Thank you all for thought provoking questions and comments. I agree with Rick E's points.
Order of Operations: Rebalancing occurs at the start of each year, before any account deposits, withdrawals, or growth is calculated. Someday I will add a section to the user manual documenting the order of operations.
Lots: I do not foresee that Pralana will track lots as would be needed for LIFO, FIFO, etc. anytime soon, if ever. For one thing, Pralana's 'Taxable' account is an aggregation of possibly many taxable accounts you may have. Second, you may well have large numbers of lots going back many years including one for every dividend reinvestment. Sure, Quicken can handle it. But Quicken is not running 1,000 Monte Carlo iterations across 40 years each (with internal iterations to calc Roth Conversion amounts and all tax forms/calcs, etc.) while the user waits.
Unrealized LTCG by asset class: Currently you specify a single unrealized LTCG amount for each of your individual account entered and they are aggregated to a single amount for Pralana's virtual 'Taxable Investment' account. Let's say it is $100K. Today, Pralana Online (and PRC Excel) track unrealized LTCG at the account level.
With the upcoming change to support realizing LTCG on annual rebalancing, Online will track the unrealized LTCG by asset class. At the start of your first plan year, the $100K will allocated to your asset classes proportionately, based on your initial asset allocation.
But based on this forum discussion, I see that this is not a good assumption and that Online should allow you to specify your own distribution of the initial $100K among asset classes.
This can be problematic. Let's say you set your allocation to 50/50 Large Cap/Small Cap, define the initial unrealized LTCG as $40K Large Cap/$60K Small Cap, then go back later and change your allocation to:
- 50/50 Large Cap/International Stocks...no more Small Cap. What happens the to $60K unrealized LTCG you allocated to Small Cap?
- 95/5 Large Cap/Small Cap: Your Small Cap unrealized LTCG may exceed its balance.
Setting aside the messy details, I can either:
- a) delay implementation until an input screen is created to allow this, or
- b) implement the realization of LTCG on rebalancing in 2-steps: 1: get it working, 2: add the input screen for initial unrealized LTCG by asset class.
I will probably do the 2-step implementation as the input screen and handling the edge cases will be tricky.
@cstone responding to:
”Let's say you set your allocation to 50/50 Large Cap/Small Cap, define the initial unrealized LTCG as $40K Large Cap/$60K Small Cap, then go back later and change your allocation to:
- 50/50 Large Cap/International Stocks...no more Small Cap. What happens the to $60K unrealized LTCG you allocated to Small Cap?
- 95/5 Large Cap/Small Cap: Your Small Cap unrealized LTCG may exceed its balance.”
In the taxable account, the capital gain consequences of rebalancing could perhaps be modeled as a sale followed by a matching purchase. For example, eliminating the small cap position would realize all the unrealized capital gains therein. Likewise, if the small cap balance is reduced, even drastically, the unrealized gain in the position could perhaps be realized in proportion to the reduction in the balance
@cstone responding to “Order of Operations: Rebalancing occurs at the start of each year”
@cstone responding to “With the upcoming change to support realizing LTCG on annual rebalancing, Online will track the unrealized LTCG by asset class.”
I really like this proposed change! I am looking forward to it.
(There is another thread about how Pralana handles LTCG withdrawals, "Strategy for Withdrawing LTCG from Taxable Account", but the discussion here Advanced Portfolio Modeling-dynamic reallocation" seems to have evolved to the same topic, so I am not sure where to post.)
@cstone My two cents, pulling together elements of various comments, and leveraging what Pralana already has.
- Pralana allows multiple accounts under Taxable. Users who intend to leverage LTCG can use these separate accounts for buckets with unique names e.g. "Stocks to leave for heirs", "High gains to harvest" "Loss Harvesting". These might literally be separate accounts or they might be mental buckets of different lots/basis/purposes within a single actual account.
- Users would set the basis each year for each account. An accounts could even be used as placeholder for negative unrealized (saved losses).
- Users would have a new ability to set the unscheduled taxable withdrawal priority for each taxable account and each time period: "First" "Last" (or "Never use"?), and "Medium priority" (the latter the default).
(So overall order of withdrawal would be: Inherent growth of gains/dividends etc within the account first, of course. Then scheduled withdrawals, then "first" priority accounts, then "medium" priorities, and finally ""last priority" accounts last. With "never" for accounts saved for heirs) - It is likely that people will have different harvesting strategies at different time periods, so allowing users to set start year/end year for each account would be needed. (E.g. You might want to only gain harvest when you first retire; you might to save your losses for when you know a huge treasury bond is maturing.)
- Users already set Account Withdrawal Priority (between Taxable, Roth, Tax-deferred, etc), that shapes when taxable is called, so that gives another lever to influences LTCG.
All the taxable account withdrawals would actually be taxed and have the basis changed at "average cost" (i.e. LTCG unrealized/total for that account). But--given all of the above--the buckets would effectively allow users would mimic the most common strategies of harvesting gains ("first" priority of a bucket with stocks with a lot of gains) and losses (negative unrealized gain bucket), postponing gains for spouse or heirs ("never" priority). This wouldn't be a burden because users who harvesting are already tracking this, and users who don't care could just leave everything at the default "medium priority" with only a single taxable account.
Bucketing different situations into different accounts also dampens the complications for taxable funds that have a lot of bonds, e.g. target date accounts or other taxable with lots of bonds. I am not sure if it solves the complications with the fact taxable accounts can be stocks/bonds/or different types of treasuries and CDs.
