using IRA distributions to buy munis

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Kennyt7
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using IRA distributions to buy munis

Post by Kennyt7 » Sun Sep 30, 2018 4:01 pm

with tax rates very low and I have no state tax(thank you FLA), I am considering taking larger distributions from my 4.3 million ira to buy munis
with our MASSIVE debt taxes have to INCREASE in due time
what say you?

retiredjg
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Re: using ira distributions to buy munis

Post by retiredjg » Sun Sep 30, 2018 4:15 pm

With a 4.3 million dollar IRA, it probably does not matter what you do. But it's obvious you do care enough to wonder about it or you would not have asked.

Munis pay less than a comparable taxable bond fund. For people in high tax brackets, munis are a good choice in a taxable account because you make more than a comparable taxable bond after you pay your high taxes.

If you are not in a higher tax bracket, you make more money using the taxable bond and just paying the taxes (if the money is in a taxable account).

The dividing line between "higher tax bracket" and "not a higher tax bracket" is a bit squishy. We don't know what your tax bracket currently is.

With an IRA of that size, your RMDs could be a bit of a burden. Have you considered Roth conversions? Not sure it would help much.

Long story short, there is no one answer and there is not enough information in your post to know much about what your better options might be.

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LadyGeek
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Re: using IRA distributions to buy munis

Post by LadyGeek » Sun Sep 30, 2018 4:16 pm

This thread is now in the Investing - Help with Personal Investments forum (portfolio help). I fixed the capitalization in the thread title "IRA".

Please see this post: Political comments and proposed tax plan remain off-topic The point is to make investing decisions using current law. Discussions of what "might happen" is off-topic.

As retiredjg implies, please post your portfolio information in this thread using the Asking Portfolio Questions format. It will make you think about the "big picture" while giving us the information we need to point you in the right direction.
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bsteiner
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Re: using IRA distributions to buy munis

Post by bsteiner » Sun Sep 30, 2018 4:58 pm

Kennyt7 wrote:
Sun Sep 30, 2018 4:01 pm
with tax rates very low and I have no state tax(thank you FLA), I am considering taking larger distributions from my 4.3 million ira to buy munis
with our MASSIVE debt taxes have to INCREASE in due time
what say you?
If you're in a low tax bracket, you could do some Roth conversions to the extent you can do so without it putting you into too high a tax bracket. If you're married, the 24% bracket goes up to $315,000, so you might convert up to that point. You could buy taxable bonds in your IRA.
LadyGeek wrote:
Sun Sep 30, 2018 4:16 pm
,,, Political comments and proposed tax plan remain off-topic. ... The point is to make investing decisions using current law. Discussions of what "might happen" is off-topic.
...
THe Tax Cuts and Jobs Act of 2017 reduced the tax rates for 2018 through 2025. It also widened the joint return brackets for 2018 through 2025 to twice the width of the single brackets up through the 24% bracket, which goes up to $315,000 on a joint return.

These changes, particularly the widening of the joint return brackets through the 24% bracket, provide a window for IRA owners to do Roth conversions. You might consider whether doing some Roth conversions might make sense in your case, at least up to the top of the 24% bracket.

Kennyt7
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Re: using IRA distributions to buy munis

Post by Kennyt7 » Mon Oct 01, 2018 9:04 am

[OT comment removed by admin LadyGeek]
we will never see tax rates this low
on 234k income my federal taxes are around 38k, no state income tax
doing roth conversions or taking greater distributions to buy munis both seem prudent
the only drawback is higher medicare part b premiums

retiredjg
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Re: using IRA distributions to buy munis

Post by retiredjg » Mon Oct 01, 2018 2:45 pm

You may not have an income anywhere near $234k when you retire - your tax bracket could drop a lot. That would be the time to take money out of IRA or just convert it to Roth IRA.

If you are not yet 59.5, taking money out of IRA will come with a penalty unless you fall under an exception.

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Kevin M
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Re: using IRA distributions to buy munis

Post by Kevin M » Mon Oct 01, 2018 3:08 pm

Kennyt7 wrote:
Mon Oct 01, 2018 9:04 am
[OT comment removed by admin LadyGeek]
we will never see tax rates this low
on 234k income my federal taxes are around 38k, no state income tax
doing roth conversions or taking greater distributions to buy munis both seem prudent
the only drawback is higher medicare part b premiums
Why would you take a distribution instead of doing a Roth conversion? Either way, you pay the same taxes (assuming age 59 1/2 or older), but with the Roth conversion, you get tax-free returns after the conversion. Taxable bonds or a bond fund in a Roth provide(s) higher after-tax yields than munis or a muni fund of comparable risk in taxable.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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grabiner
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Re: using IRA distributions to buy munis

Post by grabiner » Mon Oct 01, 2018 7:55 pm

Kennyt7 wrote:
Sun Sep 30, 2018 4:01 pm
with tax rates very low and I have no state tax(thank you FLA), I am considering taking larger distributions from my 4.3 million ira to buy munis
It doesn't make sense to do this with extra distributions. As others have posted, you could convert part of the IRA to a Roth IRA and hold corporate bonds, or just continue to hold corporate bonds in the traditional IRA.

If you have to take RMDs from the IRA which are more than you need to spend, then it makes sense to take money from the IRA and invest it in a similar asset class in a taxable account. Thus, you might take an RMD from a bond fund to buy a muni fund. However, it would probably be better to take an RMD from a stock fund to buy a stock index fund in your taxable account; if you have RMDs you aren't spending, the stock will probably be left to your heirs, so that there will be no tax on any capital gains.
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Kennyt7
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Re: using IRA distributions to buy munis

Post by Kennyt7 » Tue Oct 09, 2018 5:00 pm

BTW-my effective tax rate on 240k or so is around 17%
WHAT ABOUT CASHING OUT MY ROTH IRA, 140K as its at its high and BUYING TAX FREE MUNIS???
About 3% of my portfolio all in Vanguard total stock fund

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grabiner
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Re: using IRA distributions to buy munis

Post by grabiner » Tue Oct 09, 2018 7:27 pm

Kennyt7 wrote:
Tue Oct 09, 2018 5:00 pm
BTW-my effective tax rate on 240k or so is around 17%
WHAT ABOUT CASHING OUT MY ROTH IRA, 140K as its at its high and BUYING TAX FREE MUNIS???
This makes no sense. Rather than cashing out the Roth IRA to buy munis, you can buy taxable bonds in the Roth IRA with higher yields, and no extra risk. Munis are only useful if you must hold bonds in your taxable account.
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rkhusky
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Re: using IRA distributions to buy munis

Post by rkhusky » Tue Oct 09, 2018 8:07 pm

Don't let the tax tail wag the total return dog.

That is, don't spend $10 to save $1 in taxes.

retiredjg
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Re: using IRA distributions to buy munis

Post by retiredjg » Wed Oct 10, 2018 7:36 am

Kennyt7 wrote:
Tue Oct 09, 2018 5:00 pm
BTW-my effective tax rate on 240k or so is around 17%
WHAT ABOUT CASHING OUT MY ROTH IRA, 140K as its at its high and BUYING TAX FREE MUNIS???
About 3% of my portfolio all in Vanguard total stock fund
I agree with grabiner. This makes no sense at all. It accomplishes nothing and would increase your IRMAA MAGI. That seems a bit counter-productive to me.

With a $4 million IRA, you should be concentrating on Roth conversions (which I understand you are already doing), up to whatever limit you believe is worthwhile. For you, that limit might be higher than what is often discussed here. It is pretty clear you will not be in the lowest IRMAA tier.

Why are you so interested in holding a lot of tax free munis? How do you think that is going to help you? If you don't take your living expenses now from the current IRA, that will just be more money subject to RMDs at 70.5. It's not like living on muni income now will keep those chickens from coming home to roost in a couple of years.

megabad
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Re: using IRA distributions to buy munis

Post by megabad » Wed Oct 10, 2018 12:01 pm

I agree with retiredjg, I am 100% on board with increasing distributions for Roth conversions. I would fill up 24% bracket in your case. Looks like you might be over top tier limit for IRMMA so I wouldn't worry much about that. I don't understand how munis play into the equation of deciding whether to take larger distributions. The decision to invest in munis in taxable with leftover funds that you are not able to spend or convert and that you have to take (ie. RMDs) should be based on your overall investment goals and current/future tax bracket. In my opinion and based on the limited info here, I assume you are in the 24% bracket and munis will be roughly a break even for you and offer less diversification, so I would lean toward aggregate bond indices. This is just my preference.

dcdowden
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Re: using IRA distributions to buy munis

Post by dcdowden » Wed Oct 10, 2018 12:32 pm

We have also taken advantage of the new tax law to do some Roth Conversions up to the top of the 24% bracket. In our case, it was not only the new brackets, but also the change in the AMT exemption amount and the threshold for phasing out the AMT exemption. Previously, we were nominally in the 28% bracket, but were effectively in a marginal 33% bracket because of the phaseout of AMT exemption. Fortunately, IRA distributions are not taxed in Illinois, but we will end up in a higher IRMAA bracket. But by my model, once we have to take RMD's it appears we may jump up to the 32% bracket or higher if tax law not extended for individuals, so now is the best opportunity to do some Roth conversions at a lower rate.

Kennyt7
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Re: using IRA distributions to buy munis

Post by Kennyt7 » Wed Oct 10, 2018 5:12 pm

250k income=16.8 effective tax rate
that's what counts rather than marginal bracket
florida resident

Kennyt7
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Re: using IRA distributions to buy munis

Post by Kennyt7 » Wed Oct 10, 2018 5:13 pm

nothing better than tax free income-have held them for 40yrs-long term A rated or better

retiredjg
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Re: using IRA distributions to buy munis

Post by retiredjg » Wed Oct 10, 2018 5:19 pm

Kennyt7 wrote:
Wed Oct 10, 2018 5:12 pm
250k income=16.8 effective tax rate
that's what counts rather than marginal bracket
florida resident
Effective rate is not what counts when you are looking at Roth conversions (which you are apparently doing).

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grabiner
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Re: using IRA distributions to buy munis

Post by grabiner » Wed Oct 10, 2018 8:42 pm

retiredjg wrote:
Wed Oct 10, 2018 5:19 pm
Kennyt7 wrote:
Wed Oct 10, 2018 5:12 pm
250k income=16.8 effective tax rate
that's what counts rather than marginal bracket
florida resident
Effective rate is not what counts when you are looking at Roth conversions (which you are apparently doing).
Nor when you are buying munis. If you are in the 24% tax bracket (a married couple earning $250K) and you buy a muni yielding $760 rather than a taxable bond yielding $1000, you break even; you save $240, not $168, in tax.
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