due on the LTCG portion? That's a serious question for you.

Is there some detail you're not sharing or more to the story?
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Re: Generate Capital Gain to buy IBonds?

Postby Brian2d » Fri Mar 15, 2013 10:47 am

Thanks. This is not a question of maxing tax advantaged space. I am happy with my current contributions there.

This is a question of: Are I-bonds preferrable enough over a Vanguard bond fund in my IRA that it is worth it to generate the gains and pay about $750 in taxes, given that I can achieve my desired asset allocation either way.
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 10:51 am

and pay about $750 in taxes


What I'm hinting at is that you may have a faulty assumption baked into your decision making cake.
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 10:56 am

Let another Boglehead [Mike Piper] help.

Sneak peek "Just like before, any qualified dividends and long-term capital gains that fall in the 15% tax bracket or below will not be taxed"

http://www.obliviousinvestor.com/divide ... tax-rates/
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Re: Generate Capital Gain to buy IBonds?

Postby STC » Fri Mar 15, 2013 10:56 am

Brian2d wrote:Thanks. This is not a question of maxing tax advantaged space. I am happy with my current contributions there.

This is a question of: Are I-bonds preferrable enough over a Vanguard bond fund in my IRA that it is worth it to generate the gains and pay about $750 in taxes, given that I can achieve my desired asset allocation either way.


No one can answer that question, because no one can predict future returns. I will say however that starting ~-7.5% ($750 taxes on $10k investment), is going to be a tough nut to overcome in a low interest rate, low inflation environment.
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Re: Generate Capital Gain to buy IBonds?

Postby Brian2d » Fri Mar 15, 2013 11:04 am

Though I would have to pay $750 now, isn't that $750 gains that I would have to pay eventually whenever I sell this stock (perhaps long into the future). I know in general its a good idea to defer taxes for compounding purposes but if I'm correct it's not fully being 750 in the red because my overall basis on my taxable investments will have increased as a result.

It may still be worth it not to realize the gain however and just stay in a bond fund (I'll choose short duration now if I were to choose that).
'
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 11:10 am

You're in the 15% federal marginal tax bracket, right?

This option would generate about 3,000 in capital gains, which I figure would lead to about $750 in taxes (15% federal, 10% local-almost all would be LTCG)



Please show me your calculation for this.
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Re: Generate Capital Gain to buy IBonds?

Postby Brian2d » Fri Mar 15, 2013 11:24 am

No, I'm above 15% marginal, but the Cap Gains rate is 15% on LTCG.

My state marginal is 6.85 + 3.25 city = 10.1%, so that's where I got the 25% from.
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 11:27 am

Ahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh.

Gottcha - one of us was out-to-lunch. The good news for you is it was me! :oops:
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 11:32 am

Brian2d wrote:Though I would have to pay $750 now, isn't that $750 gains that I would have to pay eventually whenever I sell this stock (perhaps long into the future). I know in general its a good idea to defer taxes for compounding purposes but if I'm correct it's not fully being 750 in the red because my overall basis on my taxable investments will have increased as a result.

It may still be worth it not to realize the gain however and just stay in a bond fund (I'll choose short duration now if I were to choose that).
'


Now I'll offer my opinion. I would not realize the gain. You may have better options to avoid the gain in the future - a low income year, early retirement, maybe you will use highly appreciated shares as gifts or charitable contributions, etcetera. I can't see why you would take the gain now when you may very well avoid it in the future. The cost/benefit does not suggest it is a good idea. Just my $.02....
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Re: Generate Capital Gain to buy IBonds?

Postby Brian2d » Fri Mar 15, 2013 11:47 am

Thanks BBL. Another option is to not-reinvest distributions and then buy i-bonds with the distribution amounts. There's no reason I couldn't by i-bonds multiple times during the year, right? What's your thought on this?
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Re: Generate Capital Gain to buy IBonds?

Postby BBL » Fri Mar 15, 2013 11:57 am

Brian2d wrote:Thanks BBL. Another option is to not-reinvest distributions and then buy i-bonds with the distribution amounts. There's no reason I couldn't by i-bonds multiple times during the year, right? What's your thought on this?


You can certainly do that as well. I think I bonds are great and wish the limits were higher.

When stocks are doing well and you need to add to bonds that's a nice method to help keep you in balance and add to the I bond stash. When stocks are doing poorly and you're likely to need to add to the equity side you can always change the distribution option back to reinvest.

I suppose another method is to direct any federal tax refunds you may get to I bonds. I would mention that some even intentionally over-withhold just to get additional I bonds but I doubt that would do you any good because it would crimp your cash flow.
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Re: Generate Capital Gain to buy IBonds?

Postby Brian2d » Fri Mar 15, 2013 12:43 pm

Thanks....I'll probably do that.

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Re: Generate Capital Gain to buy IBonds?

Postby Watty » Fri Mar 15, 2013 12:53 pm

I have the option to do 1 of the following

1. Invest about 10,000 in Short Term Investment Grade in my Roth IRA.
2. Sell 10,750 in stocks, buy 10,000 worth of ibonds, and take invest the 10,000 in the IRA in Equity funds.


Your question has an unreasonable assumption since you have the get the money to deposit in the Roth from somewhere.

For a more reasonable question the amounts should be the same.

For a more "apples to apples" comparison you might look at a buying a $10,000 it the bond fund in the Roth or buying $10,000 in iBonds.

If you hold them both for a log until your are older than 59.5 and they double in value to $20,000 then once you cash them and take the money out;

1) From the Roth you have $20,000 with no taxes due.

2) From the iBonds you have $10,000 in taxable income, so in the 15% tax bracket you pay $1,500 in taxes and net $18,500.
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Re: Generate Capital Gain to buy IBonds?

Postby Brian2d » Fri Mar 15, 2013 1:27 pm

Watty-

I don't think you understood the question properly.
The IRA investment's already there, I will shift investment from bond to equity in the IRA if I buy IBonds to keep allocation the same.
If I buy the i-bonds I would get the money by selling from my taxable account and generating a $3000 gain, which I estimated would be $750 in taxes, which would account for the difference.

But I've decided instead to not reinvest dividends, buy I bonds with those, and rebalance my IRA accordingly, so I think I've resolved it.
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