Trying to avoid tIRA CDs

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Topic Author
BeWyse
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Joined: Thu Jul 19, 2018 3:32 pm

Trying to avoid tIRA CDs

Post by BeWyse » Tue May 14, 2019 9:05 am

Husband age 66 retiring very soon and will be moving company 401K to a tIRA at Vanguard. We plan to make Roth conversions prior to RMDs at age 70 up to the IRMAA threshold. For the sake of simplicity and to not have IRA funds scattered over a number of banks/credit unions, does it make sense to put a portion of the tIRA into either VBTLX (total bond fund), VFSUX (short-term bond fund), or VMMXX (prime money market) to draw from over the next several years rather than IRA CDs? If so, which fund might the best alternative? Or would there be another option? I know there are folks who do use the IRA CDs, but I would rather avoid dealing with the varying rules of withdrawal for each bank/CU. Sorry if the question shows lack of knowledge on my part, still learning.

megabad
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Re: Trying to avoid tIRA CDs

Post by megabad » Tue May 14, 2019 9:24 am

BeWyse wrote:
Tue May 14, 2019 9:05 am
Husband age 66 retiring very soon and will be moving company 401K to a tIRA at Vanguard. We plan to make Roth conversions prior to RMDs at age 70 up to the IRMAA threshold. For the sake of simplicity and to not have IRA funds scattered over a number of banks/credit unions, does it make sense to put a portion of the tIRA into either VBTLX (total bond fund), VFSUX (short-term bond fund), or VMMXX (prime money market) to draw from over the next several years rather than IRA CDs? If so, which fund might the best alternative? Or would there be another option? I know there are folks who do use the IRA CDs, but I would rather avoid dealing with the varying rules of withdrawal for each bank/CU. Sorry if the question shows lack of knowledge on my part, still learning.
I can’t tell if you are talking about the whole portfolio or a part of it? Obviously a large chunk should be invested inequities so I will assume that we are only talking about the fixed income side?

If you truly want to hold CDs than I would simply hold all of them thru Vanguard Brokerage. This is pretty simple and allows one portal to view them all.

A money market fund is an alternative that is very safe, but may return slightly less than a multi year CD. However the shorter term will expose you less to interest rate risk. This is likely a great simple option for your short term needs.

A short term bond fund will further expose you to both interest rate risk and default risk. That said, these funds are still typically fairly safe though they are an order of magnitude riskier that a money market fund or CD. Yields are similar to a multi year CD right now.

Total bond market is much longer term and therefore exposes you to significantly more interest rate risk. You are also once again exposed to default risk. The yield is significantly higher to potentially reward you for taking these risks.

Of course, an online savings account is another potential vehicle, but you would need to deal directly with a bank or banks depending on FDIC limits. This option is on par with money market imo but adds a little more complexity.

Topic Author
BeWyse
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Re: Trying to avoid tIRA CDs

Post by BeWyse » Tue May 14, 2019 10:23 am

Yes, this discussion only applies to the fixed-income portion of the tIRA. Concerning the CDs bought through the Vanguard brokerage, I would assume that each CD would come with its own set of rules as far as withdrawals for conversions and RMDs.

sport
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Re: Trying to avoid tIRA CDs

Post by sport » Tue May 14, 2019 10:56 am

BeWyse wrote:
Tue May 14, 2019 10:23 am
Yes, this discussion only applies to the fixed-income portion of the tIRA. Concerning the CDs bought through the Vanguard brokerage, I would assume that each CD would come with its own set of rules as far as withdrawals for conversions and RMDs.
You cannot withdraw money from a brokered CD. If you need some money from one, you have to sell the entire CD on the open market. Also, the interest on a brokered CD does not reinvest. It is paid to your settlement fund according to the schedule for that CD (ie. monthly, or quarterly, etc.)

megabad
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Re: Trying to avoid tIRA CDs

Post by megabad » Tue May 14, 2019 11:43 am

sport wrote:
Tue May 14, 2019 10:56 am
BeWyse wrote:
Tue May 14, 2019 10:23 am
Yes, this discussion only applies to the fixed-income portion of the tIRA. Concerning the CDs bought through the Vanguard brokerage, I would assume that each CD would come with its own set of rules as far as withdrawals for conversions and RMDs.
You cannot withdraw money from a brokered CD. If you need some money from one, you have to sell the entire CD on the open market. Also, the interest on a brokered CD does not reinvest. It is paid to your settlement fund according to the schedule for that CD (ie. monthly, or quarterly, etc.)
Yes. This is one of the reasons I asked about whether this was only a portion of the portfolio. If you need to take RMDs from an all CD portfolio it can be complicated, but otherwise you can take them from other portions of the portfolio and then rebalance upon maturity.

If you want a CD, typically you don’t need access to the money. There are different “rules” for each CD but most of these aren’t really relevant to me. I would pick the highest rate at that term that isn’t callable and has a death put. If you care about withdrawal and the like, an alternative investment may be better for you (like a money market fund).

mhalley
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Re: Trying to avoid tIRA CDs

Post by mhalley » Tue May 14, 2019 12:49 pm

This is a reason to use a cd ladder, so CDs mature as the money is needed.

Topic Author
BeWyse
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Re: Trying to avoid tIRA CDs

Post by BeWyse » Tue May 14, 2019 1:22 pm

I understand the benefits of CDs, but also there are issues with IRA CDs and taking withdrawals/RMDs without penalty. My MIL passed away recently with multiple accounts scattered here and there, no fun to resolve. My aim is to consolidate and have as few accounts as possible (Vanguard plus 1 or 2 banks/credit unions).

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welderwannabe
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Re: Trying to avoid tIRA CDs

Post by welderwannabe » Wed May 15, 2019 8:18 am

I'd probably buy treasuries instead. No harder than buying CDs and easier to sell with a lower spread. Commission free too usually...whereas selling a CD will usually involve a commission.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

2cents2
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Re: Trying to avoid tIRA CDs

Post by 2cents2 » Wed May 15, 2019 11:32 am

BeWyse wrote:
Tue May 14, 2019 1:22 pm
I understand the benefits of CDs, but also there are issues with IRA CDs and taking withdrawals/RMDs without penalty. My MIL passed away recently with multiple accounts scattered here and there, no fun to resolve. My aim is to consolidate and have as few accounts as possible (Vanguard plus 1 or 2 banks/credit unions).

The nice thing about brokered CDs is they are all kept in one place. Vanguard has them available. https://www.bogleheads.org/wiki/Certifi ... okered_CDs You should take a look at what is available. You can get brokered CDs for as short as 1 month duration. I have been researching Fidelity (but maybe Vanguard has something similar?)--there is an auto-roll feature where CD investments are automatically reinvested at maturity (this can also be turned off so it doesn't reinvest at maturity).

I am working on setting up a CD ladder with maturity dates corresponding to when I plan to take distributions (no auto-roll on those :) ).

Topic Author
BeWyse
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Joined: Thu Jul 19, 2018 3:32 pm

Re: Trying to avoid tIRA CDs

Post by BeWyse » Wed May 15, 2019 12:28 pm

Thanks for all the comments. I can see brokered Cds and a CD ladder within Vanguard or Fidelity being a workable option.

retiredjg
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Re: Trying to avoid tIRA CDs

Post by retiredjg » Wed May 15, 2019 3:41 pm

Vanguard has a number of plain old bond funds that would be good choices in an IRA. I would probably use Total Bond Index as a core fund and maybe add something else if you want. Or not.

Jack Bogle felt that TBM didn't have enough in corporate bonds, so I added a little slice of corporate bonds the next time I needed to add bonds. Some short term bonds would not be harmful.

Keep in mind that Total Bond Market has some of almost everything (short term, intermediate term, long term, corporate bonds, US government bonds, etc.). It does not contain junk bonds (which you really don't need) or inflation protected bonds (which many people like in retirement).

A brokered CD ladder might have something to offer, but I don't know what it is. Too much trouble for this lazy investor.

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