How to take income from IRA?

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racy
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How to take income from IRA?

Post by racy » Sun Nov 19, 2017 12:51 pm

What is the recommended or preferred way(s) to take income from a tax-deferred account?
a) take dividends & capital gains from bond funds, or
b) take dividends from bond fund & reinvest capital gains, or
c) take dividends & capital gains from stock funds, or
d) take dividends from stock fund & reinvest capital gains, or
e) some combination of the above
f) what a dumb question: it doesn't matter

When I search, I find a lot of info on taking income from taxable accounts, but I have not found an answer to my question. Thank you in advance for your help. Much appreciated.
Ray

radiowave
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Re: How to take income from IRA?

Post by radiowave » Sun Nov 19, 2017 12:58 pm

Not a dumb question at all.

I don't know the preferred method, but I am getting set up when I reach 70.5 to just do the RMD. You can set that up to automatically pull the money out of the account on a monthly or yearly basis, have estimated taxes withheld and the cash transferred to a taxable brokerage or external bank/online bank. This is available at most brokerages. I have my dividends in tax-deferred on reinvest and my understanding is you can only withdraw from tax-advantaged funds as cash. If there is anyone on the forum who knows if you can withdraw actual funds, e.g. transfer a portion of shares of say a total stock/bond fund to a taxable account, please let me know.
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dbr
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Re: How to take income from IRA?

Post by dbr » Sun Nov 19, 2017 1:11 pm

You can (or may be able) to take a distribution in kind, but the distribution is still taxed in full as ordinary income. There might be an advantage in avoiding a commission to sell an asset and then repurchase the asset if for some reason you wanted to keep exactly that asset.

It doesn't mean anything to say from where in the IRA you have taken a distribution as whatever is left in the IRA can be rebalanced/reallocated/reinvested at will.

It is probably better to think of distributions from an IRA as being transfers from the IRA to your taxable account and to think of income as whatever you actually withdraw to wherever you account for household cash flow.

clydewolf
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Re: How to take income from IRA?

Post by clydewolf » Sun Nov 19, 2017 1:17 pm

racy wrote:
Sun Nov 19, 2017 12:51 pm
What is the recommended or preferred way(s) to take income from a tax-deferred account?
a) take dividends & capital gains from bond funds, or
b) take dividends from bond fund & reinvest capital gains, or
c) take dividends & capital gains from stock funds, or
d) take dividends from stock fund & reinvest capital gains, or
e) some combination of the above
f) what a dumb question: it doesn't matter
Money in a tax deferred account is comprised of contributions, and gains. A tax deferred account such as a tIRA has gains from interest, dividends or capital gains. All distributions are ordinary income.

When you have a taxable investment account, you may want your IRA to be invested in bond funds because the distributions from the bond funds are taxed as ordinary income just like the bond interest would be taxed in your taxable account.

Along the same lines, in a taxable account, long term capital gains and qualified dividends receive a more favorable tax treatment.

livesoft
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Re: How to take income from IRA?

Post by livesoft » Sun Nov 19, 2017 1:19 pm

While it doesn't matter much, I think many people just sell some shares that exceed the portfolio percentages that they desire from their well-thought-out asset allocation plan and that cost the least fees (i.e. should be no cost) to sell.

For example, equities are up about 20% in 2017, but bonds are only up about 3%. So sell some equities, but not the ones that subject to a short-term redemption fee. Selling equities should help with rebalancing the portfolio towards one's desired asset allocation. And 2018 could be different.

Remember: It is not market timing, but it is market rebalancing or rebalancing timing.
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mickeyd
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Re: How to take income from IRA?

Post by mickeyd » Sun Nov 19, 2017 1:22 pm

What is the recommended or preferred way(s) to take income from a tax-deferred account?
My recommendation is to wait until you are ago 70 and then take out only the Required Minimum Distribution (RMD). If you need that cash prior to age 70 to live on, take it out when you need it.
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CABob
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Re: How to take income from IRA?

Post by CABob » Sun Nov 19, 2017 1:36 pm

g) Take distributions in whatever manner maintains your desired asset allocation.

Everything that is taken from a traditional tax deferred account will be taxed at your ordinary income tax rate. For this reason it is not important whether distributions come from capital gains, dividends or principle. Since you still want to maintain your desired asset allocation, distributions should help achieve this although I understand that you could re-balance the account after the distribution is made.
Bob

retiredjg
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Re: How to take income from IRA?

Post by retiredjg » Sun Nov 19, 2017 2:03 pm

I do it the easy way. All gains/earnings are reinvested. When I need money, I sell some shares (stocks or bonds - whichever I have too much of) and have some withheld for taxes. Few clicks of the mouse and done.

I doubt there is anything wrong with any of your other ideas, but there is no reason to make this more difficult than it needs to be.

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Christine_NM
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Re: How to take income from IRA?

Post by Christine_NM » Sun Nov 19, 2017 2:25 pm

I've worked out 2 rules for RMDs, they may be important to you or not.

1. For high-dividend and high-income funds, continue reinvesting fund distributions to get maximum return from the fund.

2. Transfer the RMD from a money market fund in the IRA to a mmf in a taxable account. To build up the RMD amount in the IRA mmf, do one or two transfers well in advance of the date you take your RMD. Hopefully using mmfs and selling in advance avoid both selling at a lower than necessary NAV and buying at a higher than necessary NAV in the taxable account. IOW, convert the RMD amount to cash for a short period of time (a few months) and then reinvest.

For example right now I have 2/3rds of my RMD amount for 2018 in the IRA mmf. Will do one more transfer from income fund to mmf for the remaining 1/3rd in Dec or Jan. Will take full RMD in spring.

I don't want the high-div fund (Wellesley) in taxable so an in-kind transfer is not an option.
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