Allocation at RMD

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JerryB
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Allocation at RMD

Post by JerryB »

I will start RMD's in 2021. My 401K and tIRA are about 50% and taxable is also about 50%. Keeping my overall allocation the same, would it be a good idea to shift some or all equities from the tIRA/TSP to the taxable account (index funds to hold)? I do not plan to spend the taxable account. What am I missing?
dbr
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Re: Allocation at RMD

Post by dbr »

JerryB wrote: Mon Sep 14, 2020 10:30 am I will start RMD's in 2021. My 401K and tIRA are about 50% and taxable is also about 50%. Keeping my overall allocation the same, would it be a good idea to shift some or all equities from the tIRA/TSP to the taxable account (index funds to hold)? I do not plan to spend the taxable account. What am I missing?
I wouldn't say "missing" but the two things to think about are your overall asset allocation, taxable and tax deferred together, and location of funds with respect to tax cost. Under "normal" conditions when bonds produce interest payments that are significant and taxed at ordinary income tax rates, and if your tax brackets are high enough to matter, one would hold all the bonds in tax deferred accounts and stocks in taxable accounts. When you take an RMD you can decide what to sell in tax deferred and what to buy with the money transferred to taxable. It is also possible to take RMDs in kind sometimes.
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Leif
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Re: Allocation at RMD

Post by Leif »

I've been doing Roth conversions of my equities (in my tIRA) prior to RMD. I'm keeping my AA the same. Just convert my stock to my Roth in-kind. By RMD time I'm expecting my tIRA to be 100% bonds. My equity will be in my Roth and taxable accounts. I want to try to minimize my RMDs by removing the higher expected returns stock. Of course, the conversions increases your taxes so you need to have money available to pay those taxes from you taxable account.

Your question, like mine, is a tax question. I think Roth, in general, is a good idea, since you are then protected from possible tax increases. Also, with the SECURE act, if you plan to have tIRA to pass on then taking what you can out may help (depending on the tax brackets of everyone involved). But, money from an RMD cannot be added to a Roth. Money taken above the RMD amount is eligible for a Roth. This year, since everyone's RMD is zero, any tIRA withdrawal can be placed in a Roth.
Last edited by Leif on Mon Sep 14, 2020 12:05 pm, edited 4 times in total.
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bertilak
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Re: Allocation at RMD

Post by bertilak »

You can reinvest your RMD as you see fit, including doing so in a way that maintains overall your AA. No need to adjust your IRA ahead of time. Of course there will be taxes to pay but that is a separate issue.

Or am I misunderstanding the question?
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ruralavalon
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Re: Allocation at RMD

Post by ruralavalon »

JerryB wrote: Mon Sep 14, 2020 10:30 am I will start RMD's in 2021. My 401K and tIRA are about 50% and taxable is also about 50%. Keeping my overall allocation the same, would it be a good idea to shift some or all equities from the tIRA/TSP to the taxable account (index funds to hold)? I do not plan to spend the taxable account. What am I missing?
I am not sure that I understand your question.

What percentage of of your portfolio is in your taxable account, and what and percentage of your portfolio is in traditional tax-deferred accounts? What is the stock/fixed income mix in the taxable accounts? What is the stock/bond mix in the traditional tax-deferred accounts? What is your desired asset allocation overall?

Our overall asset allocation is 50/50. We have both stock and bond funds in my rollover IRA, and automatically every month take Required Minimum Distributions (RMDs) proportionally from each fund in my rollover IRA, the RMD is automatically transferred to our joint checking account.

We invest any excess over living expenses in stock index funds in our joint taxable account. Then any necessary rebalancing is done inside my rollover IRA. Rebalance is seldom necessary.
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JerryB
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Re: Allocation at RMD

Post by JerryB »

Thanks for responding. Taxable and Tax Deferred are approximately the same dollars. I am asking if I should decrease equities in the tax deferred and increase equities in the taxable account sooner rather than later to prevent further growth in the tax deferred. It's seems a little contradictory, but because of the RMD's starting next year, the tax deferred is really the taxable account and the taxable account is kind of the tax deferred account if I buy and hold the equity index funds.
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Re: Allocation at RMD

Post by bertilak »

JerryB wrote: Mon Sep 14, 2020 12:35 pm Thanks for responding. Taxable and Tax Deferred are approximately the same dollars. I am asking if I should decrease equities in the tax deferred and increase equities in the taxable account sooner rather than later to prevent further growth in the tax deferred. It's seems a little contradictory, but because of the RMD's starting next year, the tax deferred is really the taxable account and the taxable account is kind of the tax deferred account if I buy and hold the equity index funds.
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Re: Allocation at RMD

Post by sailaway »

The general advice is to always hold the equities in Roth and taxable and bonds in tax deferred. Of course, this is a gross simplification, but the longer the time horizon, the more important this is. You want the least growth in the accounts that are going to be taxed as ordinary income at withdrawal.
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Re: Allocation at RMD

Post by TravelforFun »

JerryB wrote: Mon Sep 14, 2020 12:35 pm Thanks for responding. Taxable and Tax Deferred are approximately the same dollars. I am asking if I should decrease equities in the tax deferred and increase equities in the taxable account sooner rather than later to prevent further growth in the tax deferred. It's seems a little contradictory, but because of the RMD's starting next year, the tax deferred is really the taxable account and the taxable account is kind of the tax deferred account if I buy and hold the equity index funds.
Depends. Since the growth in tax deferred account is taxed at your ordinary income and long term capital gains in your taxable accounts are taxed at either, 0%, 15%, or 20%, you can determine which account should have more growth while maintaining your desired AA.

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ruralavalon
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Re: Allocation at RMD

Post by ruralavalon »

Do you currently hold bonds in your taxable account? If so which bond funds you use in each account, and at what percentage in each account? What is your tax bracket, both federal and state?
JerryB wrote: Mon Sep 14, 2020 10:30 am I will start RMD's in 2021 [emphasis added]. My 401K and tIRA are about 50% and taxable is also about 50%. Keeping my overall allocation the same, would it be a good idea to shift some or all equities from the tIRA/TSP to the taxable account (index funds to hold)? I do not plan to spend the taxable account. What am I missing?
JerryB wrote: Mon Sep 14, 2020 12:35 pm Thanks for responding. Taxable and Tax Deferred are approximately the same dollars. I am asking if I should decrease equities in the tax deferred and increase equities in the taxable account sooner rather than later to prevent further growth in the tax deferred [emphasis added]. It's seems a little contradictory, but because of the RMD's starting next year, the tax deferred is really the taxable account and the taxable account is kind of the tax deferred account if I buy and hold the equity index funds.
So far, I don't see a reason to switch before RMDs start next year, in just 3 months.
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JerryB
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Re: Allocation at RMD

Post by JerryB »

It’s almost like a Roth conversion with no tax consequence today.
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Re: Allocation at RMD

Post by grabiner »

Since you have the TSP, you have a better bond fund there than you can get at retail. Therefore, it makes sense to put as much of your bond allocation as possible in the G fund. If the TSP is all G fund, you can take an RMD from the TSP, and then add an equal amount to another bond fund in either your taxable account or IRA to keep the same allocation.

It is usually better to hold stocks in a taxable account in retirement, as long as it is consistent with your asset allocation. If you are not withdrawing much from the account, you will likely avoid all capital-gains tax on those stocks, as you will leave them to your heirs. And if you are withdrawing and have a bond fund in the taxable account, your tax cost does not depend much on the amount withdrawn from that fund, while withdrawing from a stock fund does have a tax cost.
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celia
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Re: Allocation at RMD

Post by celia »

JerryB wrote: Mon Sep 14, 2020 10:30 am ... would it be a good idea to shift some or all equities from the tIRA/TSP to the taxable account (index funds to hold)?
Why would you ever want to move money to taxable when you can convert to Roth for the exact same tax hit and then have the Roth grow tax-free for ever more (as long as the Roth has been open 5 years and you are over 59.5, when you withdraw)? :beer

Moving money to taxable is what you do when you take your RMD out. But this year, your RMD is $0, meaning you can convert all withdrawals to Roth. If you had to take a RMD this year, what tax bracket would you then be in? I would convert to the top of that tax bracket, since that is what you would be doing for the upcoming years anyway. If you have a lot of money in the tax-deferred accounts that will cause RMDs you don't need for living expenses, you might even benefit from doing several years of Roth conversions.

Note: Put stock funds in the Roth so you can maximize your tax-free growth, as stocks tend to grow faster than bonds.
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JerryB
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Re: Allocation at RMD

Post by JerryB »

I would not be be withdrawing any money from the TSP/tIRA. I would be only changing the allocation in those accounts as well as my taxable account. Money is not moving from the deferred to taxable, so why would that be taxable? Obviously, the RMD’s will be taxable, but my goal is to reduce the future RMD’s by restricting growth in the tax deferred accounts and increasing future growth in the taxable accounts. I have been doing Roth conversions (obviously not enough), and I certainly would consider more but I will probably be into the 24% tax bracket with the RMD’s.
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celia
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Re: Allocation at RMD

Post by celia »

Looks like you already know that Roth conversions would lower future RMDs. Another way to lower them is for some/all of your RMD to be a Qualified Charitable Distribution (QCD).
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Re: Allocation at RMD

Post by MathIsMyWayr »

bertilak wrote: Mon Sep 14, 2020 12:42 pm
JerryB wrote: Mon Sep 14, 2020 12:35 pm Thanks for responding. Taxable and Tax Deferred are approximately the same dollars. I am asking if I should decrease equities in the tax deferred and increase equities in the taxable account sooner rather than later to prevent further growth in the tax deferred. It's seems a little contradictory, but because of the RMD's starting next year, the tax deferred is really the taxable account and the taxable account is kind of the tax deferred account if I buy and hold the equity index funds.
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Leif
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Re: Allocation at RMD

Post by Leif »

celia wrote: Mon Sep 14, 2020 10:42 pm Looks like you already know that Roth conversions would lower future RMDs. Another way to lower them is for some/all of your RMD to be a Qualified Charitable Distribution (QCD).
A third way I use, while keeping the same AA, is to indirectly transfer my equity from tIRA to taxable.

I have an SS bridge of CDs that come due each year. The CDs are typically larger than what I need for living expenses for the year. So, I stash what I need for the year in a HYS account. The rest I use to buy a tax efficient index fund in taxable. In my tIRA I sell the same amount of a similar fund and buy an intermediate term bond index fund. My AA stays the same, my expected return on the tIRA account is reduced (and thus my income taxes), and my taxable fund can get a step up in basis when the fund is passed on.

For tax inefficient funds I use the first technique, which is an in-kind Roth conversion.
Last edited by Leif on Wed Sep 16, 2020 10:14 am, edited 1 time in total.
jimkinny
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Re: Allocation at RMD

Post by jimkinny »

I think having equities in an TIRA is okay as is bonds. It depends on taxes.
Long term cap gains have a different tax rate than regular interest rate income (unless you manage to have a marginal tax rate the same as your capital gains tax rate. Look up both.
Also consider that heirs are allowed a step up basis in your taxable account that might eliminate the capital gains entirely.

Also, having taxes at a regular rate isn't so bad if the income is low. With interest rates being very low, it may not matter too much to you if your are paying your marginal tax rate every year.

Also, equities are consider a higher growth asset compared to bonds. If that proves to be true then your RMDs might keep getting bigger and bigger. Which is good but not if your paying a higher marginal tax rate than you otherwise would have if you kept bonds in the TIRA and had the LT cap gains tax rate or your heirs a step up basis.

I might have a need for cash in the next year. I wish I had sold a lot of equities back at the lows in March. The cap gains would have been low or I may have had a loss. With hindsight I would have then bought bonds in the taxable account and equities in my TIRA. When I needed the cash in one year, I would not have a large amount of cap gains.

I think therefore the answer is it all depends on your circumstances and your tax rates.
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