Common problem: I want to sell Asset A but it’s in a retirement account; I don’t want to sell Asset B, but it is what’s accessible in my brokerage account. How do I handle the conundrum? Answer: An Asset Swap, but be careful of the Wash Sale rule! Two embedded videos here to help you out.
This post is another in the Risk Parity Basics series and concerns basic skills of portfolio management. It is not a risk parity topic, per se, though frequently this does come up when managing Risk parity portfolios as a result of the desire for a particular strategic asset allocation. So, even though there is nothing special about the technique, it is one you’ll need to be familiar with in order to properly manage your portfolio. It is one that I have to do a couple of times a year, for example.
This came up in Episode 217 of Risk Parity Radio, in an email from a listener, Craig, at the 17:47 mark. You can listen to the clip here:
As for the first part of the question (borrowing from the account to meet short-term cash needs), I agree with Frank that it’s probably not a good idea. Borrowing against an account is not a bad thing, but something you want to do as part of a long-term strategy, not as a temporary fix for a cash shortfall.
The second part of the question is how to manage one’s finances when different assets are in different accounts. Craig, for example, needs to remove from his brokerage account, but only has long-term bonds in that account, which are down quite a bit this year (-31% year to date). His retirement account has other assets, some of which are up this year (Craig has a Risk Parity Ultimate style portfolio, meaning he has commodities and gold, both up in 2022), but the problem there is he’s before retirement so there’d be major penalties if he withdrew from that. Essentially, how can Craig get money out of his account in the most logical way?
Frank’s answer is to do an asset swap, which isn’t that complicated to grasp, but I thought it may be helpful for Craig and others to see it in action. It’s also worth going over the “wash sale” rules a bit, since you really don’t want to run afoul of tax laws in the process, and if you’re not aware of the rules, it is a little too easy to make the mistake.
One way to avoid this issue is to have mixes of different assets in different accounts, as that gives you more flexibility for withdrawals and deposits. When doing that, you'll also want to be cognizant of asset location - what assets to have in which accounts - which you can read more about in my guide to asset location in an RP portfolio:
Justin
Now onto the main subject: how to do an asset swap? Here are two YouTube explainers: the first on the mechanics of the swap, and the second on the Wash Sale rule. If you’re doing an asset swap that involves a loss in a taxable account, be sure to watch the second video.
How To Do An Asset Swap:
The Wash Sale Rule:
As mentioned in the Wash Sale video, here are some more resources about the Wash Sale rule.
1) This is the most important to read: Publication 550, Investment Income and Expenses. Wash Sales are covered in Chapter 4, on page 56 of the PDF:
You can also search through the digital version of Publication 550 here.
2) Here is Investopedia’s Explainer on the Wash Sale rule:
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3) And here’s the Financial Planner’s Financial Planner, Michael Kitces:
Buckingham Strategic Wealth