Do Inherited IRA RMDs Change Asset Allocation Plan?

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lkar
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Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by lkar » Fri May 24, 2019 4:08 pm

So, I think this is mostly a math problem. I've looked at it from a few different angles and my conclusion is that it's not really worth worrying about but I found this forum a short while ago and I figure if I'm overlooking something, I'll get good answers here.

The basic question is whether the existence of an inherited IRA should call for changes in retirement asset allocation. Part of my problem answering the question is that I'm having trouble even figuring out how to ask it, but here goes.

I'm 51. My desired asset allocation across all retirement accounts at this point is about 75/25. The target date fund in my 401k is nice and I am a very passive set and forget type of investor. Most of our retirement assets are in that 401k. I'm currently taking stock of all my investments, consolidating them where possible, setting everything up with an easy set and forget system, and then hoping to just stop looking at anything for the next couple of years. I plan in about 5 years to do a check up and see if the glide path is still giving me an asset allocation that works for me at that point in time. I'm guessing retirement around 66 or 67.

I also have an inherited IRA. It constitutes about 20 percent of my retirement assets. I have to take RMDs from it. They are not that significant yet, given my age, but they make it so that the IRA is likely to act different from my other retirement accounts, which are in accumulation mode. I'm maxed out on retirement contributions so if I were to reinvest the RMDs it would be in taxable accounts. We have a few one-time expenses coming up and my wife is making a case to spend the RMDs at least in the next couple of years. This is still being negotiated.

At a 4 percent rate of return, the point at which the RMDs would start to take the inherited IRA balance below what it is today would be about 11 years from now. At a 5 percent rate of return, it would be about 15 years. At that point, the RMDs will start to deplete the retired IRA at a faster rate than my other retirement accounts I believe. Of course, less than a 4 percent rate of return, and the inherited IRA will deplete very fast.

So, long wind up -- should I change my overall allocation to account for the fact that the inherited IRA has a shorter time in the market horizon than my other retirement accounts. And, if so, how on earth do I do the math. There's no magic to 75/25. So, if the shorter horizon on the IRA makes it so that maybe there should be an adjustment of a couple of percentage points one way or the other, I don't care. But, again, if there's something I'm overlooking about how one should account for taking RMDs well before retirement age, I'd like to take it into account.

retiredjg
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by retiredjg » Fri May 24, 2019 4:17 pm

Fill the inherited IRA with bonds - this will just be part of your bond allocation. This will reduce the amount you have to pay taxes on each year.

When you take the RMD, put the money into taxable and invest it in stocks (if you don't spend it). Then rebalance from stocks into bonds in your 401k or tIRA or some tax-deferred account. This will get you back to your desired stock to bond ratio.

fz583
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by fz583 » Fri May 24, 2019 6:38 pm

Do you have a Roth IRA? I have an inherited IRA also, its invested in vanguard 2040 and I just take 12,000 in Jan. out and max out mine and my wife's Roth's for the year, I'm in a fairly low effective tax rate and don't mind paying the taxes on it at age 43, for years of tax free growth, It was money that given to me vs earning, I just put it in vanguard 2045, my 401k is also in 2040, The inherited IRA should be close to zero in 4-6 years and then I don't need to deal with satisfying RMD's from that anymore.
Last edited by fz583 on Sat May 25, 2019 3:20 pm, edited 1 time in total.

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Duckie
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by Duckie » Fri May 24, 2019 6:49 pm

lkar wrote:So, long wind up -- should I change my overall allocation to account for the fact that the inherited IRA has a shorter time in the market horizon than my other retirement accounts.
No. Just because the inherited IRA value is slowly decreasing doesn't change anything. Other retirement assets increase or decrease in value all the time as the market shifts. Once or twice a year add up the dollar amounts in all your retirement accounts (even those in taxable if earmarked for retirement). Change the dollar amounts to percentages and allocate your 75/25 AA accordingly.

And I agree with retiredjg; put just bonds in the inherited IRA.

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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by Spirit Rider » Fri May 24, 2019 8:20 pm

Duckie wrote:
Fri May 24, 2019 6:49 pm
lkar wrote:So, long wind up -- should I change my overall allocation to account for the fact that the inherited IRA has a shorter time in the market horizon than my other retirement accounts.
No. Just because the inherited IRA value is slowly decreasing doesn't change anything. Other retirement assets increase or decrease in value all the time as the market shifts. Once or twice a year add up the dollar amounts in all your retirement accounts (even those in taxable if earmarked for retirement). Change the dollar amounts to percentages and allocate your 75/25 AA accordingly.

And I agree with retiredjg; put just bonds in the inherited IRA.
I second that. An inherited retirement account should not change your overall asset allocation.

Our goal is to maximize returns, maximize tax deferral and minimize taxes on an overall portfolio basis. Therefore, generally it is better to use your other tax-advantaged accounts for higher returning assets. So the best assets for an inherited retirement account are your lowest returning, lowest volatility assets.

Some people prefer to have the same exact asset allocation for each account rather than optimize asset location. That is OK too as long as you understand the trade offs involved.

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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by grabiner » Fri May 24, 2019 9:27 pm

If you aren't maxing out your retirement accounts, you can take the RMD from your inherited IRA and contribute it to your 401(k), for no net tax cost, keeping the money tax-deferred.

If you are maxing out, you can take the RMD from your inherited IRA and contribute it to the same asset class in your taxable account. You will keep the same risk level, with a slightly increased tax cost (paying tax on dividends in a stock fund, or using munis rather than taxable bonds and paying a cost to avoid paying taxes).

In either situation, the fact that the IRA is inherited is not really relevant to your asset allocation.
Wiki David Grabiner

Topic Author
lkar
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by lkar » Sat May 25, 2019 9:06 am

Lots of good advice in here. Thank you.

The prospect of splitting up asset classes across accounts is a little bit daunting and I would kind of like to just do target funds. But I am going to do some more reading and this is a very good start.

retiredjg
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by retiredjg » Sat May 25, 2019 9:26 am

lkar wrote:
Sat May 25, 2019 9:06 am
Lots of good advice in here. Thank you.

The prospect of splitting up asset classes across accounts is a little bit daunting and I would kind of like to just do target funds. But I am going to do some more reading and this is a very good start.
Do look into splitting up asset classes across accounts. However, if you decide it is not for you, you can still just put a target fund in that inherited IRA. The catch is "how do I invest the money once I take it out?"

If the money coming out of the IRA goes into a taxable account to be invested, there are choices you will need to make about what kind of bonds (if any) you want to use there. That will depend on things we don't know (your tax bracket is a starting place).

A target fund is not usually the best choice for a taxable account so you might want to invest the money in 1 or more individual funds. If we knew what (if anything) you hold in your taxable account now, it would be easier to suggest something.

Keep in mind that your inherited IRA is only 1/5th of your portfolio and only a small portion of it will come out each year....so whatever goes into your taxable account is not going to change your asset allocation much.

Topic Author
lkar
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by lkar » Sat May 25, 2019 12:56 pm

retiredjg wrote:
Sat May 25, 2019 9:26 am
lkar wrote:
Sat May 25, 2019 9:06 am
Lots of good advice in here. Thank you.

The prospect of splitting up asset classes across accounts is a little bit daunting and I would kind of like to just do target funds. But I am going to do some more reading and this is a very good start.
Do look into splitting up asset classes across accounts. However, if you decide it is not for you, you can still just put a target fund in that inherited IRA. The catch is "how do I invest the money once I take it out?"

If the money coming out of the IRA goes into a taxable account to be invested, there are choices you will need to make about what kind of bonds (if any) you want to use there. That will depend on things we don't know (your tax bracket is a starting place).

A target fund is not usually the best choice for a taxable account so you might want to invest the money in 1 or more individual funds. If we knew what (if anything) you hold in your taxable account now, it would be easier to suggest something.

Keep in mind that your inherited IRA is only 1/5th of your portfolio and only a small portion of it will come out each year....so whatever goes into your taxable account is not going to change your asset allocation much.
This is really helpful. Ok, I think I have a plan now. I don't think it hurts me too much tax wise and it should keep me invested in roughly the same assets.

I have three different retirement accounts that I'm currently contributing to using after-tax dollars. My wife's IRA, which then gets converted to Roth, my HSA and for the first time this year my IRA which gets converted too. That's $21k per year. What I've been doing is taking the money out of savings in January and then using direct deposit to replenish the savings/emergency fund in 24 installments from my bi-monthly pay. The inherited IRA is relatively new and I used it last year to basically prepay principal on mortgage while I decided on a better plan.

The IRAs and the HSA are invested in target funds. I think what I'm going to do is invest the entire inherited IRA in a similar target fund with my desired AA. Then, starting in 2019, take the RMD in January and use it toward the $21k in after-tax retirement. For the next few years, the RMD won't be enough to cover the whole amount, but I'll get a good part of the way there and it will be more and more each year as the RMDs increase. Then, I'll still keep taking the direct deposits from my pay that I used to take to replenish savings/emergency fund for the money I took out in January. I'll just direct deposit this right into a taxable account with bonds in it. This is not likely to change my overall AA very much at least in the first few years. And then I'll either sell some of the bond account at the end of the year to pay the taxes on the RMD or pay it out of savings if it won't get me below my desired emergency account -- or maybe I won't need to depending on deductions for the year.

So, I think what I'm doing if I do it that way is that I'm essentially re-investing the RMDs in a like for like manner as they were in the inherited IRA but then essentially moving the RMDs into a largely liquid and not overly taxed account, which allows for me to pay the taxes on the RMDs without having to deplete my savings/emergency money to a point where I'm uncomfortable with it. If the bond account grows enough over a few years to change my AA significantly, then I can figure out what to do then, although as time goes by I'm going to want to be more conservative in AA anyway and having a little bit extra in bonds isn't really a big deal.

Edit: Whoops, the HSA is not after-tax. I don't think that changes anything though. I'll still use the RMDs from the inherited IRA to pay it all in January and then use the bi-monthly direct deposit from my paycheck for bonds.

retiredjg
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Re: Do Inherited IRA RMDs Change Asset Allocation Plan?

Post by retiredjg » Sat May 25, 2019 1:03 pm

That sounds reasonable to me.

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