Generating 2017 money in 2016

[Fermion]

As mentioned in another thread, we have done quite well so far in the market to the point that I would really like any additional investment income (interest, dividends, capital gains) to be in tax year 2017.

It is looking like our house is going to sell and with other cash from selling household items and various things, I have to put about half a million to work without making any 2016 income from it (for ACA reasons).

If I put it in SPY it will generate about $5,000 in dividends for this year, which is too much. I could put it in something which doesn't pay dividends like Berkshire but not sure about the wisdom in that.

So here I am thinking about writing puts against SPY which expire in 2017, and thus the income from selling them would be deferred to that tax year. Am I missing any particular feature of ACA MAGI calculations which would be violated by this?

 

[jim584672]

Put it in gold (GLD)?

 

[Fermion]

Put it in gold (GLD)?

Yeah, no. I was thinking of a lower volatility investment.

 

[Senator]

If I put it in SPY it will generate about $5,000 in dividends for this year, which is too much. I could put it in something which doesn't pay dividends like Berkshire but not sure about the wisdom in that.

Figure out how much in ACA you are missing, compared to how much in market gains and dividends you are going to forgo.

Maybe it's best to just put it in a cashiers check and bring it home. Or put off any healthcare visits for a few months.

Do not be penny wise and pound foolish. $5K in dividends buys a lot of insurance. If the market goes up 2%, that is a bunch more.

 

[Fermion]

Figure out how much in ACA you are missing, compared to how much in market gains and dividends you are going to forgo.

Maybe it's best to just put it in a cashiers check and bring it home. Or put off any healthcare visits for a few months.

Do not be penny wise and pound foolish. $5K in dividends buys a lot of insurance. If the market goes up 2%, that is a bunch more.

It is not like you are missing out on the $5K. Assuming you could get in the 3% to 3.5% range for selling the puts (have not researched this fully to get a price point), you would be making $15,000 to $20,000. It is just that you would not have to include that income on your 2016 taxes and it would not go on your 2016 MAGI for ACA calculations.

The question is, will the market go up, go down, or stay flat? If it goes down or stays flat, you are much better off having sold puts than holding stock. Now we have near 100% of our 401K and IRA in stock, so really we would benefit still from a big market rise.

I am just mulling it over right now. I did not expect to have met my income goals before May and trying to figure out what to do with the rest of the year that is better than mattress stuffing.

 

[NW-Bound]

Writing Jan 2017 puts on S&P at 5% down from present value gets you 5% for the premium (as true of this writing).

Market stays flat, you get 5% return in 9 months (6.7% annualized), not shabby at all.

Market goes down more than 5%, well you "get" to buy S&P at a price 10% lower than it is now (counting the option premium). Another way to look at this is that you do not lose money until the S&P drops more than 10%.

Market goes up big, you miss out and have only that 5% gain. Now, you have to decide the likelihood of that.

 

[Fermion]

Would an early assignment on those Jan 2017 puts place the income from the put sale into 2016 or would that income only be realized if you sold the shares assigned to you? In other words, would the put premium be added to the basis of the stock you had to buy?

I remember there being something about within three strike prices of the actual market value of the stock when the put is written but that may have been for covered calls and LTCG treatment.

I don't care about early assignment if I can just hold the stock and not realize the gain until I sell it.

 

[NW-Bound]

Yes, if the options get assigned, you reduce the stock basis by the option premium. This stock basis is used for gain/loss taxation only when you finally sell.

Of course, if the option expires worthless (the desirable outcome here), the premium is taxed in 2017 when the option expires and the gain is "realized".


PS. If the option gets assigned, whether early or not, the assignment date is used in the determination for short or long-term cap gain/loss when you eventually sell. The date you sell the option does not count in this case.

 

[Spudd]

You could go for an equity growth fund, they seem to have lower yields than S&P 500.

Examples:
https://www.ishares.com/us/products/239583/ishares-morningstar-midcap-growth-etf
https://www.ishares.com/us/products/239580/ishares-morningstar-largecap-growth-etf
https://www.ishares.com/us/products/239709/ishares-russell-2000-growth-etf
https://www.ishares.com/us/products/239762/ishares-sp-midcap-400-growth-etf

 

[Spudd]

To add a thought to my above post, I find it interesting that it doesn't seem like you have any no-dividend funds in the US. Here in Canada, there are swap funds that somehow magically convert dividends into future capital gains, that would be perfect for a situation like this. But my google-fu couldn't find any such thing for the US.

Normally the situation is reversed, you guys get all the good stuff!

 

[Totoro]

Can you buy this one?
iShares MSCI World UCITS ETF (Acc) IE00B4L5Y983

It's an accumulating ETF based on the MSCI World index. Basically Vanguard VT lookalike, with slightly higher expense ratio. Based in Ireland for tax purposes.

Edit: Linky: http://www.morningstar.com/etfs/xlon/iwda/quote.html

 

[Fermion]

So I am looking into some new accounts for this put selling strategy and Scottrade has a promotion for up to $2,000 and 50 free trades.

Question: If you were to sell cash secured puts on SPY or a similar broad index for expiration next year, can you actually do anything with the cash sitting in the account? Do any of you who do this employ some strategy to earn something with the cash while you are short the put? It is possible the only thing that is allowed is for the cash to be in a money market fund in the broker account, which pays 0.001% or something. I think I would prefer in that case to not even be in a money market (don't ever want to break the buck).

I was just not sure if there were a way to get a very short CD that is breakable if needed to cover an early exercise of the put.

 

[Fedup]

I've always have it in money market at Scottrade. But they let you trade on your cash. It's not like an IRA.


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