Sell Gainers or Losers in tIRA for Living Expenses?

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JDSwim3
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Sell Gainers or Losers in tIRA for Living Expenses?

Post by JDSwim3 »

Looking for some thoughts as I'm a bit confused on this.

Age 59, retired, with majority of our 55/45 AA in tIRAs in a 3 fund portfolio.

To avoid future RMD and IRMAA issues, we're performing annual Roth conversions of total US market index that will leave our tIRA tilted on bond fund. Conversion taxes are being paid from a taxable brokerage account.

We sell and take monthly distributions from tIRAs to supplement a moderate pension and a low-pay part-time gig. To date, we've been selling total US market since gains have been strong.

We want to let the Roth ride untouched as long as possible, but that will mean eventually selling bond fund in the tIRA at a loss or at most menial gains.

Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
2. Should we continue converting just the total US market index to give the Roth the best (?) chance for long-term growth?
3. Since we're looking to live off the tIRAs as long as possible, should we maintain a 55/45 in just the tIRAs, or should we include the Roth in the AA mix? This one obviously affects question 2.

Thank you.
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JDSwim3
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by JDSwim3 »

Just to clarify - we're over 59.5, so not paying any early withdrawal penalties.
terran
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by terran »

1) No, at least from a tax perspective it doesn't matter what investments are sold during a conversion.
2) As opposed to bonds? Yes, I'd rather have something with high expected growth (stocks) than something with low expected growth (bonds) in an account on which you don't pay tax on the growth.
3) I would consider all of your accounts (traditional, Roth, and taxable) in your asset allocation and place assets in accounts based on the principles of tax efficient fund placement outlined in the wiki.
exodusNH
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by exodusNH »

JDSwim3 wrote: Tue Jan 11, 2022 2:23 pm Looking for some thoughts as I'm a bit confused on this.

Age 59, retired, with majority of our 55/45 AA in tIRAs in a 3 fund portfolio.

To avoid future RMD and IRMAA issues, we're performing annual Roth conversions of total US market index that will leave our tIRA tilted on bond fund. Conversion taxes are being paid from a taxable brokerage account.

We sell and take monthly distributions from tIRAs to supplement a moderate pension and a low-pay part-time gig. To date, we've been selling total US market since gains have been strong.

We want to let the Roth ride untouched as long as possible, but that will mean eventually selling bond fund in the tIRA at a loss or at most menial gains.

Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
2. Should we continue converting just the total US market index to give the Roth the best (?) chance for long-term growth?
3. Since we're looking to live off the tIRAs as long as possible, should we maintain a 55/45 in just the tIRAs, or should we include the Roth in the AA mix? This one obviously affects question 2.

Thank you.
You should look at all of your accounts as one big pot. If you have decided that 55/45 is what you want, then you stuff as much as your 55% into taxable and Roth accounts. The IRAs then hold your bonds and whatever remains of the 55% equities. If the 45% is too large for your tax-deferred accounts, then it'll need to spill into your other accounts.

You want to fill your Roth with assets that are likely to grow the most.

One note on bond funds: don't focus too much on share price. Investment-grade fund prices are not expected to grow or shrink too much over the course of the duration. It's the interest payments that define bond funds.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by RetiredCSProf »

JDSwim3 wrote: Tue Jan 11, 2022 2:23 pm ...
3. Since we're looking to live off the tIRAs as long as possible, should we maintain a 55/45 in just the tIRAs, or should we include the Roth in the AA mix? This one obviously affects question 2.

Thank you.
I am 73 and struggling with the same questions. I have been converting equity funds to Roth since I retired and plan to continue Roth conversions for a few more years. I plan to leave Roth for legacy and gifts. At the same time, I have withdrawn RMDs largely from equity funds because they had the highest gain. I spend my RMDs on QCDs and taxes rather than re-investing into taxable.

As a result of the Roth conversions and RMD distributions, my tax-deferred has become increasingly bond-heavy, but has continued to grow.

My advisor at Fidelity suggested that I maintain my tIRA at 60/40 while keeping only stocks in Roth. I have been on the fence about this but, in reality, I have accounts with different objectives. An analogy would be an age-based 529 college savings account versus a target-date retirement fund. There is no reason to incorporate both into one AA objective. I know this goes against traditional BH philosophy, but the alternative increases the risk of my running out of tIRA money in my 90's and having to dip into my Roth accounts.

To rebalance my tIRA AA, I have started slowly selling bond funds that have a small gain.
Topic Author
JDSwim3
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by JDSwim3 »

RetiredCSProf wrote: Tue Jan 11, 2022 4:15 pm
JDSwim3 wrote: Tue Jan 11, 2022 2:23 pm ...
3. Since we're looking to live off the tIRAs as long as possible, should we maintain a 55/45 in just the tIRAs, or should we include the Roth in the AA mix? This one obviously affects question 2.

Thank you.
I have been on the fence about this but, in reality, I have accounts with different objectives.... I know this goes against traditional BH philosophy, but the alternative increases the risk of my running out of tIRA money in my 90's and having to dip into my Roth accounts.

To rebalance my tIRA AA, I have started slowly selling bond funds that have a small gain.
Exactly! I want to treat the Roth as a separate objective: 1) dip into only if tIRA is exhausted; 2) self-insured LTC if needed; 3) a nice gift for heirs.

I'm really leaning towards a tIRA-only AA, and have begun considering taking distributions from bond or converting bond to total market once in the Roth in order to keep AA in just the tIRA. Let the Roth ride at 100/0.

Funny, but I gained a bit of satisfaction knowing I'm not alone in this little conundrum.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by Breezy »

I funded my Roth so that I would not feel compelled to sell even with a stock market crash. If I were 100/0, I know I would be so tempted to sell. So it's roughly half in Wellington and half in VBIAX (balanced income). My traditional IRAs are Wellesley and Target Date Retirement Income, while my taxable is VTSAX and VTMFX and a few other assorted other things that found their way in over the years.
Topic Author
JDSwim3
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by JDSwim3 »

Breezy wrote: Tue Jan 11, 2022 8:30 pm If I were 100/0, I know I would be so tempted to sell.
Haha! I'm only a year and a half into this retirement thing, but at least for the moment I'm convincing myself I'll be strong, and "let it ride" in the Roth. It's not a large portion of my portfolio yet, so that has been relatively easy so far. Who knows if I'll resist the temptation after a few more years of conversions and hopefully more big gains. I have "STAY THE COURSE" written on a sticky note above my computer.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by grabiner »

The tax situation does not depend on what you sell. Therefore, you should do whatever makes the remaining allocation appropriate for you. If you have both bonds and stocks in your IRA, the recent stock-market rise has probably left you with more in stocks than you want, so you should rebalance. You can sell stocks to buy bonds, and then take your living expenses proportionally from both. Alternatively, you could take your living expenses entirely from stocks, and possibly still need to sell more stocks to rebalance.
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KlangFool
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by KlangFool »

OP,

A) Why do you think this is the most tax efficient method to spend your money?

B) What is your annual expense?

C) In my mind, this does not make any sense.

What makes more sense to me.

1) Roth convert up to standard deduction/10%/12%

2) Capital gain harvest your taxable investment up to 0% long term capital gain.

3) Spend from (2), annual taxable dividend/distribution, and Roth account.

This seems to be more tax efficient.

Why does it makes sense to take additional IRA distribution and pay ordinary income tax? It is cheaper to capital gain harvest your taxable account. Or, just spend from your Roth account.

KlangFool
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Topic Author
JDSwim3
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by JDSwim3 »

KlangFool wrote: Tue Jan 11, 2022 10:35 pm OP,

A) Why do you think this is the most tax efficient method to spend your money?

B) What is your annual expense?

C) In my mind, this does not make any sense.

What makes more sense to me.

1) Roth convert up to standard deduction/10%/12%

2) Capital gain harvest your taxable investment up to 0% long term capital gain.

3) Spend from (2), annual taxable dividend/distribution, and Roth account.

This seems to be more tax efficient.

Why does it makes sense to take additional IRA distribution and pay ordinary income tax? It is cheaper to capital gain harvest your taxable account. Or, just spend from your Roth account.

KlangFool
We're way heavy in tax-deferred versus tax-free. Anticipate remaining in 22% bracket without RMDs, so performing annual conversions that may prevent unneeded RMD dollars that would likely kick us into next bracket. Our taxable is modest, and will be exhausted paying the conversion tax over the next several years. Roth is also modest for now. Even if we were to take the "tax savvy" approach by using taxable and Roth for living expenses, that would only sustain us for about 4-5 years based on current levels in each.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by KlangFool »

JDSwim3 wrote: Thu Jan 13, 2022 9:31 pm
KlangFool wrote: Tue Jan 11, 2022 10:35 pm OP,

A) Why do you think this is the most tax efficient method to spend your money?

B) What is your annual expense?

C) In my mind, this does not make any sense.

What makes more sense to me.

1) Roth convert up to standard deduction/10%/12%

2) Capital gain harvest your taxable investment up to 0% long term capital gain.

3) Spend from (2), annual taxable dividend/distribution, and Roth account.

This seems to be more tax efficient.

Why does it makes sense to take additional IRA distribution and pay ordinary income tax? It is cheaper to capital gain harvest your taxable account. Or, just spend from your Roth account.

KlangFool
We're way heavy in tax-deferred versus tax-free. Anticipate remaining in 22% bracket without RMDs, so performing annual conversions that may prevent unneeded RMD dollars that would likely kick us into next bracket. Our taxable is modest, and will be exhausted paying the conversion tax over the next several years. Roth is also modest for now. Even if we were to take the "tax savvy" approach by using taxable and Roth for living expenses, that would only sustain us for about 4-5 years based on current levels in each.
I seriously doubt that your calculation is correct. It would be good if you can get someone else to check out your numbers. It could be worth a lot of money for you. Good luck to you!

KlangFool
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by teen persuasion »

JDSwim3 wrote: Thu Jan 13, 2022 9:31 pm
KlangFool wrote: Tue Jan 11, 2022 10:35 pm OP,

A) Why do you think this is the most tax efficient method to spend your money?

B) What is your annual expense?

C) In my mind, this does not make any sense.

What makes more sense to me.

1) Roth convert up to standard deduction/10%/12%

2) Capital gain harvest your taxable investment up to 0% long term capital gain.

3) Spend from (2), annual taxable dividend/distribution, and Roth account.

This seems to be more tax efficient.

Why does it makes sense to take additional IRA distribution and pay ordinary income tax? It is cheaper to capital gain harvest your taxable account. Or, just spend from your Roth account.

KlangFool
We're way heavy in tax-deferred versus tax-free. Anticipate remaining in 22% bracket without RMDs, so performing annual conversions that may prevent unneeded RMD dollars that would likely kick us into next bracket. Our taxable is modest, and will be exhausted paying the conversion tax over the next several years. Roth is also modest for now. Even if we were to take the "tax savvy" approach by using taxable and Roth for living expenses, that would only sustain us for about 4-5 years based on current levels in each.
Then why are you worried about tIRA being exhausted? Either RMDs are unneeded, or they are being spent (and then some) for annual expenses. Which is it?

I really don't understand the confusion. Treat your various accounts as one portfolio. Place asset classes according to best tax efficiency. Rebalance as needed, either directly by buying/selling, or by withdrawing from the overweighted class.

Apologies to McQ, but I also don't subscribe to the never touch your Roth accounts philosophy. I don't intend to drain them first, but I will use them judiciously. Of course, as we are under 59.5, we have to make use of a Roth ladder to access our tIRA balances without penalty. But it's just a workaround, not unlike the backdoor Roth IRA contribution, in reverse: convert some from tIRA to Roth, withdraw same amount (or less) from previous Roth contributions or seasoned conversions. It's equivalent to just withdrawing from tIRA, but gets around the penalty. After 59.5, I intend to continue in this manner: convert an amount optimized for taxes to Roth, withdraw from Roth amount needed for expenses. I could directly withdraw from tIRA for expenses and then convert some additional amount after figuring that out, but it seems easier and cleaner to stick with my plan.

Roth is all stocks, tIRA a mix of stocks and bonds. I want to shift (convert) stocks to Roth each time, leaving bonds in tIRA. Over time, my proportion of Roth to tIRA should grow, so the mix of stock:bond inside the tIRA should become more bond heavy, slowing its growth and shrinking future RMDs. This is exactly what I want, because after SS begins, our expenses drawn from IRAs will decrease. At this point I hope RMDs will approximate our needed residual expenses. If there's an opportunity, I will continue Roth conversions after taking RMDs, to continue shifting our balances from tIRA to Roth.

Our conversions will likely be moderate, mostly controlling growth within the tIRA over time, but letting Roth IRA grow without limits.
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JDSwim3
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by JDSwim3 »

teen persuasion wrote: Fri Jan 14, 2022 8:48 am
Roth is all stocks, tIRA a mix of stocks and bonds. I want to shift (convert) stocks to Roth each time, leaving bonds in tIRA. Over time, my proportion of Roth to tIRA should grow, so the mix of stock:bond inside the tIRA should become more bond heavy, slowing its growth and shrinking future RMDs. This is exactly what I want, because after SS begins, our expenses drawn from IRAs will decrease. At this point I hope RMDs will approximate our needed residual expenses. If there's an opportunity, I will continue Roth conversions after taking RMDs, to continue shifting our balances from tIRA to Roth.

Our conversions will likely be moderate, mostly controlling growth within the tIRA over time, but letting Roth IRA grow without limits.
From a tax-efficient and tIRA growth-control perspective (to help control RMDs), that makes perfect sense.

However, I've been of the mindset to leave the Roth untouched except for contingencies or potentially as a nice gift to heirs when the time comes. If I aim to maximize bond in the tIRA through annual conversions of stock, I will effectively be withdrawing more principle from tIRA as bonds will undoubtedly underperform stock over the long haul.

I guess I'm not (yet?) thoroughly convinced on "treat the entire portfolio as one AA". I have a different objective for the Roth.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by KlangFool »

JDSwim3 wrote: Fri Jan 14, 2022 7:11 pm
However, I've been of the mindset to leave the Roth untouched except for contingencies or potentially as a nice gift to heirs when the time comes.
JDSwim3,

You only have one portfolio. How does paying more taxes and making your portfolio smaller is better for your heirs?

I think you should calculate the numbers instead of assuming that your current approach actually works.

KlangFool
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by vtsnowdin »

Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
Of course it does. Sell losers, at least enough to balance out any winners so you owe Zero Cap gains tax. Hopefully you don't have enough losers to just live off selling losers only.
As to running out of other funds and having to tap into a Roth, that is what it is for. Any legacy is what you end up not needing and will probably be plenty.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by KlangFool »

vtsnowdin wrote: Fri Jan 14, 2022 8:05 pm
Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
Of course it does. Sell losers, at least enough to balance out any winners so you owe Zero Cap gains tax.
vtsnowdin,

OP is correct. tIRA distributions are taxed as ordinary income. It is not taxed as capital gain or loss.

KlangFool
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by vtsnowdin »

KlangFool wrote: Fri Jan 14, 2022 8:08 pm
vtsnowdin wrote: Fri Jan 14, 2022 8:05 pm
Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
Of course it does. Sell losers, at least enough to balance out any winners so you owe Zero Cap gains tax.
vtsnowdin,

OP is correct. tIRA distributions are taxed as ordinary income. It is not taxed as capital gain or loss.

KlangFool
But is not the taxable amount the net gain?
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by KlangFool »

vtsnowdin wrote: Fri Jan 14, 2022 8:10 pm
KlangFool wrote: Fri Jan 14, 2022 8:08 pm
vtsnowdin wrote: Fri Jan 14, 2022 8:05 pm
Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
Of course it does. Sell losers, at least enough to balance out any winners so you owe Zero Cap gains tax.
vtsnowdin,

OP is correct. tIRA distributions are taxed as ordinary income. It is not taxed as capital gain or loss.

KlangFool
But is not the taxable amount the net gain?
No. It is the amount that you distribute from the Trad IRA. If you distribute 10K from the Trad IRA, your taxable income is 10K. Capital gain or loss only apply to your investment at your taxable account.

KlangFool
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by vtsnowdin »

KlangFool wrote: Fri Jan 14, 2022 8:15 pm
vtsnowdin wrote: Fri Jan 14, 2022 8:10 pm
KlangFool wrote: Fri Jan 14, 2022 8:08 pm
vtsnowdin wrote: Fri Jan 14, 2022 8:05 pm
Questions:
1. Since tIRA distributions are taxed as regular income, does it even matter if we're selling gainers or losers?
Of course it does. Sell losers, at least enough to balance out any winners so you owe Zero Cap gains tax.
vtsnowdin,

OP is correct. tIRA distributions are taxed as ordinary income. It is not taxed as capital gain or loss.

KlangFool
But is not the taxable amount the net gain?
No. It is the amount that you distribute from the Trad IRA. If you distribute 10K from the Trad IRA, your taxable income is 10K. Capital gain or loss only apply to your investment at your taxable account.

KlangFool
You are of course correct. I was forgetting that the principle was tax deferred. I learn something here every day.
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teen persuasion
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by teen persuasion »

JDSwim3 wrote: Tue Jan 11, 2022 8:23 pm
RetiredCSProf wrote: Tue Jan 11, 2022 4:15 pm
JDSwim3 wrote: Tue Jan 11, 2022 2:23 pm ...
3. Since we're looking to live off the tIRAs as long as possible, should we maintain a 55/45 in just the tIRAs, or should we include the Roth in the AA mix? This one obviously affects question 2.

Thank you.
I have been on the fence about this but, in reality, I have accounts with different objectives.... I know this goes against traditional BH philosophy, but the alternative increases the risk of my running out of tIRA money in my 90's and having to dip into my Roth accounts.

To rebalance my tIRA AA, I have started slowly selling bond funds that have a small gain.
Exactly! I want to treat the Roth as a separate objective: 1) dip into only if tIRA is exhausted; 2) self-insured LTC if needed; 3) a nice gift for heirs.

I'm really leaning towards a tIRA-only AA, and have begun considering taking distributions from bond or converting bond to total market once in the Roth in order to keep AA in just the tIRA. Let the Roth ride at 100/0.

Funny, but I gained a bit of satisfaction knowing I'm not alone in this little conundrum.
So if you keep Roth at 100/0, and tIRA at 55/45, you will be making your overall portfolio more stock heavy. What is your ratio of Roth to tIRA?

As an example with our situation: we want 70/30 overall. If our Roth IRAs are about 40% and tIRA are 60%, then we want Roth all stock (40%), and the 30% bonds in tIRA, leaving the last 30% of stocks also in the tIRA. Thus tIRA ends up half stocks, half bonds. --> that's not far off your planned 55/45 in tIRA, but look - overall it's really 70/30!

Your end result depends on the Roth/tIRA ratio.
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Re: Sell Gainers or Losers in tIRA for Living Expenses?

Post by KlangFool »

vtsnowdin wrote: Fri Jan 14, 2022 8:35 pm
KlangFool wrote: Fri Jan 14, 2022 8:15 pm
vtsnowdin wrote: Fri Jan 14, 2022 8:10 pm
KlangFool wrote: Fri Jan 14, 2022 8:08 pm
vtsnowdin wrote: Fri Jan 14, 2022 8:05 pm
Of course it does. Sell losers, at least enough to balance out any winners so you owe Zero Cap gains tax.
vtsnowdin,

OP is correct. tIRA distributions are taxed as ordinary income. It is not taxed as capital gain or loss.

KlangFool
But is not the taxable amount the net gain?
No. It is the amount that you distribute from the Trad IRA. If you distribute 10K from the Trad IRA, your taxable income is 10K. Capital gain or loss only apply to your investment at your taxable account.

KlangFool
You are of course correct. I was forgetting that the principle was tax deferred. I learn something here every day.
No problem. It is easy to be confused.

KlangFool
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