Money market in inherited IRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
3stgs
Posts: 46
Joined: Mon Dec 25, 2017 8:58 pm

Money market in inherited IRA

Post by 3stgs »

I have an IRA now with an 8 year time horizon for taking RMDs, and I have since reallocated assets in all of my IRAs and brokerage accounts to index funds, leaving the entire amount in the inherited IRA in a money market for the last couple of years, making a decent 5%+ return and leaving my total AA at about 75/25. The contents of this IRA will basically fund my retirement for the next 8 years, so I am now considering reallocating from MM (which I viewed as a temporary place to park the funds) to possibly another conservative investment. Any suggestions? The goal is to fund retirement with the RMDs (along with SS payments) over the next 8 years which will ultimately liquidate the account by the end of the required RMD period.
User avatar
Raymond
Posts: 2014
Joined: Mon Apr 16, 2012 6:04 am

Re: Money market in inherited IRA

Post by Raymond »

An eight-year TIPS ladder?

Use this tool to build one: https://www.tipsladder.com/

Or you could use nominal Treasury securities if you prefer.

You can buy either kind at auction or on the secondary market at the brokerage you use.
"Ritter, Tod und Teufel"
steadyosmosis
Posts: 1945
Joined: Mon Dec 26, 2022 11:45 am

Re: Money market in inherited IRA

Post by steadyosmosis »

I agree with Raymond.
I bought a TIPS ladder in my IRA.
Early-retired ... portfolio AA 50/50 ... [46% tIRA (TIPS, Treasuries, SGOV), 33% RIRA (SCHB, SCHF, SGOV), 16% taxable (VTI), 5% HSA (VITSX)].
cranberrycrash
Posts: 73
Joined: Mon Apr 10, 2023 5:27 pm

Re: Money market in inherited IRA

Post by cranberrycrash »

I am in a similar situation. Also 8 more years to empty. Inherited IRA had cash and Fidelity bond index funds.

I also thought about TIPS ladder.

After doing just like you.... keeping the cash in MMF ..... I starting moving some into VTI this year. And then last month, moved a big chunk of the cash into my Fidelity bond index funds to reach my 70/30 goal. And then I bought VXUS with the rest. Haven't quite figured out what my final International allocation will be yet, but I didn't have any international previously.

This is what was recommended to me by my fee only financial planner. Well respected and recommended here.

So when he recommended Fidelity bond index funds, I asked "what about TIPS?....". And he said.. "well, you could..... or keep it simple". So I did the lazy thing in the end.
RetiredAL
Posts: 4325
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Money market in inherited IRA

Post by RetiredAL »

Sister and I inherited our Dad's IRA.

Dad had long standing verbal instructions to give money to Rotary and his Church, but no how to. Sister and I agreed to use QCD's from our now Inherited IRAs to accomplished Dad's desire. So we each gave 80% away via QCD's last year.

After the QCDs, my balance sat in a MMK. This year, I withdrew 1/2 of the remainder. Next year I'll do the other 1/2. I want it all gone just to simplify. These 2 chunks are about $8K each, small peanuts in our (me and DW) retirement portfolio.
User avatar
goodenyou
Posts: 3737
Joined: Sun Jan 31, 2010 10:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

Re: Money market in inherited IRA

Post by goodenyou »

With the new 10 year rule for Inherited IRAs, it can get very complicated with investing the tIRAs while simultaneously withdrawing RMDs over the 10 year period. For those of us not sure about retiring just yet, having RMDs sitting on top of earned income only complicates the decision planning even further. Ideally, the strategy would be to take RMDs up to the time of retirement, and then with zero earned income in retirement, take the largest distributions over the remainder of the 10 years. Depending on age, it may be possible to take those larger remaining distributions from the remaining balance while retired right up to SS claiming age of 70.

If you inherit a large IRA and you continue to work at high enough income levels, you will have the privilege of having your earned income (or Inherited IRA distributions) taxed at the highest marginal rates. This was the intention of the new legislation. Planning a 10 year withdrawal from an Inherited IRA definitely puts the decision of retirement in focus.
"Ignorance more frequently begets confidence than does knowledge" | “At 50, everyone has the face he deserves”
User avatar
dogagility
Posts: 3839
Joined: Fri Feb 24, 2017 5:41 am
Location: Del Boca Vista - Phase 3

Re: Money market in inherited IRA

Post by dogagility »

3stgs wrote: Sat Nov 09, 2024 3:27 pm The contents of this IRA will basically fund my retirement for the next 8 years, so I am now considering reallocating from MM (which I viewed as a temporary place to park the funds) to possibly another conservative investment. Any suggestions?
I agree with prior respondents... a ladder of individual TIPS for protection against unexpected inflation and known return (in real dollars) at the time of purchase.
tpawplanner.com - Cheers to Ben Mathew and his brother! | Daaaaa Jankees Lose! - David Ortiz
Topic Author
3stgs
Posts: 46
Joined: Mon Dec 25, 2017 8:58 pm

Re: Money market in inherited IRA

Post by 3stgs »

cranberrycrash wrote: Sat Nov 09, 2024 6:56 pm I am in a similar situation. Also 8 more years to empty. Inherited IRA had cash and Fidelity bond index funds.

I also thought about TIPS ladder.

After doing just like you.... keeping the cash in MMF ..... I starting moving some into VTI this year. And then last month, moved a big chunk of the cash into my Fidelity bond index funds to reach my 70/30 goal. And then I bought VXUS with the rest. Haven't quite figured out what my final International allocation will be yet, but I didn't have any international previously.

This is what was recommended to me by my fee only financial planner. Well respected and recommended here.

So when he recommended Fidelity bond index funds, I asked "what about TIPS?....". And he said.. "well, you could..... or keep it simple". So I did the lazy thing in the end.
I have no dedicated international funds, mainly VOO and VTI in my other IRAs and brokerage. Very little (maybe 10% of entire portfolio) in a couple other indexes and a couple legacy individual stocks. This is an interesting strategy - I am looking for a low maintenance solution, and bond / index funds I think would work for me and get me close to 75/25 AA. What Fidelity bond fund did you use?
cranberrycrash
Posts: 73
Joined: Mon Apr 10, 2023 5:27 pm

Re: Money market in inherited IRA

Post by cranberrycrash »

I bought FXNAX.

My father was already invested in the Fidelity US bond index funds - ~50% in each

FXNAX (0.025% fee)
FIPDX (0.05% fee) - inflation protected.

My advisor recommended only having 20% of my bonds inflation protected, so I only bought more FXNAX. He thought it was a very good fund. He also likes Vanguard Total Bond Market ETF (BND - 0.035% fee) and iShares Core US Aggregate Bond ETF (AGG - 0.04%)

My inherited IRA distributions have pushed me into a high tax bracket. So first I will pull out the VTI, and then buy more VTI in my brokerage accounts. Then I will pull out from my bond funds, and buy Municipal bond index funds in my brokerage account to maintain my desired asset allocation. The interest from Municipal bonds is often exempt from Federal tax, which is nice in light of my high tax bracket.

My advisor recommended the municipal funds:

Schwab Municipal Bond ETF (SCMB - 0.03% fee)
iShares National Muni Bond ETF (MUB - 0.05% fee)
Vanguard Tax-Exempt Bond ETF (VTEB - 0.06% fee)

Once my distributions from the inherited IRA is complete, and my tax rate falls, I will move to a taxable bond fund for better performance.
Topic Author
3stgs
Posts: 46
Joined: Mon Dec 25, 2017 8:58 pm

Re: Money market in inherited IRA

Post by 3stgs »

I guess a higher tax bracket is a “good” problem to have… I have been concentrating on my RMD situation with my inherited IRA, trying to stay under the 22% bracket while drawing it down and at the same time factoring in realized gains from my brokerage.

Also this week I’ve consolidated my tax advantaged accounts into mostly VOO, selling off some JEPI and all individual stocks I had hanging around. Now I have VTI in my brokerage, VOO in all tax advantaged, and a MM currently holding all funds in the inherited IRA. So basically no international or bonds at the moment.

I may do some research before the end of the year and find alternatives to where I could park the inherited IRA funds. I really would need a hard kick to do a TIPS ladder, I know the concept is sound but I’ve been spoiled by the recent returns of the SP500 ETFs, and most other index ETFs.
User avatar
dogagility
Posts: 3839
Joined: Fri Feb 24, 2017 5:41 am
Location: Del Boca Vista - Phase 3

Re: Money market in inherited IRA

Post by dogagility »

3stgs wrote: Wed Nov 27, 2024 12:03 pm I really would need a hard kick to do a TIPS ladder, I know the concept is sound but I’ve been spoiled by the recent returns of the SP500 ETFs, and most other index ETFs.
A TIPS ladder and a stock market index fund are different in kind. Comparison of these two is inappropriate, in my opinion.

One provides a known inflation-protection value when held to maturity. The other is volatile with potentially greater value increase. These serve different purposes in a portfolio.
tpawplanner.com - Cheers to Ben Mathew and his brother! | Daaaaa Jankees Lose! - David Ortiz
Topic Author
3stgs
Posts: 46
Joined: Mon Dec 25, 2017 8:58 pm

Re: Money market in inherited IRA

Post by 3stgs »

Definitely different vehicles, it was more of a statement than a comparison. I had never owned bonds of any type until I inherited IRAs, and then it was in the form of a couple balanced high American funds and some individual munis, and not a significant percentage of the holdings. My dad’s hobby was watching CNBC and trading stocks / funds by phone, it was quite the interesting mix when I received it…
User avatar
Artsdoctor
Posts: 6304
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Money market in inherited IRA

Post by Artsdoctor »

3stgs wrote: Sat Nov 09, 2024 3:27 pm I have an IRA now with an 8 year time horizon for taking RMDs, and I have since reallocated assets in all of my IRAs and brokerage accounts to index funds, leaving the entire amount in the inherited IRA in a money market for the last couple of years, making a decent 5%+ return and leaving my total AA at about 75/25. The contents of this IRA will basically fund my retirement for the next 8 years, so I am now considering reallocating from MM (which I viewed as a temporary place to park the funds) to possibly another conservative investment. Any suggestions? The goal is to fund retirement with the RMDs (along with SS payments) over the next 8 years which will ultimately liquidate the account by the end of the required RMD period.
As you might imagine, details matter here.

You say that you'll need the RMD to fund your retirement in addition to your social security payments and that you'd like to have the money in conservative investments.

Usually, the RMDs for inherited IRAs are quite small compared to the balloon payment you'll be required to take when you drain the account at the end of the holding period. Is this OK with you, or do you think that you'll need to take more money out during the holding period? Meaning, would you like equal payments throughout.

If you're unfamiliar with bonds or buying individual bonds, and if you want to have a very specific amount each year, then you can put the money in laddered CDs.

If you are going to be much more flexible (say, if you can withstand an inflationary period or equity bear market), you can use something like the Vanguard LifeStrategy funds (20% equities, 40% equities, 60% equities, etc.).
Topic Author
3stgs
Posts: 46
Joined: Mon Dec 25, 2017 8:58 pm

Re: Money market in inherited IRA

Post by 3stgs »

The amount of my yearly withdraws will really fulfill two functions - living expense income at low tax levels, and regular drawdown to deplete the account in 8 years. It has really worked out quite nicely - barring any catastrophic event or large purchase, I will not need to touch my IRAs or brokerage accounts for at least 8 years.

I will definitely look more into the LifeStrategy funds, I think that would make sense since the fund allocations are static and don’t adjust like a target-date fund.
User avatar
goodenyou
Posts: 3737
Joined: Sun Jan 31, 2010 10:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

Re: Money market in inherited IRA

Post by goodenyou »

Usually, the RMDs for inherited IRAs are quite small compared to the balloon payment you'll be required to take when you drain the account at the end of the holding period. Is this OK with you, or do you think that you'll need to take more money out during the holding period? Meaning, would you like equal payments throughout.
This. Depending on your age and plans for retirement, the optimal tax strategy is take larger distributions when you have less (other) income. That strategy will likely keep you in lower brackets when you take larger distributions towards the end of the 10 year depletion requirement. If income is consistent throughout the 10-year time frame, then equal payments would be a tax-neutral depletion strategy.

One other thing to consider (and I posted it in another thread) is to use distributions from the Inherited IRA for taxes. That is, if you are required to pay estimated taxes, you can take a distribution from the Inherited IRA in December and withhold up to 99% of the distribution to meet your entire yearly estimated taxes (from any sources) without running the risk of under withholding throughout the year. RMD tax withholdings are considered ratable (paid throughout the year).
"Ignorance more frequently begets confidence than does knowledge" | “At 50, everyone has the face he deserves”
Post Reply