PSLDX during FIRE and/or ex-pat status

[sigma_frq1]

Hi,

I came here while researching PSLDX and FIRE (early retirement) aspects. I want to understand two things.

1. I know PSLDX is not recommended in a taxable account. But how would it look like in taxable if want to do early retirement? Since there will be no other significant income, does the tax treatment improve, such that it can be viable?

2. What if you also become an ex-part in the near future. Does anyone know how that scenario should be evaluated in terms of taxes?
I believe there is ~$107 k of foreign income exemption, but instead, here the main income is from PSLDX. I'm not sure how to understand this.

Thanks for any guidance on this.

 

[Alan]

I have no idea about PSLDX but assuming you are a US citizen then if you go live in another country all worldwide income, including that from PSLDX will be taxable by the USA and the country you are living in will also likely tax most US based income including that from PSLDX, possibly treating it as a PFIC.

If you EARN income in a foreign country then the first $107k can be exempt from US tax using FEIE form 2555. Most other foreign income (with some exceptions) is taxed by the USA.

 

[sigma_frq1]

Yes, US citizen. But looking to be ex-pat.
So income from US based funds/ETFs, like PSLDX, SPY, QQQ, VTI, are just taxed in the usual way? i.e., so special consideration for residing outside the US?


Thank you

I have no idea about PSLDX but assuming you are a US citizen then if you go live in another country all worldwide income, including that from PSLDX will be taxable by the USA and the country you are living in will also likely tax most US based income including that from PSLDX, possibly treating it as a PFIC.

If you EARN income in a foreign country then the first $107k can be exempt from US tax using FEIE form 2555. Most other foreign income (with some exceptions) is taxed by the USA.

 

[Alan]

Yes, US citizen. But looking to be ex-pat.
So income from US based funds/ETFs, like PSLDX, SPY, QQQ, VTI, are just taxed in the usual way? i.e., so special consideration for residing outside the US?


Thank you

The US has "citizenship based taxation" which means that it taxes its citizens no matter where in the world they live. (Bolded text is mine below)

https://www.taxesforexpats.com/expa...-Based-Taxation-International-Comparison.html

Systems of personal income tax vary enormously around the world. The differences are big and small, simple and complex. Some countries' personal income tax code consists of one word - "none" - while other countries' consist of volumes and volumes of intricate details.

However, almost all nations are unified on one point: a country only taxes non-residents on, at most, income earned within the country. Residents are fully taxed by the country according to its tax code. But if you don't live there, then your personal income tax obligation to that country is limited to, at most, tax on only the income earned within that country. This is the essence of what is called "territorial taxation".

The United States is an exception.

"The USA is one of the few countries of the world which levies personal income tax on all its citizens: not only on its residents - citizens or non-citizens - but also on its citizens who do not live in the country. All citizens of the United States are taxed under the same personal income tax system, regardless of whether they live in the country or abroad."

This citizenship-based taxation is very unique. How unique?

Only the U.S. and Eritrea

 

[Alan]

Yes, US citizen. But looking to be ex-pat.
So income from US based funds/ETFs, like PSLDX, SPY, QQQ, VTI, are just taxed in the usual way? i.e., so special consideration for residing outside the US?

Not only will those funds be taxed by the US in the usual way, any foreign fund you may invest in will be treated as a PFIC and taxed punitively by the USA.

The IRS also ignores many of a countries' tax shelters. for example here in the UK the first £1,000 of interest is tax free, and there are various types of tax free accounts where after tax money can be saved and grow tax free but they are all fully taxed by the IRS.

 

[ncbill]

There is a (very) long thread on PSLDX over on bogleheads forums.

 

[sigma_frq1]

Not only will those funds be taxed by the US in the usual way, any foreign fund you may invest in will be treated as a PFIC and taxed punitively by the USA.

The IRS also ignores many of a countries' tax shelters. for example here in the UK the first £1,000 of interest is tax free, and there are various types of tax free accounts where after tax money can be saved and grow tax free but they are all fully taxed by the IRS.

wow! Unbelievable. But good to know regardless. Thank you.

 

[sigma_frq1]

There is a (very) long thread on PSLDX over on bogleheads forums.

Yes I have gone through it, but it is for general investing and therefore the strong recommendation to not hold it in taxable. Not much discussion around using it for FIRE, hence I posted a dedicated question .

 

[sigma_frq1]

Any other thoughts or comments on 1.
(I think I am clear on 2.)

 

[brett]

Two of my former colleagues, both expats, gave up their US citizenship because of the tax implications and the hassle of reporting each year. They were both well established in another country with no intention of returning to the US.

It was apparently quite a process that involved getting a clearance letter from the IRS.

They were very surprised when they attended a presentation from US consulate officials. The room full of people in their city who were interested in doing the same... and it seemed to them for the same reason.

 

[Out-to-Lunch]

Any other thoughts or comments on 1.
(I think I am clear on 2.)

You had not explicitly asked for this before, but your latest post inviting comments makes me think this is appropriate.

The fund in question has had a remarkable run of outperformance. If you are thinking that you can swing early retirement based on the expectation that such outperformance will continue in the future, then I think you should NOT rely on such expectations.

 

[sigma_frq1]

Hi,


I am not thinking that, what I am thinking about is whether it will be viable or not.


I want to know what sort of income I can get using PSLDX. Any thoughts on that?
That should help me determine.

You had not explicitly asked for this before, but your latest post inviting comments makes me think this is appropriate.

The fund in question has had a remarkable run of outperformance. If you are thinking that you can swing early retirement based on the expectation that such outperformance will continue in the future, then I think you should NOT rely on such expectations.

 

[MichaelB]

Hi,


I am not thinking that, what I am thinking about is whether it will be viable or not.


I want to know what sort of income I can get using PSLDX. Any thoughts on that?
That should help me determine.

If you’re not clear what sort of income the investment will provide, it’s probably safe to say this investment may not be a good choice for you.

What are you looking for with this fund? Is it intended to be a core holding or one of many funds? What % of your portfolio do you intend in putting into it. Finally, what is it about this fund that interests you so much?

 

[RetiredAndLovingIt]

Not only will those funds be taxed by the US in the usual way, any foreign fund you may invest in will be treated as a PFIC and taxed punitively by the USA.

The IRS also ignores many of a countries' tax shelters. for example here in the UK the first £1,000 of interest is tax free, and there are various types of tax free accounts where after tax money can be saved and grow tax free but they are all fully taxed by the IRS.

Alan, did you ever become a US citizen, I'm assuming you were born in the UK?
I've been a citizen for many years but it's crossed my mind more than once to buy a small house and live back there for a few months a year on the beach where I grew up. I'm not rich by any means so I doubt the US government would target me as long as I filed a US tax return yearly and did not work over there.

 

[Alan]

Alan, did you ever become a US citizen, I'm assuming you were born in the UK?
I've been a citizen for many years but it's crossed my mind more than once to buy a small house and live back there for a few months a year on the beach where I grew up. I'm not rich by any means so I doubt the US government would target me as long as I filed a US tax return yearly and did not work over there.

Yes, we all became US citizens last century

If you did buy a small house and lived there a few months a year you would probably avoid paying UK taxes. Just be sure you look up the UK statutory residence test. This is what we planned to do in 2016 when we moved into a rental in May of that year, but after 6 weeks we loved it so much we decided to make the move permanent.

Fortunately access to our Vanguard accounts and US bank account has turned out to be pretty easy and unlike the USA the UK has a huge list of foreign funds that “report into” HMRC so get the favorable tax treatment for qualified dividends and capital gains.

 

[sigma_frq1]

If you’re not clear what sort of income the investment will provide, it’s probably safe to say this investment may not be a good choice for you.

What are you looking for with this fund? Is it intended to be a core holding or one of many funds? What % of your portfolio do you intend in putting into it. Finally, what is it about this fund that interests you so much?

Presently, I want to understand what income can I expect (roughly) if I move all my non-401K portfolio to this fund?
I like this fund because it provides 2x leverage (and of course, the associated higher risk).

 

[bada bing]

Presently, I want to understand what income can I expect (roughly) if I move all my non-401K portfolio to this fund?
I like this fund because it provides 2x leverage (and of course, the associated higher risk).

The income (dividends) from PSLDX are extremely variable. The primary investment of the fund is S&P e-mini futures, not the underlying equities. The quarterly gains don't accumulate as increasing NAV, they are distributed as quarterly dividends. Last quarter the dividend was ~10%. There was a year about 10 years ago where the dividends for the year totaled 60%. There have been years where the payout wasn't much at all.

I've had a position in PSLDX since 2010, held in an IRA. Because of the dividend payouts, the fund is very tax unfriendly if held in a taxable account. The relatively high returns are from leveraging the S&P500, not stock picking or market timing. Because of this you can expect it to return more or loose more than the S&P500, depends on which way the market is trending.

Study what you're buying before dumping a large percentage into it. It is not a typical stock fund.

 

[sigma_frq1]

Because of the dividend payouts, the fund is very tax unfriendly if held in a taxable account.

Any chance you can illustrate that with a comparison with a tax friendly fund (like NTSX). Two hypothetical taxable portfolios, one PSLDX and one NTSX - what would that look like?

 

[ncbill]

Any chance you can illustrate that with a comparison with a tax friendly fund (like NTSX). Two hypothetical taxable portfolios, one PSLDX and one NTSX - what would that look like?

Head on over to Portfolio Visualizer and plug in whatever funds (over whatever time periods) you want to backtest:

https://www.portfoliovisualizer.com

 

[sigma_frq1]

Head on over to Portfolio Visualizer and plug in whatever funds (over whatever time periods) you want to backtest:

https://www.portfoliovisualizer.com

Hi, I know I can use that tool to get historic performance, but it does not account for taxes:

"Hypothetical returns do not reflect trading costs, transaction fees, or taxes."


I want to know what a rough comparison would be:


Person A: NTSX in taxable, withdrawing some % every year, paying taxes
Person B: PSDLX in taxable, withdrawing some % every year, paying taxes

 

[Out-to-Lunch]

Hi, I know I can use that tool to get historic performance, but it does not account for taxes:

"Hypothetical returns do not reflect trading costs, transaction fees, or taxes."


I want to know what a rough comparison would be:


Person A: NTSX in taxable, withdrawing some % every year, paying taxes
Person B: PSDLX in taxable, withdrawing some % every year, paying taxes

And you want bada bing or ncbill, rather than yourself, to do this comparison?

 

[bada bing]

I can't do a detailed tax analysis, but I can give you a couple data points: A few years ago PSLDX had a 60% annual return and because of the structure of the fund, this gain was almost entirely distributed in that year as dividends. So far this year the total return is only 11.5%, but again fully distributed as dividends. Compare that to SPY, that pays 1.5% dividends and the rest of the gains are unrealized until cashed in.

PSLDX is not going to give reliable, consistent annual dividends. It has a higher beta than an index fund. On the years it does really well, you will be taxed on the entire annual gain in that year. Say we get lucky and PSLDX has a 50% gain some year in the future and you have $500K invested in a taxable account. You're going to pay taxes on $250K in dividends that year. No opportunity to level taxes over years or to leave a stepped up basis.

JMO, but I wouldn't hold it outside of a retirement account. I hold mine in my Roth exclusively.

 

[ncbill]

Hi, I know I can use that tool to get historic performance, but it does not account for taxes:

"Hypothetical returns do not reflect trading costs, transaction fees, or taxes."


I want to know what a rough comparison would be:


Person A: NTSX in taxable, withdrawing some % every year, paying taxes
Person B: PSDLX in taxable, withdrawing some % every year, paying taxes

You'll probably need to construct a spreadsheet with annual returns (based on the above historical results) decreased by your tax rate in each specific year.

 

[sigma_frq1]

And you want bada bing or ncbill, rather than yourself, to do this comparison?

I did not ask them to do anything
I shared what I was looking for, after which there are several possibilities:


- Maybe someone is aware of a tool and they can mention it.
- Maybe someone has already seen the comparison elsewhere, and they can point me to it.
- Maybe it's a cinch and someone can tell me how to do it myself.
- Maybe it's arduous and someone can tell me that also.

 

[sigma_frq1]

I can't do a detailed tax analysis, but I can give you a couple data points: A few years ago PSLDX had a 60% annual return and because of the structure of the fund, this gain was almost entirely distributed in that year as dividends. So far this year the total return is only 11.5%, but again fully distributed as dividends. Compare that to SPY, that pays 1.5% dividends and the rest of the gains are unrealized until cashed in.

PSLDX is not going to give reliable, consistent annual dividends. It has a higher beta than an index fund. On the years it does really well, you will be taxed on the entire annual gain in that year. Say we get lucky and PSLDX has a 50% gain some year in the future and you have $500K invested in a taxable account. You're going to pay taxes on $250K in dividends that year. No opportunity to level taxes over years or to leave a stepped up basis.

JMO, but I wouldn't hold it outside of a retirement account. I hold mine in my Roth exclusively.

That's very helpful actually! Thanks for the more detail on this.