IRA balance does not decrease

[Ferd Burfel]

I have a new thought, at least to me, regarding funding RMDs, and would like to hear any concerns about it.

With 20-Year TBonds hitting 5%, I am thinking of switching my tIRA investment to the purchase of 20-year 5% TBonds.

I have calculated and the average RMD withdrawal over my expected remaining lifetime is also about 5%. I could match the coupons with the RMDs.

I don't think I am concerned about inflation here, as the liability, so to speak, I am matching the coupons with is the RMD rate, not the inflation rate.

Has this idea been discussed before and if so, can someone provide a link? If not, what are the holes in the idea?

[ncdcpa]

Starting simple, once you pass 81, your RMD is over 5% of the value of the IRA at the end of the previous year. You have to be cashing in bonds by then, if not earlier. So it is a little more complicated. Averages over-simplify things here.

A fundamental problem is that value of any bond varies with interest rates. Suppose you carefully construct a bond ladder that you calculate will, in any future year, produce cash (interest and maturation) that matches the RMD calculated for the value of the bonds at the end of the previous year. Now suppose interest rates drop going forward. The value of the bonds at the end of the year, especially the longer term bonds, will have become than was projected originally, making the RMD for the next year greater than originally planned. So the fixed coupon and at-par redemptions you planned for that year, unchanged by the changing interest rates, will not be sufficient to meet the now-higher RMD. You will have to use something else to meet the RMD. If all you have there are your bonds, you will have to sell some of your bonds intended for future years..

There are ways to attempt to deal with this, though I've not spotted any that are simply set and forget. I'm doing something like this, but with TIPS. My IRA includes some additional funds to buffer this effect. Should that proves insufficient, I plan to sell bonds off the long end. I suspect these effects would be greater with nominal bonds than with TIPS, but haven't looked at it. (I'm not saying TIPS makes this easier or better; I'm just describing the issue in terms of something with which I am more familiar.)

The other point is that, at least with TIPS ladder in an IRA (with original owner) built before about age 80, the natural IRA ladder end point using the current IRA table is age 99. I suspect the same is true with nominal bonds.

[MtnBiker]

Why focus on “funding the RMD?” An RMD is not necessarily a need to generate a cash flow equal to the amount of the RMD.

My understanding is that an RMD is a requirement to transfer assets in the IRA to a taxable account. If you don’t need the withdrawal amount for living expenses, the only cash that needs to be generated in such an event is the amount needed to pay taxes on the transfer.

My goal for RMDs is to have the tax due not increase substantially over time. This implies a declining IRA balance.

[ncdcpa]

Why focus on “funding the RMD?” An RMD is not necessarily a need to generate a cash flow equal to the amount of the RMD.

My understanding is that an RMD is a requirement to transfer assets in the IRA to a taxable account. If you don’t need the withdrawal amount for living expenses, the only cash that needs to be generated in such an event is the amount needed to pay taxes on the transfer.

I agree with this. My goal for the IRA is to make it part of my reliable paycheck. Once I decide to use a risk-free asset (TIPS ladder) for that reliable paycheck, I try to make it work with the IRA rules. This may be the intent of OP as well. (I'm using risk-free in the sense of being able to provided the future payout according to schedule, not the market value, hence not cash.)

[Ferd Burfel]

Starting simple, once you pass 81, your RMD is over 5% of the value of the IRA at the end of the previous year. You have to be cashing in bonds by then, if not earlier. So it is a little more complicated. Averages over-simplify things here.

That is true, so I will save up the differences between the coupons and the RMDs from 73 to 81 to pay for the years between 81 and 87.

A fundamental problem is that value of any bond varies with interest rates. Suppose you carefully construct a bond ladder that you calculate will, in any future year, produce cash (interest and maturation) that matches the RMD calculated for the value of the bonds at the end of the previous year. Now suppose interest rates drop going forward. The value of the bonds at the end of the year, especially the longer term bonds, will have become than was projected originally, making the RMD for the next year greater than originally planned. So the fixed coupon and at-par redemptions you planned for that year, unchanged by the changing interest rates, will not be sufficient to meet the now-higher RMD. You will have to use something else to meet the RMD. If all you have there are your bonds, you will have to sell some of your bonds intended for future years..

There are ways to attempt to deal with this, though I've not spotted any that are simply set and forget. I'm doing something like this, but with TIPS. My IRA includes some additional funds to buffer this effect. Should that proves insufficient, I plan to sell bonds off the long end. I suspect these effects would be greater with nominal bonds than with TIPS, but haven't looked at it. (I'm not saying TIPS makes this easier or better; I'm just describing the issue in terms of something with which I am more familiar.)

I am not creating a self-liquidating bond ladder with varying maturities. Instead I am investing once into 20-year TBonds that mature all at once. My intent is to not liquidate the investment but to keep it essentially steady-state. If interest rates rise first, then the value of the bonds would fall and my RMD would be lower but my coupons would remain the same and I would have a second source of funds to buffer against the later periods of higher RMDs or potentially higher interest rates. If interest rates fall first, then the RMDs will be higher than planned and some small liquidation might be required but because the bonds now are worth more than when purchased, I expect this rise in valuation could offset the additional RMDs, proaably netting out.

The other point is that, at least with TIPS ladder in an IRA (with original owner) built before about age 80, the natural IRA ladder end point using the current IRA table is age 99. I suspect the same is true with nominal bonds.

Again, not using a ladder, but really not making any plan for living so long. I think that is like a 1 in 7 chance, so will take the risk. Liquidating bonds if need be is fine and probably required, given the high RMD percentages at that age, assuming the whole RMD concept even survives that long.

[exodusNH]

I have a new thought, at least to me, regarding funding RMDs, and would like to hear any concerns about it.

With 20-Year TBonds hitting 5%, I am thinking of switching my tIRA investment to the purchase of 20-year 5% TBonds.

I have calculated and the average RMD withdrawal over my expected remaining lifetime is also about 5%. I could match the coupons with the RMDs.

I don't think I am concerned about inflation here, as the liability, so to speak, I am matching the coupons with is the RMD rate, not the inflation rate.

Has this idea been discussed before and if so, can someone provide a link? If not, what are the holes in the idea?

You don't have to spend the RMD. You can just take it, pay the taxes, and reinvest the rest in a taxable account.

The median retirement balance in one's 70s is about $500,000, which is only an RMD of around $20,000.

[ncdcpa]

Starting simple, once you pass 81, your RMD is over 5% of the value of the IRA at the end of the previous year. You have to be cashing in bonds by then, if not earlier. So it is a little more complicated. Averages over-simplify things here.

That is true, so I will save up the differences between the coupons and the RMDs from 73 to 81 to pay for the years between 81 and 87.

...

I am not creating a self-liquidating bond ladder with varying maturities. Instead I am investing once into 20-year TBonds that mature all at once. My intent is to not liquidate the investment but to keep it essentially steady-state. If interest rates rise first, then the value of the bonds would fall and my RMD would be lower but my coupons would remain the same and I would have a second source of funds to buffer against the later periods of higher RMDs or potentially higher interest rates. If interest rates fall first, then the RMDs will be higher than planned and some small liquidation might be required but because the bonds now are worth more than when purchased, I expect this rise in valuation could offset the additional RMDs, proaably netting out.

...

Again, not using a ladder, but really not making any plan for living so long. I think that is like a 1 in 7 chance, so will take the risk. Liquidating bonds if need be is fine and probably required, given the high RMD percentages at that age, assuming the whole RMD concept even survives that long.

It sounds like you have worked through and are comfortable with how the 20-year treasury will work as an IRA holding.

[Ferd Burfel]

Why focus on “funding the RMD?” An RMD is not necessarily a need to generate a cash flow equal to the amount of the RMD.

My understanding is that an RMD is a requirement to transfer assets in the IRA to a taxable account. If you don’t need the withdrawal amount for living expenses, the only cash that needs to be generated in such an event is the amount needed to pay taxes on the transfer.

My goal for RMDs is to have the tax due not increase substantially over time. This implies a declining IRA balance.

You either have to have the cash flow from dividends or sell parts of your investment to fund the RMD. If you do that latter, you are slowly liquidating the IRA. If you can get a high enough return not to do that, then there is more for your heirs/charities to take hold of.

The RMD itself will pay for the related tax, so that is not a concern. Just trying to generate the highest IRA return and deal with RMDs at the same time.

[Ferd Burfel]

That is true, so I will save up the differences between the coupons and the RMDs from 73 to 81 to pay for the years between 81 and 87.

I am not creating a self-liquidating bond ladder with varying maturities. Instead I am investing once into 20-year TBonds that mature all at once. My intent is to not liquidate the investment but to keep it essentially steady-state. If interest rates rise first, then the value of the bonds would fall and my RMD would be lower but my coupons would remain the same and I would have a second source of funds to buffer against the later periods of higher RMDs or potentially higher interest rates. If interest rates fall first, then the RMDs will be higher than planned and some small liquidation might be required but because the bonds now are worth more than when purchased, I expect this rise in valuation could offset the additional RMDs, proaably netting out.


Again, not using a ladder, but really not making any plan for living so long. I think that is like a 1 in 7 chance, so will take the risk. Liquidating bonds if need be is fine and probably required, given the high RMD percentages at that age, assuming the whole RMD concept even survives that long.

It sounds like you have worked through and are comfortable with how the 20-year treasury will work as an IRA holding.

No, not really, the idea just occurred this morning and today's market action reinforced it. Whenever long-term rates cross 5%, it seems like that is a return that one could live with through any retirement situation. A 5% annuity, except you get to keep the capital and its is guaranteed. What is not to like?

Just wondering if there are any gotchas.

[Ferd Burfel]

I have a new thought, at least to me, regarding funding RMDs, and would like to hear any concerns about it.

With 20-Year TBonds hitting 5%, I am thinking of switching my tIRA investment to the purchase of 20-year 5% TBonds.

I have calculated and the average RMD withdrawal over my expected remaining lifetime is also about 5%. I could match the coupons with the RMDs.

I don't think I am concerned about inflation here, as the liability, so to speak, I am matching the coupons with is the RMD rate, not the inflation rate.

Has this idea been discussed before and if so, can someone provide a link? If not, what are the holes in the idea?

You don't have to spend the RMD. You can just take it, pay the taxes, and reinvest the rest in a taxable account.

The median retirement balance in one's 70s is about $500,000, which is only an RMD of around $20,000.

Yes, I understand you are not spending an RMD, but you have to distribute a sufficient amount from dividends or sales for the RMD amount.

What I am thinking about primarily is how do I get the highest guaranteed return in my IRA over 20 years. The fact that this income is sufficient to meet the RMD requirement is secondary, but does provide a larger balance for my heirs/charities.

I guess what I am pondering on is whether it is better to have a diminishing value IRA (receive less income) or a stable-value IRA (receive more income). Like has someone charted out on a post-tax analysis if it is better to have your IRA diminish in value over time or to be stable?

[rkhusky]

You don't have to spend the RMD. You can just take it, pay the taxes, and reinvest the rest in a taxable account.

The median retirement balance in one's 70s is about $500,000, which is only an RMD of around $20,000.

Yes, I understand you are not spending an RMD, but you have to distribute a sufficient amount from dividends or sales for the RMD amount.

What I am thinking about primarily is how do I get the highest guaranteed return in my IRA over 20 years. The fact that this income is sufficient to meet the RMD requirement is secondary, but does provide a larger balance for my heirs/charities.

I guess what I am pondering on is whether it is better to have a diminishing value IRA (receive less income) or a stable-value IRA (receive more income). Like has someone charted out on a post-tax analysis if it is better to have your IRA diminish in value over time or to be stable?

It’s better to get more after-tax money. Guaranteed return will likely provide less money over the long run. To get more return, you usually have to take more risk.

[sycamore]

A couple of thought exercises. Let's assume you buy X number of 20 year bonds
and for simplicity they pay coupons only once a year.

Thought exercise #1:
On the day coupons of $Y are distributed (in cash),
you realize that $Y is not enough to meet RMD so you have to sell one measly bond
and withdraw $Y + one bond as RMD.

The RMD "came from" a mix of coupons and selling bonds.
Did your plan fail?

Thought exercise #2:
On the day coupons of $Y are distributed (in cash),
in the spirit of experimentation you decide to buy $Y worth of new bonds (that mature at the same time as the others)
and you sell $Y worth of the bonds.
You withdraw the $Y as RMD.

Now the RMD "came from" selling the bonds and not from coupons.
Did your plan fail?

The goal of these thoughts is to tease out just how important it is that RMDs come specifically from the coupons. If it is an essential part of your plan, then I think your plan will probably work. But whether fulfilling RMD with only coupons helps with other goals of your plan (like provide a larger balance for beneficiaries) is a really different question. You need to decide which goal is the more important one.

[MtnBiker]

Why focus on “funding the RMD?” An RMD is not necessarily a need to generate a cash flow equal to the amount of the RMD.

My understanding is that an RMD is a requirement to transfer assets in the IRA to a taxable account. If you don’t need the withdrawal amount for living expenses, the only cash that needs to be generated in such an event is the amount needed to pay taxes on the transfer.

My goal for RMDs is to have the tax due not increase substantially over time. This implies a declining IRA balance.

You either have to have the cash flow from dividends or sell parts of your investment to fund the RMD. If you do that latter, you are slowly liquidating the IRA. If you can get a high enough return not to do that, then there is more for your heirs/charities to take hold of.

The RMD itself will pay for the related tax, so that is not a concern. Just trying to generate the highest IRA return and deal with RMDs at the same time.

The part of your response that I think is misguided is the part that I highlighted above. You don't have to sell any part of your investment to fund the RMD. You can transfer the assets to the taxable account in kind.

At least the way I have planned it out, I think I will have more for my heirs by having a declining IRA balance. It is a matter of tax efficiency. Gradually moving assets from IRA to taxable results in near-constant annual taxes. A constant IRA balance would result in taxes growing over time. I strive for growing the sum of (taxable + IRA + Roth) for heirs/charity, not IRA only. Of those three accounts, the IRA is the least tax efficient for me.

[Ferd Burfel]

Yes, I understand you are not spending an RMD, but you have to distribute a sufficient amount from dividends or sales for the RMD amount.

What I am thinking about primarily is how do I get the highest guaranteed return in my IRA over 20 years. The fact that this income is sufficient to meet the RMD requirement is secondary, but does provide a larger balance for my heirs/charities.

I guess what I am pondering on is whether it is better to have a diminishing value IRA (receive less income) or a stable-value IRA (receive more income). Like has someone charted out on a post-tax analysis if it is better to have your IRA diminish in value over time or to be stable?

It’s better to get more after-tax money. Guaranteed return will likely provide less money over the long run. To get more return, you usually have to take more risk.

Is not the sole reason for TIPS ladders to provide a guaranteed return in retirement? This is like that. As I said, the thing I am pondering is whether a stable value vs. a diminishing value for an IRA is something that has been discussed here?

[Ferd Burfel]

A couple of thought exercises. Let's assume you buy X number of 20 year bonds
and for simplicity they pay coupons only once a year.

Thought exercise #1:
On the day coupons of $Y are distributed (in cash),
you realize that $Y is not enough to meet RMD so you have to sell one measly bond
and withdraw $Y + one bond as RMD.

The RMD "came from" a mix of coupons and selling bonds.
Did your plan fail?

Thought exercise #2:
On the day coupons of $Y are distributed (in cash),
in the spirit of experimentation you decide to buy $Y worth of new bonds (that mature at the same time as the others)
and you sell $Y worth of the bonds.
You withdraw the $Y as RMD.

Now the RMD "came from" selling the bonds and not from coupons.
Did your plan fail?

The goal of these thoughts is to tease out just how important it is that RMDs come specifically from the coupons. If it is an essential part of your plan, then I think your plan will probably work. But whether fulfilling RMD with only coupons helps with other goals of your plan (like provide a larger balance for beneficiaries) is a really different question. You need to decide which goal is the more important one.

The first scenario could only happen if interest rates rose sufficiently to overcome both the annual coupons and any coupons previously paid in excess of RMDs. I don't follow the purpose of scenario #2.

Almost without exception, the examples of IRA balances over retirement show a declining value. In this example the balance does not decline due to the income matching the RMDs. So I am trying to understand, probably on a post-tax basis over the longer term, if that is a net positive or net negative.

[Ferd Burfel]

You either have to have the cash flow from dividends or sell parts of your investment to fund the RMD. If you do that latter, you are slowly liquidating the IRA. If you can get a high enough return not to do that, then there is more for your heirs/charities to take hold of.

The RMD itself will pay for the related tax, so that is not a concern. Just trying to generate the highest IRA return and deal with RMDs at the same time.

The part of your response that I think is misguided is the part that I highlighted above. You don't have to sell any part of your investment to fund the RMD. You can transfer the assets to the taxable account in kind.

I hold a TIPS fund in my IRA. I do not want a TIPS fund in taxable, so I would need to buy a different fund. I would have to change the fund inside the IRA if I was going to do an in-kind exchange.

At least the way I have planned it out, I think I will have more for my heirs by having a declining IRA balance. It is a matter of tax efficiency. Gradually moving assets from IRA to taxable results in near-constant annual taxes. A constant IRA balance would result in taxes growing over time. I strive for growing the sum of (taxable + IRA + Roth) for heirs/charity, not IRA only. Of those three accounts, the IRA is the least tax efficient for me.

One thing that might be different in your scenario vs mine is that the reason to pursue the 20Y TBond is the higher, guaranteed return, like an annuity but without having to part with your capital. While the RMD tax would be higher, so would the return. While you have a lower tax bill on the RMDs over time, I have a higher asset balance, which should outweigh the tax benefits you gain via lower RMDs, shouldn't it?

[Ferd Burfel]

To make these choices clearer, I have added numbers. This model assumes that the choice on how to allocate within an IRA is made at age 68, with RMDs to start at age 73. The tIRA balanced at age 68 is $1m. The two options are: (A) a bond fund which will deliver a 3% average return or (B) a 20Y TBond with a 5% coupon. RMD tax rate is 22%. Compounding is not included for simplicity.

Over the first 5 years before RMDs begin, the balance of Option A has grown to $1.15m and for Option B to $1.25m.

After 20 years, 15 of which require RMDs, the numbers are:

Option A, RMDs = $0.781m, IRA balance = $0.836m, RMD-related taxes paid = $0.172m, net of balance and taxes = $0.664m

Option B, RMDs = $0.978m, IRA balance = $1.197m, RMD-related taxes paid = $0.215m, net of balance and taxes = $0.982m

The difference in net IRA balance and taxes is $0.318m for Option B. Taken in isolation, it seems that Option B is clearly superior, despite the higher RMDs, higher taxes, and that the IRA balance does not start to decline until the 13th year (8th RMD year).

[rkhusky]

It’s better to get more after-tax money. Guaranteed return will likely provide less money over the long run. To get more return, you usually have to take more risk.

Is not the sole reason for TIPS ladders to provide a guaranteed return in retirement? This is like that. As I said, the thing I am pondering is whether a stable value vs. a diminishing value for an IRA is something that has been discussed here?

A TIPS ladder will give you a guaranteed inflation-adjusted return if every rung is held to maturity. If you have unexpected expenses requiring you to sell early, all bets are off.

If inflation is less than expected, TIPS will likely return less than nominal bonds. Bonds, along with most fixed income, will likely return less than stocks over the long run.

[alluringreality]

The two options are: (A) a bond fund which will deliver a 3% average return or (B) a 20Y TBond with a 5% coupon.

Where is the 2% difference coming from? It looks like Friday the 5-20 year yield curve ranged roughly 0.5%. SEC yields on Vanguard's intermediate Treasury funds might add around 0.1%, although such average durations or average maturities come in under 6 years, so appropriateness may be debatable. Personally I'm not familiar with criteria used to establish the duration or return difference for (A), although sometimes posters use recent past performance to estimate future bond fund returns. To me it seems difficult to say if a roughly steady duration holding (A) might end up underperforming a falling duration holding (B) across future years 5-20, since I cannot say how rates might change across the holding period. Personally I might be inclined to prefer coupon payments from option (B), or zero-coupon bonds, or target maturity bond funds (iBonds or BulletShares) for some of my own purposes, but honestly I don't follow the 2/3 better performance across 20 years proposed for option (B).

[MtnBiker]

The part of your response that I think is misguided is the part that I highlighted above. You don't have to sell any part of your investment to fund the RMD. You can transfer the assets to the taxable account in kind.

I hold a TIPS fund in my IRA. I do not want a TIPS fund in taxable, so I would need to buy a different fund. I would have to change the fund inside the IRA if I was going to do an in-kind exchange.

At least the way I have planned it out, I think I will have more for my heirs by having a declining IRA balance. It is a matter of tax efficiency. Gradually moving assets from IRA to taxable results in near-constant annual taxes. A constant IRA balance would result in taxes growing over time. I strive for growing the sum of (taxable + IRA + Roth) for heirs/charity, not IRA only. Of those three accounts, the IRA is the least tax efficient for me.

One thing that might be different in your scenario vs mine is that the reason to pursue the 20Y TBond is the higher, guaranteed return, like an annuity but without having to part with your capital. While the RMD tax would be higher, so would the return. While you have a lower tax bill on the RMDs over time, I have a higher asset balance, which should outweigh the tax benefits you gain via lower RMDs, shouldn't it?

Rather than focusing on the nominal size of the IRA, I still think you need to view the real value (after inflation) of the portfolio as a whole, including the taxable account. I too have TIPS as about 1/2 of my IRA, in the form of a non-rolling ladder that depletes over time. Gradually shifting assets from IRA to taxable allows me to increase investments in tax-efficient equity index funds in the taxable account. (I have a rising equity glidepath.) My assumption (rightly or wrongly) is that real growth over long time periods (after inflation) will be higher in equities than in fixed income. I hope to have more total assets in taxable plus IRA, than if I had tried to grow the IRA.

If investing your IRA in nominal bonds, you have no idea what the real value of the IRA might be for heirs/charities in 20 years, regardless of its size in nominal dollars. You are accepting the risk that it may lose value to inflation.

[sycamore]

Thought exercise #2:
On the day coupons of $Y are distributed (in cash),
in the spirit of experimentation you decide to buy $Y worth of new bonds (that mature at the same time as the others)
and you sell $Y worth of the bonds.
You withdraw the $Y as RMD.

Now the RMD "came from" selling the bonds and not from coupons.
Did your plan fail?
...

... I don't follow the purpose of scenario #2.

Sometimes we see posters who say "I want to do X but by only using dividends" which is often based on some misguided idea. It seems analogous to using only coupons so I thought I'd check. It appear you are not hung up on using coupons, which I think is a good thing

[sycamore]

Has this idea been discussed before and if so, can someone provide a link?

I tried some searches but no luck. There were several discussions of using a ladder of TIPS or bonds (not a single bond issue) to satisfy RMDs.

[Ferd Burfel]

The two options are: (A) a bond fund which will deliver a 3% average return or (B) a 20Y TBond with a 5% coupon.

Where is the 2% difference coming from? It looks like Friday the 5-20 year yield curve ranged roughly 0.5%. SEC yields on Vanguard's intermediate Treasury funds might add around 0.1%, although such average durations or average maturities come in under 6 years, so appropriateness may be debatable. Personally I'm not familiar with criteria used to establish the duration or return difference for (A), although sometimes posters use recent past performance to estimate future bond fund returns. To me it seems difficult to say if a roughly steady duration holding (A) might end up underperforming a falling duration holding (B) across future years 5-20, since I cannot say how rates might change across the holding period. Personally I might be inclined to prefer coupon payments from option (B), or zero-coupon bonds, or target maturity bond funds (iBonds or BulletShares) for some of my own purposes, but honestly I don't follow the 2/3 better performance across 20 years proposed for option (B).

3% comes from an expected long-term average inflation rate of 2.3-2.5%, a neutral rate of around 0.5% and no term premium. Since option A is based on an ITT bond fund over 20 years, that seems about right, with expected up and downs in rates netting out. I can't think of a better number of use. Some of the difference will locking in the rate delta from the initial term difference between the 20Y TB and the ITT bond fund and also in taking on the illiquidity premium for 20Y TBs.

[Ferd Burfel]

I hold a TIPS fund in my IRA. I do not want a TIPS fund in taxable, so I would need to buy a different fund. I would have to change the fund inside the IRA if I was going to do an in-kind exchange.


One thing that might be different in your scenario vs mine is that the reason to pursue the 20Y TBond is the higher, guaranteed return, like an annuity but without having to part with your capital. While the RMD tax would be higher, so would the return. While you have a lower tax bill on the RMDs over time, I have a higher asset balance, which should outweigh the tax benefits you gain via lower RMDs, shouldn't it?

Rather than focusing on the nominal size of the IRA, I still think you need to view the real value (after inflation) of the portfolio as a whole, including the taxable account. I too have TIPS as about 1/2 of my IRA, in the form of a non-rolling ladder that depletes over time. Gradually shifting assets from IRA to taxable allows me to increase investments in tax-efficient equity index funds in the taxable account. (I have a rising equity glidepath.) My assumption (rightly or wrongly) is that real growth over long time periods (after inflation) will be higher in equities than in fixed income. I hope to have more total assets in taxable plus IRA, than if I had tried to grow the IRA.

If investing your IRA in nominal bonds, you have no idea what the real value of the IRA might be for heirs/charities in 20 years, regardless of its size in nominal dollars. You are accepting the risk that it may lose value to inflation.

With 50% of my IRA in TIPS, investing it all into a 20Y TB would be a change in philosophy.

One way to think about it is the maximum loss one would expect by using nominals vs. TIPS? The average U.S. inflation rate over the last 40 years is around 2.7%. The difference between the 20Y nominal (5.04%) and the 20Y TIPS (2.52%) is expected 20Y inflation of about 2.5%. If 20Y instead reverts to the average of the prior 40 years, I will lose about $2k per year but if it instead is 2.3% inflation, I gain about $2k per year. In either case, no big deal, so I guess I would be accepting that I may lose value or gain value due to actual inflation being different than expected inflation.

I am still pondering this idea but one other thing is that I am not subject to US CPI, so that is a part of the thought process.

[jeffyscott]

The part of your response that I think is misguided is the part that I highlighted above. You don't have to sell any part of your investment to fund the RMD. You can transfer the assets to the taxable account in kind.

I hold a TIPS fund in my IRA. I do not want a TIPS fund in taxable, so I would need to buy a different fund. I would have to change the fund inside the IRA if I was going to do an in-kind exchange.

I'm not sure why you don't want to own a TIPS fund in taxable, but you can do whatever selling and buying you need to do to change asset location at the time of the RMD.

You can sell enough of the TIPS fund for the RMD and then buy whatever it is you plan to buy in taxable.

You haven't really explained what you are planning to do with the RMD money, but it sounds to me like you are letting asset location and RMD requirements determine your asset allocation?

When I have to take RMDs, I don't expect to need the money for spending. The IRA is nearly all bonds now. For RMDs, I will either sell bonds in IRA and buy stocks in taxable while simultaneously selling stocks and buying bonds in Roth or just move bonds from IRA to taxable.

If doing the latter then a TIPS fund, being exempt from state income tax, seems like a perfectly reasonable option. If doing the former, I'd be moving TIPS fund to Roth as RMDs occur which also seems to be a perfectly reasonable option.

[Ferd Burfel]

I hold a TIPS fund in my IRA. I do not want a TIPS fund in taxable, so I would need to buy a different fund. I would have to change the fund inside the IRA if I was going to do an in-kind exchange.

I'm not sure why you don't want to own a TIPS fund in taxable, but you can do whatever selling and buying you need to do to change asset location at the time of the RMD.

You can sell enough of the TIPS fund for the RMD and then buy whatever it is you plan to buy in taxable.

You haven't really explained what you are planning to do with the RMD money, but it sounds to me like you are letting asset location and RMD requirements determine your asset allocation?

When I have to take RMDs, I don't expect to need the money for spending. The IRA is nearly all bonds now. For RMDs, I will either sell bonds in IRA and buy stocks in taxable while simultaneously selling stocks and buying bonds in Roth or just move bonds from IRA to taxable.

If doing the latter then a TIPS fund, being exempt from state income tax, seems like a perfectly reasonable option. If doing the former, I'd be moving TIPS fund to Roth as RMDs occur which also seems to be a perfectly reasonable option.

TIPS not in taxable for phantom income. Not sure if I will use the RMDs or re-invest. If the latter, you are positing holding a TIPS fund in a Roth and transferring your RMDs into it? Are there no income or other limits in doing so?

[jeffyscott]

You said "TIPS fund", there's no so-called phantom income with a fund.

No, I am positing that I have TIPS fund in tIRA. I sell some, use cash for RMD. Then I buy stocks in taxable, sell the same amount of stock in Roth and buy TIPS fund in Roth.

(This could also be done with individual TIPS at the cost of paying the bid-ask spread, or by using maturing TIPS.)

[sycamore]

...you are positing holding a TIPS fund in a Roth and transferring your RMDs into it? Are there no income or other limits in doing so?

Regarding the last question, you're asking if there are limits on a Roth conversion?
There are no limits or eligibility questions.

Whether, when, and how much to convert are the questions to consider.