Optimal Time to Begin Use of ASCET

 

Anyone with substantial assets (greater than $500,000) outside of a company 401k plan can benefit from ASCET.  It is optimal to start applying the technique at least one year prior to retirement.  This allows at full year’s worth of ASCET income to be generated, ready for spending immediately upon retirement.  If the use of ASCET does not start until or after retirement, the safe spending level for the first year is limited to 4%. 

 

Tax Implications of ASCET

 

We will strive to maximize the after-tax returns for the portfolio.  In general, this strategy is most tax efficient when both Pool 1 and Pool 2 are held within a tax-deferred account, since the ASCET process generates short-term capital gains, which are treated as ordinary income for tax purposes in Pool 2.  However, the successful application of ASCET does not depend on the use of tax-deferred accounts. 

 

Whether tax-deferred accounts are available or not, features of ASCET that help to improve the tax efficiency of the technique in a taxable account include:

 

§  ETF holdings in the Equity portfolio are very tax-efficient.

§  Limited trading of the ETFs defers realization of capital gains due to appreciation of the ETFs over time.

Note that the current tax treatment of the sale and repurchase of covered calls generates short-term capital gains, which are taxed at the ordinary income tax rate, not the long-term capital gains tax rate. 

 

Use of ASCET with Individual Stocks

 

For clients with a large position in an individual stock for which they have no desire to sell, ASCET can be used to generate income just as effectively as when implemented with ETFs.  This is especially helpful if the stock position’s original cost is significantly lower than the current price.  ASCET permits deferral of capital gains taxes on the position, while generating income for living expenses.