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I am assisting my mother with her portfolio as she nears full retirement, but have a general question on how MRDs can shift AA. For example, she has roughly a 50/50 portfolio set-up as follows:
50% Taxable (3 fund equity index portfolio), roughy $300k
50% Tax-advantaged ($50k ROTH and $250k Traditional IRA all invested in Total Bond Index and TIPS fund), roughly $300k
Set up this way, we strived to make it the most tax-friendly as possible by placing the equity funds in her taxable account. As she gets nearer to having to take her MRDs (or even general living expenses once she full retires in several more years), this would impact the AA. Further, she would like to get a little more conservative - perhaps 40/60 or even 30/70 as she approaches her 70s and 80s.
So, when the MRDs come out (assuming she does not need to spend the money and wants to reinvest), what is the best way to "re-invest"? She is in the 25% tax bracket, so I thought about municipal bonds. Certainly a generic total bond index seems out of the question in the taxable account, at least from a tax standpoint.
Am I missing something?
One other thought I had was to convert the T-IRAs to Roth, which would negate the need for MRDs altogether).
Last edited by CorradoJr
on Fri May 10, 2013 8:04 am, edited 2 times in total.
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There's only so much you can do about proper asset location given the account balances. At some point the IRA will be nearly zero so you'll have to hold inefficient funds in the taxable account. I don't think a total bond fund is out of the question at all. Just from a marginal bracket standpoint the yields are probably all the same (tax free 1.5% or taxable 2.0%.) Long term it will matter a bit more as the taxable account grows.
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CorradoJr wrote:Am I missing something?
I see nothing here about her anticipated income streams, expenses, and tax rates (Fed + state) in retirement.
So, unless she doesn't need this portfolio to cover expenses in retirement, what makes you assume that she'll have the "problem" of needing to re-invest RMDs? The first distribution on a $300K balance is about $11K (depends on whether her birthday is in the first or second half of the year).
Similarly, don't even think about a Roth conversion now unless you're sure she'll be in the 25% bracket in retirement. Seems unlikely, unless a pension is covering a large fraction of her current income. Many states also have special tax breaks on IRA distributions for seniors.
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