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Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 12:12 pm
by LarryG
My IRA contains 2 funds, an equity and a bond fund. I am subject to RMD and have used withdrawals to balance my asset allocation.
Would opening a money market fund with the amount of the next year RMD in the IRA be of value to protect against making a withdrawal from equity or bond funds during a severe market correction?
Thank you

LarryG

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 12:22 pm
by Gill
I don’t have a money market fund in my IRA for RMD purposes but I do keep a reserve in the short term corporate bond fund which serves the same purpose with higher yield and low volatility.
Gill

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 12:28 pm
by retired@50
LarryG wrote:
Sun Nov 10, 2019 12:12 pm
My IRA contains 2 funds, an equity and a bond fund. I am subject to RMD and have used withdrawals to balance my asset allocation.
Would opening a money market fund with the amount of the next year RMD in the IRA be of value to protect against making a withdrawal from equity or bond funds during a severe market correction?
Thank you

LarryG
I'm not sure if there is any advanced theory on this topic but the money you'll be putting in the money market fund will have to come from either the bond or stock fund you mention, won't it?. So, selling will need to occur at some point. The trick is "timing" the selling activity, which starts to sound like market timing.

If I might suggest a different approach, you could direct the stock and bond dividends and interest to a money market account, which would take care of some portion of the RMD. If it was necessary to sell off more, then you could use a "reverse dollar cost averaging" approach, where you sell some particular dollar amount each month from the fund(s). This will likely minimize regret and hassle.

Alternatively, you could just sell every December in an amount that maintains your desired stock/bond allocation. Obviously this would require that you sell more of the fund that has performed better...

Regards,

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 12:29 pm
by illumination
That's the same strategy I use, I guesstimate enough for like 2 years of RMD in a money market. I figure that's enough to last most bear markets where I could draw down during those times without having to dip into equities that may be in a down cycle.

https://www.moneycalculator.org/Require ... tribution/

I personally don't like bond funds, I just can't tolerate losing principal on fixed income and would prefer to just take a slightly lower rate of return than risk it.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 1:02 pm
by 1210sda
LarryG wrote:
Sun Nov 10, 2019 12:12 pm
My IRA contains 2 funds, an equity and a bond fund. I am subject to RMD and have used withdrawals to balance my asset allocation.
Would opening a money market fund with the amount of the next year RMD in the IRA be of value to protect against making a withdrawal from equity or bond funds during a severe market correction?
Thank you

LarryG
If you don't need to spend it, then you could re-invest it in the same fund you withdrew it from, but in a taxable account. If you need the money, then......... :)
1210

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 1:07 pm
by neilpilot
Only sell invested assets and move them to a money market fund (a year in advance?) if your asset allocation includes keeping that portion of your assets in cash. Otherwise, wait until the RMD is required to sell those assets.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 4:41 pm
by GerryL
In you have converted to the Vanguard Brokerage account for your IRA, you have a settlement account, Vanguard Federal Money Market Fund, which is currently yielding about 1.8%.

In this, my first RMD year, I saw that the money that had disappeared in the EOY dip had come back fairly early on, so I decided to move the amount needed for my RMD into the IRA money market while at the same time rebalancing. Then, for the rest of the year, requesting Vanguard send me QCD checks and later taking the remainder of the RMD was very simple: just execute each transaction on the money market fund. I expect to do the same thing next year, even if the IRA does not increase in value.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 5:13 pm
by kaneohe
LarryG wrote:
Sun Nov 10, 2019 12:12 pm
.............................
Would opening a money market fund with the amount of the next year RMD in the IRA be of value to protect against making a withdrawal from equity or bond funds during a severe market correction?
...........................
Seems like it would help if you were depending on the RMDs to spend. I used to believe that that wasn't necessary if you weren't going to
spend it and could simply reinvest the RMD in taxable to participate in the recovery...............that works in the short term if you have cash elsewhere to pay the taxes on the RMD. In the long term, however, you need to replenish that cash so perhaps a middle ground would be
having the cash to pay the RMD taxes in the IRA m. mkt for market corrections.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 5:16 pm
by dbr
RMD is a tiny fraction of the balance in your account. There is no need whatsoever to worry about holding money in cash in case of a downturn. The amount is on the order of 4% per year.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 5:37 pm
by sport
I keep a MM fund in my IRA for writing checks for QCD donations. I keep a limited amount in that fund so my exposure to check fraud or errors is minimized. I just have to make sure there is a sufficient balance in that fund to cover any check I write. I could have Vanguard write the check and send it to me, but that is two opportunities for the check to get lost in the mail. It would be nice if QCDs did not require paper checks, or allow me to use my regular checking account with bill-pay.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 6:49 pm
by retired@50
dbr wrote:
Sun Nov 10, 2019 5:16 pm
RMD is a tiny fraction of the balance in your account. There is no need whatsoever to worry about holding money in cash in case of a downturn. The amount is on the order of 4% per year.
Initially, this is true, but the percentage grows as you age. My father-in-law will be taking 9.25% this year.

Regards,

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 7:11 pm
by dbr
retired@50 wrote:
Sun Nov 10, 2019 6:49 pm
dbr wrote:
Sun Nov 10, 2019 5:16 pm
RMD is a tiny fraction of the balance in your account. There is no need whatsoever to worry about holding money in cash in case of a downturn. The amount is on the order of 4% per year.
Initially, this is true, but the percentage grows as you age. My father-in-law will be taking 9.25% this year.

Regards,
That still is not a very large fraction relative to concerns that the asset needs to be held in cash. A reasonable balance of stocks and bonds in a portfolio is sufficient.

But also keep in mind that RMD is not a withdrawal from assets but only a transfer from tax deferred to taxable holdings. It is not likely someone is actually spending upwards of 10% of their assets in a year unless they are intentionally planning to deplete the portfolio in perhaps only ten years. I would agree that for a plan to do that one would indeed not own any stocks and just keep the whole thing in cash and cash equivalents.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 9:10 pm
by scrabbler1
retired@50 wrote:
Sun Nov 10, 2019 12:28 pm
LarryG wrote:
Sun Nov 10, 2019 12:12 pm
My IRA contains 2 funds, an equity and a bond fund. I am subject to RMD and have used withdrawals to balance my asset allocation.
Would opening a money market fund with the amount of the next year RMD in the IRA be of value to protect against making a withdrawal from equity or bond funds during a severe market correction?
Thank you

LarryG
If I might suggest a different approach, you could direct the stock and bond dividends and interest to a money market account, which would take care of some portion of the RMD. If it was necessary to sell off more, then you could use a "reverse dollar cost averaging" approach, where you sell some particular dollar amount each month from the fund(s). This will likely minimize regret and hassle.
My friend has an inherited IRA which I help manage for him. When he first got it back in 2012, it had cash, a few stocks, and a few individual bonds. We put the cash into an investment-grade bond fund so it would start earning some meaningful income. Together, they generated much more dividends and interest than he needed for his RMD.

But most of the bonds were close to coming to maturity, and one other one got called way early (bummer, it was paying nicely!). So, all he has left is the bond fund and a few other smaller holdings. They still generate a little more than his RMD, and any leftover cash can get used for next year. We haven't hit that crossover point where the generated cash fails to be enough for the RMD, but we have been close. Once that happens, we'll have to sell something, probably a few shares from the bond fund.

Re: Money Market Fund in IRA for RMD

Posted: Sun Nov 10, 2019 9:27 pm
by colodane
Yes, you can certainly use a MM fund in your IRA account for purposes of RMD withdrawal. That is exactly what I've been doing for several years now. I like it due to its simplicity, since I have Vanguard automatically calculate and transfer my RMD on 1 April each year. It goes from a MM in my IRA account to a MM in my taxable account. Typically, I have enough in the IRA MM to cover the RMD. If not, then a month or two before April I sell something in the IRA to beef up the MM. After it transfers to my taxable account MM, I use the proceeds to tune up my taxable asset allocation.

Re: Money Market Fund in IRA for RMD

Posted: Mon Nov 11, 2019 8:56 am
by Ron
I have all distributions from my/wife's TIRA funds going to the MM fund within my/wife's respective holdings, both at VG and FIDO. As you know, the vast majority of distributions for the year are done in the 20 or so business days in December so that cash is not necessarily out of the market for a considerable period as some folks would look at it.

Like you, I am concerned about taking RMD's from my non-cash holdings. I do my/wife's RMD withdrawal on the first business day of the new year, using the RMD to pay taxes on the RMD along with forecast FIT on all other taxable benefits for the year (SS, pensions, SPIA) which is easy to calculate. The remaining cash is split to support our forecast annual budget with the remainder going to short term taxable savings.

There has been other discussions on the timing of the RMD withdrawal, from the last day of the year, the first day of the year, quarterly, monthly, your birthday, etc.

For me, January 2nd (normally the first business day of the new year) also happens to be one day away from my birthday, so I do meet two of the suggested withdrawal schemes (first of the year and birthday :wink: ). In addition, it removes the cash from my/wife's holdings and gives me a better view of our actual target vs. planned AA split, and I can re-adjust our respective portfolios as needed once a year. Keeping a wad of cash in our respective holdings does give a false view by the end of the year of where we actually stand AA wise.

I don't keep the cash invested for the year since I'm also wary of down cycles when it comes time to pay the piper, as happened in December of last year.

How RMD's are "harvested" and what you do with the proceeds is a process that is very individualized, the same as when to file for SS benefits. It all comes down to what works for you in your financial life.

- Ron

Re: Money Market Fund in IRA for RMD

Posted: Mon Nov 11, 2019 9:08 am
by Sheepdog
Gill wrote:
Sun Nov 10, 2019 12:22 pm
I don’t have a money market fund in my IRA for RMD purposes but I do keep a reserve in the short term corporate bond fund which serves the same purpose with higher yield and low volatility.
Gill
I have done the same thing since the market collapse in 2008.
I was taking from my investments then for expenses including RMD. Having to sell stock containing mutual funds hurt. I now can go about 3 years without doing so.
I also use that short term corporate bond fund in my rollover IRA from which I write QCD checks.

Re: Money Market Fund in IRA for RMD

Posted: Wed Nov 13, 2019 9:41 am
by LarryG
Thanks to all who have responded.
It occurred to me that the idea of a “ cash reserve” may be considered the first step in adopting the concept (discussed by Bill Bernstein) of reallocating holdings when you have won the game.
What I am considering is placing estimated RMDs for the next 10 years (I am 89) in a money market fund and the remaining funds in Total Stock Market At present I hold 60% Total bond Market in the IRA.

LarryG

Re: Money Market Fund in IRA for RMD

Posted: Wed Nov 13, 2019 9:55 am
by dbr
LarryG wrote:
Wed Nov 13, 2019 9:41 am
Thanks to all who have responded.
It occurred to me that the idea of a “ cash reserve” may be considered the first step in adopting the concept (discussed by Bill Bernstein) of reallocating holdings when you have won the game.
What I am considering is placing estimated RMDs for the next 10 years (I am 89) in a money market fund and the remaining funds in Total Stock Market At present I hold 60% Total bond Market in the IRA.

LarryG
Bernstein's comment was directed at not continuing to take risk with large allocations to stocks when you have enough. It has nothing to do with cash reserve distinct from holding fixed income in general, whether cash, bond funds, a TIPS ladder or anything else. In any case the pertinent parameters are the risk and return of the whole portfolio which is a result of the risk and return of the components and the proportion allocated to each. The allocation between stocks and bonds is the largest driver. Very possibly the best partner for moderate allocations to stocks is intermediate bonds. It is reasonable to consider CDs because the CD market is a retail market that often offers returns competitive to many bond choices, is safely insured, and has low volatility. Note the volatility of return (aka risk) of cash equivalents is not zero because the interest rate can vary, either quickly or eventually.