best aa for inherited IRA
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best aa for inherited IRA
Hi,
I have an inherited IRA from which I have to take RMDs every year (about 2% --- it's grandfathered under the old rules). My overall AA is 95/5 because I am still youngish. I am wondering if there are any special considerations for the AA within the inherited IRA given that I have to make withdrawals from it. Historically I've had it at 100% equities, but would some bonds help prevent SORR depleting the IRA during down years? Thanks.
I have an inherited IRA from which I have to take RMDs every year (about 2% --- it's grandfathered under the old rules). My overall AA is 95/5 because I am still youngish. I am wondering if there are any special considerations for the AA within the inherited IRA given that I have to make withdrawals from it. Historically I've had it at 100% equities, but would some bonds help prevent SORR depleting the IRA during down years? Thanks.
- arcticpineapplecorp.
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Re: best aa for inherited IRA
Not sure there's one right answer though some might say invest according to your overall AA. Just because you have new money doesn't mean you invest differently. You'd just have the same AA with a larger portfolio than before. Though it's also possible if you're closer to your number as a result of this new money that might lead you to dial down risk. But the point is look at all your money as one portfolio rather than different portfolios just because you have different accounts. Though some accounts may have greater/lesser value after accounting for taxes.
What will you do with the money as you distribute?
Are you already maxing all retirement accounts?
Would these funds go into taxable?
What will you do with the money as you distribute?
Are you already maxing all retirement accounts?
Would these funds go into taxable?
Last edited by arcticpineapplecorp. on Tue Mar 21, 2023 6:06 pm, edited 2 times in total.
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Re: best aa for inherited IRA
Thanks. I don't have new money, as I've had this IRA for a few years. I just have a new question that I never thought about before. I have an AA I am happy with. I can put that exact AA in the IRA. However I'm wondering if that's most sensible, or I should, say, set the IRA at 60/40 so that it smooths out returns during recessions etc., and then modify the rest of my holdings (401ks, taxable brokerage etc) to keep my overall AA.
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Re: best aa for inherited IRA
Most here advise to put your bond allocation in tax deferred first, then fill out the rest of your portfolio with stocks. That would be my approach with the Inherited IRA.PoorHomieQuan wrote: ↑Tue Mar 21, 2023 5:52 pm Hi,
I have an inherited IRA from which I have to take RMDs every year (about 2% --- it's grandfathered under the old rules). My overall AA is 95/5 because I am still youngish. I am wondering if there are any special considerations for the AA within the inherited IRA given that I have to make withdrawals from it. Historically I've had it at 100% equities, but would some bonds help prevent SORR depleting the IRA during down years? Thanks.
The question is how much in bonds overall. Your overall allocation depends on your risk tolerance and need for returns. 95-100 equities is completely reasonable for a young person with a long time frame, but you could certainly be more conservative if you have enough wealth that you can take less risk.
The other question is whether you should be making additional withdrawals beyond the RMD. If you expect your income to increase over time it might be a good idea to take more than the 2%. Even if you don't spend it you could reinvest the distributions in taxable. If you continue taking RMDs only, the IRA will grow and eventually push your withdrawals into higher and higher tax brackets.
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Re: best aa for inherited IRA
Thanks. But isn't one of the advantages of an IRA that the growth is not taxed? We expect equities to grow more than bonds. That's why I had it set to 100% equities in the past. Unlike my other accounts, where I only contribute, this is a portfolio where I'm forced to withdraw every year. Is that a consideration or am I barking up the wrong tree?aristotelian wrote: ↑Tue Mar 21, 2023 6:03 pm Most here advise to put your bond allocation in tax deferred first, then fill out the rest of your portfolio with stocks. That would be my approach with the Inherited IRA.
I expect my annual tax liability to go down when I retire.
- retired@50
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Re: best aa for inherited IRA
If it's an inherited traditional IRA, then all withdrawals are taxed. Which of course includes the "growth".
If it's an inherited Roth account, then it's another story.
Regards,
If it's an inherited Roth account, then it's another story.
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
- arcticpineapplecorp.
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Re: best aa for inherited IRA
I'd be inclined to keep enough in bonds to last an average downturn say 5 years, so 10% in bonds at a minimum (since you're withdrawing 2% per year). Replenish yearly from stocks in up years or wait it out in down years.
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Re: best aa for inherited IRA
The growth is taxed, just on withdrawal. It is actually taxed higher than capital gains since it is taxed at income tax rates, whereas capital gains can be taxed at 0%. It is true that funds growing in taxable will have some tax drag. You haven't given us any info about your current or projected portfolio but I would certainly withdraw some extra if you expect your income to increase.PoorHomieQuan wrote: ↑Tue Mar 21, 2023 6:07 pmThanks. But isn't one of the advantages of an IRA that the growth is not taxed? We expect equities to grow more than bonds. That's why I had it set to 100% equities in the past. Unlike my other accounts, where I only contribute, this is a portfolio where I'm forced to withdraw every year. Is that a consideration or am I barking up the wrong tree?aristotelian wrote: ↑Tue Mar 21, 2023 6:03 pm Most here advise to put your bond allocation in tax deferred first, then fill out the rest of your portfolio with stocks. That would be my approach with the Inherited IRA.
I expect my annual tax liability to go down when I retire.
Since you are young you may have a long time before you retire. You will have RMDs during that time. If your income is increasing it may be to your advantage to take out more now even if your bracket will go down in retirement.
Re: best aa for inherited IRA
Totally agree. This is the account you must withdraw from first, so you generally want your gains in tax deferred accounts to happen in your other non-inherited accounts. Put you entire fixed income allocation in the inherited traditional IRA account. This will mean you should have the lowest mandatory distribution each year. Depending on your circumstances, you may want to take a larger voluntary distribution. For example, we were always prepared to take more from my husband’s inherited IRA is one of us was unemployed. Rebalance across all you accounts to maintain your AA, again with the inherited IRA containing all fixed income.aristotelian wrote: ↑Tue Mar 21, 2023 6:03 pmMost here advise to put your bond allocation in tax deferred first, then fill out the rest of your portfolio with stocks. That would be my approach with the Inherited IRA.PoorHomieQuan wrote: ↑Tue Mar 21, 2023 5:52 pm Hi,
I have an inherited IRA from which I have to take RMDs every year (about 2% --- it's grandfathered under the old rules). My overall AA is 95/5 because I am still youngish. I am wondering if there are any special considerations for the AA within the inherited IRA given that I have to make withdrawals from it. Historically I've had it at 100% equities, but would some bonds help prevent SORR depleting the IRA during down years? Thanks.
The question is how much in bonds overall. Your overall allocation depends on your risk tolerance and need for returns. 95-100 equities is completely reasonable for a young person with a long time frame, but you could certainly be more conservative if you have enough wealth that you can take less risk.
The other question is whether you should be making additional withdrawals beyond the RMD. If you expect your income to increase over time it might be a good idea to take more than the 2%. Even if you don't spend it you could reinvest the distributions in taxable. If you continue taking RMDs only, the IRA will grow and eventually push your withdrawals into higher and higher tax brackets.
Re: best aa for inherited IRA
If you don't need to spend the money from the inherited IRA, it should be part of your overall asset allocation. In particular, if you withdraw $X from the inherited IRA and contribute $X to your 401(k), the fact that it was an inherited IRA is irrelevant, as the money stayed tax-deferred.
If you are maxing out tax-favored accounts and have to withdraw from the inherited IRA to invest in taxable, then it is better to hold bonds in the inherited IRA to minimize the tax cost. Now, if you have an RMD of $X, you take that RMD from the bond fund, buy $X of stock with it for tax efficiency, and move $X from stock to bonds in some tax-advantaged account if you want to keep the same asset allocation.
The reason this minimizes the tax cost is that the IRS owns a percentage of your IRA equal to the tax rate on withdrawal. If you are in a 24% tax bracket, the IRS will take 24% of every withdrawal, so $100K in the inherited IRA is equivalent to $76K growing tax-free. But if you invest in stock, it becomes more likely that the IRS will take 32% of part of the withdrawal, as a rising stock market will increase the RMDs.
If you are maxing out tax-favored accounts and have to withdraw from the inherited IRA to invest in taxable, then it is better to hold bonds in the inherited IRA to minimize the tax cost. Now, if you have an RMD of $X, you take that RMD from the bond fund, buy $X of stock with it for tax efficiency, and move $X from stock to bonds in some tax-advantaged account if you want to keep the same asset allocation.
The reason this minimizes the tax cost is that the IRS owns a percentage of your IRA equal to the tax rate on withdrawal. If you are in a 24% tax bracket, the IRS will take 24% of every withdrawal, so $100K in the inherited IRA is equivalent to $76K growing tax-free. But if you invest in stock, it becomes more likely that the IRS will take 32% of part of the withdrawal, as a rising stock market will increase the RMDs.
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Re: best aa for inherited IRA
If your annual RMDs are about 2% now, it's hard to fathom that you're going to drain the IRA by having RMDs in a down year. The years where the market is up 6%-12% should be more common & the IRA will grow rapidly in those years.
Just mimic your 95/5 AA in the IRA & don't worry about it.
Your RMDs are being re-invested- either in taxable or else you're putting the money in checking & increasing your TDA/Roth 401k deferrals from salary, right?
You're pulling depressed shares out of the IRA & putting them in taxable- aside from taxes, you haven't lost anything, the market will rise again.
If the IRA was worth $100k last DEC, RMD is $2k (2%). Say the market drops 40% & your IRA is worth $60k. $2k is a 3.33% withdrawal, no big deal.
The math gets uglier in 20 years, because your Single Life Expectancy Table divisor goes from 40-something (~2% RMD) to 20-something (>4% RMD), but you can revisit the problem at that time.
Just mimic your 95/5 AA in the IRA & don't worry about it.
Your RMDs are being re-invested- either in taxable or else you're putting the money in checking & increasing your TDA/Roth 401k deferrals from salary, right?
You're pulling depressed shares out of the IRA & putting them in taxable- aside from taxes, you haven't lost anything, the market will rise again.
If the IRA was worth $100k last DEC, RMD is $2k (2%). Say the market drops 40% & your IRA is worth $60k. $2k is a 3.33% withdrawal, no big deal.
The math gets uglier in 20 years, because your Single Life Expectancy Table divisor goes from 40-something (~2% RMD) to 20-something (>4% RMD), but you can revisit the problem at that time.
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Re: best aa for inherited IRA
Good points all around. I guess I might be thinking about the tax backwards as grabiner@ and others explained. Sounds like it's actually better to move the bonds there to minimize tax drag from RMDs being a taxable event.