Inherited IRA/RMD question

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Inherited IRA/RMD question

Post by PEMdoc » Fri Sep 15, 2017 1:39 pm

Hey guys, I've got a quick question about my inherited IRA and my RMDs that I feel like probably has a simple answer that I'm just missing somehow. So, for a some background, I've got a low/mid six-figure inherited IRA that I am currently taking large RMDs from every year in order to empty it quickly given my young age and high future income (doc to be!). Currently, it is invested in several ETFs as part of my overall portfolio goals. But now I think I'm confusing myself. If I have only 2-3 more large RMDs to take, would it be better to not have the money invested as part of my normal portfolio and keep it away from the risk of the market given the "short" horizon I have with this account in particular? Is it better to just have the money in something safe until it distributes from the inherited IRA and I can invest it in my other accounts? I'm scared the market will have a down turn and I will get significantly less from my distributions. Whereas a market downtown doesn't mean as much to me in my other accounts because of a ~30 year investment horizon, I feel like this could be a disaster in the inherited IRA where I will be taking large distributions shortly. Or can I get my RMD in shares of the ETFs, in which case, it doesn't really matter much to me what the exact price is at the time of distribution? What's the proper way to think about this? Thanks in advance for your help, this has my mind all twisted around!

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Re: Inherited IRA/RMD question

Post by aristotelian » Fri Sep 15, 2017 2:15 pm

You should consider the IRA from a risk perspective the same as the rest of your portfolio. Your portfolio is a whole and your risk exposure across the whole is what matters.

Certainly, as a future high earner, you have less need to take risk than others. My IPS says to take only risk that is necessary to achieve my goals. For example, if I am on track to retire with a 60/40 portfolio, I should not increase to 90/10. The question for you is how much need, willingness, and ability you have to take risk across your portfolio.

Then the question becomes how to make the most tax efficient use of your different accounts. Generally Bogleheads recommend to start with your bond allocation in your IRA's, since dividends would otherwise be taxed as ordinary income.

One thing that is confusing me about your post--you say you are taking RMD's (meaning minimum distributions) but that you are trying to liquidate quickly. I think RMD is the wrong term but I just want to be sure you are clear about your strategy.

Your distributions are always going to come out as cash and you will have to pay taxes at that point. You can then reinvest them in your brokerage account however you want. Typically the recommendation is a Total Stock Market Index fund because they are highly tax efficient.

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Re: Inherited IRA/RMD question

Post by kaneohe » Fri Sep 15, 2017 2:27 pm

Do you have a fixed expense you need to pay with those a car, a house,etc? Then you need to have $$$ in hand and not take much risk. But it sounds like you are just reinvesting the funds. If you go to no risk like cash, and the market goes down, you win; if it goes up , you lose.
If you stay invested and the market goes up, you end up w/ more, pay more taxes, and have to pay higher prices to a net neutral (except for taxes). If you stay invested and the market goes down, you end w/ less, pay less taxes,but pay lower prices to again a net neutral (or think about taking in shares as you suggested. The question then is do you want to take a risk or stay neutral.

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Re: Inherited IRA/RMD question

Post by sport » Fri Sep 15, 2017 2:43 pm

If you withdraw money from the IRA and reinvest it (less taxes) in the same investment for the long term, the short term problem does not apply.

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Re: Inherited IRA/RMD question

Post by Kevin M » Fri Sep 15, 2017 3:12 pm

As mentioned, it doesn't sound like you're taking required minimum distributions, but larger distributions to shift the income to lower-income years.

If stocks tank, then you can take smaller distributions or empty the IRA faster.

You can just reinvest the distribution in the same investment in your taxable account, so it doesn't matter whether the downturn hits your IRA or your taxable account, other than the different tax impacts (and if you're concerned about that, you should be tax-adjusting your AA). If you switch from ETFs to mutual funds, you can even take your distribution by doing an exchange from the IRA to the same fund in a taxable account--at least you can do this at Vanguard.

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Re: Inherited IRA/RMD question

Post by PEMdoc » Fri Sep 15, 2017 7:08 pm

As always, thanks for clearing things up guys! Yes, sorry, RMD was the wrong term, just my typing shortcut. Just referring to my distribution in general, which, as you noted, is above the minimum in order to shift the tax on the money to years when my bracket is significantly lower.

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Re: Inherited IRA/RMD question

Post by celia » Fri Sep 15, 2017 7:20 pm

Don't think in term of "RMDs". You are just moving assets from tax-deferred to taxable each year and paying the taxes that are owed (at today's lower rate instead of the rate you will be in,10 years from now.

Then, in your thought process, "minimum" doesn't apply.
What investment you hold doesn't matter.
The only thing that matters tax-wise, is trying to withdraw more when the value is down (so the taxes will be less, OR more shares can be removed for the same tax hit)

PS. We are doing the same thing and hope to have the account emptied in about 3 years.

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