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My tax-deferred accounts are bond funds only (TIPS and Total Bond), since about half of my portfolio is taxable. I'm considering converting enough of the Total Bond to one of the Short-term funds to cover two or three years of RMDs, assuming that rates will go up and NAVs will go down sometime before too long. Is this a good idea? Would you do it now, or hold off? If you recommend holding off, what would make you decide to do it?
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- Joined: 29 Jan 2011
I too am struggling w/ a similar( but more general) issue. I have retirement funds w/ a mix of bond and equity funds. Originally I thought, like you, I should have a more stable "emergency fund" to pull the RMDs from or perhaps I pull from the best performing whenever I pull. There is another school of thought which I am currently leaning to that believes you can put it on autopilot and pull from whatever (even from all proportionately) and then just re-establish the position after-tax in the taxable portfolio so you effectively don't change AA. This seems ok esp. if you don't spend the RMD but I think some feel it's ok even if you do.
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I have a small inherited IRA subject to RMD's and I've been using Vanguard's Short-Term Bond Index Investor Funds (VBISX) as the source of the funds for withdrawal. I'm trying to simulate the Wellington Fund as the other asset class I'm using in the IRA is Vanguard's Equity Income Fund. Whether using the short-term bond index for that purpose or whether it's wise to try to simulate Vanguard's Wellington Fund is the optimal strategy is irrelevant to me; I'm shooting for good enough. It's been my observation from watching Bogleheads that a person can drive themselves half crazy searching for the perfect strategy. I'm about reached that stage myself in trying to decide if my present strategy of half TBM and half TIPS in the bond portion of my larger rollover IRA is still a reasonable plan!
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The size of the rmd goes up with age, so the risk profile of your aa should be sufficient to deal with any rmd related risk. I think it makes more sense to tailor your aa so you are comfortable, and then just take rmds so as to preserve aa. Placing rmds in a temporary holding bin before withdrawing isn't logical.
This is how I've done it with my two inherited iras. Basic message: manage your portfolio as a whole. No need to separately manage the money destined for rmd.
As you get older and rmds get bigger the risk might look different, but your aa should be different then too.
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You may want to use short-term funds for the money you are spending in the next few years. However, RMDs are not money you are spending; they are money you are required by the IRS to move from one account to another. If you have an RMD that is more than you need to spend, you can take the RMD out of the TIPS fund in your IRA and put the same money in the TIPS fund in your taxable account, or in I-Bonds.
Another good use of excess RMDs is to pay the tax on converting part of the IRA to a Roth, reducing future RMDs. (You should only do this if it won't move you up a tax bracket; there is no point in paying 25% tax on the conversion to avoid paying 15% tax on a later withdrawal.)
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