How to invest RMDs I don't need

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Need N Advice
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How to invest RMDs I don't need

Post by Need N Advice » Sun Mar 03, 2013 9:20 pm

Hello Bogleheads,

Recently, I was unpleasantly surprised by Vanguard when they wished me a happy 70 ½ birthday, and subsequently requested how and where I would like to invest my required minimum distributions (RMDs). Amazingly, and thankfully, I do not need nor want these RMDs. However, I'm obligated and looking for potential ideas outside the normal answers, such as Christine Benz's four suggestions in her article How to invest RMDs you don't need.

For those interested in specifics, I'm open to any suggestions, but I'm currently focused on remaining within the Vanguard family of mutual funds and/or laddering certificate of deposits (i.e., Ally, Discover Bank, etc.).


Emergency funds: 4 years
Debt: None
Tax Filing Status: MFJ
Marginal Tax Rate: 15% Federal, 0% State
State of Residence: FL
Age: 70 ¼
Asset Allocation: Equities – 30%, Bonds – 70%
Portfolio: Enough
Portfolio Composition: Roth – 15%, Rollover/401k – 85%


After computing numerous retirement simulations, the RMDs will distribute the rollover/401k funds in approximately 27 years. Therefore, the emergency funds and Roth funds will remain intact while we have lived comfortably on Social Security.

The dilemma is where to invest the RMDs that we do not need. If we reinvest the RMDs within the Vanguard family of funds, we are currently looking at tax-exempt funds (i.e., Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX), etc.).

Sincerely,


Need N Advice
"Simplicity Is The Ultimate Sophistication"-da Vinci

gkaplan
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Re: How to invest RMDs I don't need

Post by gkaplan » Sun Mar 03, 2013 9:38 pm

If you don't need the RMD, why not make a qualified charitable contribution?
Gordon

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joe8d
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Re: How to invest RMDs I don't need

Post by joe8d » Sun Mar 03, 2013 9:44 pm

Same age, same situation. I'm taking it from the " Bond " Allocation and putting it into Ally Bank Online Savings.
All the Best, | Joe

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Aptenodytes
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Re: How to invest RMDs I don't need

Post by Aptenodytes » Sun Mar 03, 2013 9:59 pm

It sounds like you are asking how to start a taxable portion of your portfolio. This section of the Wiki covers that:

http://www.bogleheads.org/wiki/Principl ... _Placement

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Aptenodytes
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Re: How to invest RMDs I don't need

Post by Aptenodytes » Sun Mar 03, 2013 10:01 pm

I read the Christine Benz article you refer to and I don't understand why you'd want to reject those ideas.

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LH
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Re: How to invest RMDs I don't need

Post by LH » Mon Mar 04, 2013 5:42 am

http://finance.yahoo.com/news/invest-rm ... 00729.html

another direct link to same article that should work for everyone.

I do not really understand the question, in regards to the exclusion of the ideas from the article. Is the point you do not want taxable investments? You are looking for tax sheltered only? Except for Roth, you dont want that either? Why not Roth?

Its unclear what your need/desire is here, and what the problem with the article suggestions are.

It sounds like, you are gearing up to distribute to heirs??? You have money you do not need, you are living on SS alone? The end result seems a good probability of inheritance. Maybe a 529 contribution? Also taxable then, would give money out on a stepped up basis under current law.

Levett
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Re: How to invest RMDs I don't need

Post by Levett » Mon Mar 04, 2013 7:34 am

I've done two RMDs and don't need the dough for current retirement expenses.

Here's what I do:

1. after taxes are paid, I distribute some of the money to my beneficiaries (the money is far more useful to them now than when I'm gone);

2. I have upped my charitable contributions to a select few organizations; and

3. I reinvest the rest (in case of Black Swan-like event) in two highly liquid tax efficient funds.

Nothing is foolproof, and life is subject to instantaneous change, but that's my plan--for now. 8-)

Lev

john94549
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Re: How to invest RMDs I don't need

Post by john94549 » Mon Mar 04, 2013 9:23 am

Those "unneeded" RMDs might come in handy in 20 years or so (think in-home help). You might ponder EE bonds; one each year with your RMD, to the available limit(s). When CD rates improve, switch to that ladder. With PenFed's recent rate chop, it's tough to start a ladder these days with any meaningful yield. If you already have a ladder going, then add some to the long rungs when they mature. If any spare money after that, IBonds are good insurance for unexpected inflation down the road.

I can't over-emphasize the need for a goodly "living assistance" fund as one hits RMD age. Much more important than the classic emergency fund. And it may need to last longer than four years. Maybe much longer.

ResNullius
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Re: How to invest RMDs I don't need

Post by ResNullius » Mon Mar 04, 2013 9:25 am

I just read the underlying article. Wow, it was a well written and informative article, with virtually no junk on the side, which is a little amazing in this day and age. It seems to cover the question completely.

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artthomp
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Re: How to invest RMDs I don't need

Post by artthomp » Mon Mar 04, 2013 9:50 am

I've just taken my fourth RMD. I use some of my the proceeds to pay for vacations and, infrequently, a new car. Since we want to leave our children as much of our estate as we can, we are slowly migrating equities out of the IRA, leaving fixed income in the IRA for tax purposes, and reinvesting the rest of the proceeds in taxable equities at Vanguard (Total Stock Market 20%, Total International 10%) based upon our overall allocation plan.
Art

ResNullius
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Re: How to invest RMDs I don't need

Post by ResNullius » Mon Mar 04, 2013 10:30 am

So, if you are taking RMDs and don't need the money, but want to keep some or all for your use or for your heirs, then you should pay the taxes and reinvest in either tax-exempt bonds or tax-efficient equity funds. In order to best reduce AGI and MAGI, the use of tax-efficient equites would seem best. Do I have this right?

Levett
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Re: How to invest RMDs I don't need

Post by Levett » Mon Mar 04, 2013 10:39 am

"Do I have this right?"

I am reluctant to assert that something is "right" for everyone.

But basically you have described what I do.

Lev

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Aptenodytes
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Re: How to invest RMDs I don't need

Post by Aptenodytes » Mon Mar 04, 2013 10:45 am

Problem is, all the good ideas that Bogleheads have responded with are exactly the ones the OP has rejected, but he hasn't said why he rejects them.

Calm Man
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Re: How to invest RMDs I don't need

Post by Calm Man » Mon Mar 04, 2013 10:57 am

I am 10 years from RMDs. But it seems to me that an RMD is little different or not different at all than a dividend from a mutual fund. Both can be used in the same manner and added to a portfolio or spent. You can really view a total stock market fund dividend like an RMD just that it is give quarterly and doesn't wait until age 70 to start. You have to take both like it or not\. Or is it that people psychologically look at an RMD as different.

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BL
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Re: How to invest RMDs I don't need

Post by BL » Mon Mar 04, 2013 2:21 pm

If you give any money to charities during the year, you can have Vanguard make out a check directly to a charity, mail it to you so you can contribute it to that charity. This QCD is valid for this year, and we have to wait on Congress to see if it will be continued for future years as it has in the past. When done in this way, there are no taxes on that amount.

Otherwise, invest as you would any extra cash in taxable mutual funds, I-bonds, or CDs.

YDNAL
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Re: How to invest RMDs I don't need

Post by YDNAL » Mon Mar 04, 2013 2:57 pm

Need N Advice wrote:Marginal Tax Rate: 15% Federal, 0% State
State of Residence: FL
Age: 70 ¼
Asset Allocation: Equities – 30%, Bonds – 70%
Portfolio: Enough
Portfolio Composition: Roth – 15%, Rollover/401k – 85%

..... The dilemma is where to invest the RMDs that we do not need. If we reinvest the RMDs within the Vanguard family of funds, we are currently looking at tax-exempt funds (i.e., Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX), etc.).
You can:
1. Invest RMDs in Stocks (Taxable) and bring the desired 30/70 Stock/Bond allocation (if necessary) back in line using Roth/Rollover/401K.
2. Spend and/or help others.

3. Otherwise, more specifically, help YDNAL Charities - routing 123456789, account 987654321 also here in FL. :D
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

DickBenson
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Re: How to invest RMDs I don't need

Post by DickBenson » Mon Mar 04, 2013 4:09 pm

Need N Advice wrote:The dilemma is where to invest the RMDs that we do not need. If we reinvest the RMDs within the Vanguard family of funds,........
You would be "investing the funds in the Vanguard family of funds" if you simply used those unneeded RMDs to convert part of your IRA to Roth, as Christine Benz recommended (so long as this does not move you into a higher tax bracket). Right now the government "owns" part of your TIRA. When you convert, your "ownership" increases by the amount of tax you pay to make the conversion (in your situation the amount of the RMD that you do not need). Your "net worth" stays the seme.

When it is all converted to Roth, you would "own" all off this tax-free income generating account. Your would own all the investments in that account, whereas now (in the TIRA) you only own part of them.

edit: note that this would also decrease the size of future unneeded RMDs. I would even recommend that you look into the benefits of using some of the funds in your taxable accounts to convert as much as you can without going into a higher tax bracket. (Again, this would not decrease your "net worth" as you gain ownership of your IRA as you pay taxes).

Dick

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Re: How to invest RMDs I don't need

Post by grabiner » Mon Mar 04, 2013 8:47 pm

Need N Advice wrote:Marginal Tax Rate: 15% Federal, 0% State
State of Residence: FL
This suggests that you can take unneeded RMDs from your retirement stock funds, and invest them in taxable stock funds to keep the same allocation. Any dividends from the taxable stock funds will not be taxed as long as you stay in the 15% bracket (although they may increase the taxable amount of your Social Security, creating a 12.25% marginal tax rate).

Another option would be to use the RMDs to pay the tax on converting some of the traditional account to a Roth: convert only up to the top of the 15% bracket each year. This will reduce your future RMDs, and increase the amount your heirs will inherit tax-free in a Roth.
David Grabiner

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Need N Advice
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Response to all

Post by Need N Advice » Wed Mar 13, 2013 10:26 am

Bogleheads,

First, thank you very much for your insightful commentary. Second, I never stated that I rejected the ideas listed by Christine Benz. What I did say was "I'm looking for potential ideas outside the normal answers..." As some have mentioned, I'm sure these funds may me utilized for "goodly living assistance" in these later years.

Sincerely,

Need N Advice
"Simplicity Is The Ultimate Sophistication"-da Vinci

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Aptenodytes
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Re: Response to all

Post by Aptenodytes » Wed Mar 13, 2013 11:02 am

Need N Advice wrote:Bogleheads,

First, thank you very much for your insightful commentary. Second, I never stated that I rejected the ideas listed by Christine Benz. What I did say was "I'm looking for potential ideas outside the normal answers..." As some have mentioned, I'm sure these funds may me utilized for "goodly living assistance" in these later years.

Sincerely,

Need N Advice
Sometimes the boring answers are the correct ones.

DrKMP
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Re: How to invest RMDs I don't need

Post by DrKMP » Fri Sep 09, 2016 1:07 pm

Most of the posts to this question are a few years old. I want to see if the world has changed in the last few years such that today's advice (regarding the use of RMD funds not needed) differs from the past.

This year will be my first RMD and I have spent some time thinking through my strategy for this money I don't need. I have a sizeable emergence fund in money market accounts and adequate income to cover living expenses through pensions, rental income and a small business. My 401K is currently in excess to 2M and I am in the 25% tax bracket.

So here is my strategy. I plan to take enough money to pay taxes on the withdrawal and divide the remainder into two pots. The first will be distributed to my adult children and the second will be reinvested in a taxable fund. I have adjusted my 401K from which the RMD comes to a 40% stock/60% bond allocation in order to be somewhat more conservative and to keep bonds in my tax-exempt account. I plan to reinvest the RMD investment pot into a total stock market index fund such as Vanguard VTSAX. This will keep equities in my taxable account (somewhat tax efficient) and allow it to grow for the sake of my heirs. I figure that I can take more risk in the taxable account since I am growing it for my heirs and can take a long-term perspective.

So I would welcome feedback on my strategy. Thanks in advance!

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BL
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Re: How to invest RMDs I don't need

Post by BL » Fri Sep 09, 2016 3:03 pm

It sounds like you have a good plan.

Not part of your plan, but I wanted to add that QCDs are now a permanent law rather than being updated whenever congress got around to it. Good for lowering AGI if that is a desired benefit.

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