RMD proceeds

[Chahta]

Most of the posts about AA and purchases etc. here are “generic” because they are not specified which type of account they apply to; that is, tax-deferred or taxable accounts. I have not started RMDs but will in 2025. Currently I treat each type account differently in that I hold ‘no to low tax funds in taxable’ (muni and no div equity funds) and ETFs and taxable bonds in tax-deferred accounts. Are all investors here that are into RMDs doing the same? What are you doing with excess RMDs if you have any? If you hold stocks in IRAs do you continue to hold them in your taxable accounts? I suppose I am assuming that you don’t need the RMDs to live on.

[mnfish]

I have had to take RMD's in 2 Beneficial IRA's, 1-Trad and 1 - Roth, from my brother since 2013. At first it was about 3.3% and now it's close to 5% as the divisor has gone from 28.7 to 21. The divvys each year used to equal my draw but now I have to sell a little something each year. I hold individual stocks, bond funds and recently added a fair amount of SCHD to both. I transfer the RMD's to my taxable account each year and after gifting to my daughters and grandkids I reinvest any excess. In 2021 both accounts were nearly equal to what the values were when I started RMDs and last year were down 11% due to the bond funds. Both are up 14% YTD.

[Fearchar]

My 92yo MO. Takes rmd from accounts with mostly mutual funds. Her taxable accounts have over the decades have become loaded with long term capital gains.. SPGI in particular, but also DE and BRK.

I consider SPGI a reasonable buy right now, but not the others. Mom however owns much to much SPGI, so I can not see buying it myself unless it goes on a extra good sale.

[Mustang]

I have simplified my traditional IRA to one moderate-allocation balanced fund. American Funds takes out federal and state taxes from my RMD and sends me the difference every month. It is completely automatic even though the RMD dollar value of the distribution changes every year. I then immediately invest the distribution in a similar fund in my taxable account.

I don't worry about little things. I don't try to market time the distributions and the total tax paid from all my income sources always gives me a nice refund. Yes, that is lending the government an interest free loan but I would rather have a refund then scramble at tax time to cover taxes. I would hate to be forced to sell during a crash just to pay taxes.

[steelpony10]

Chahta ,

           I think you know what I do already. All equities, a muni and cash in a taxable account. All ordinary income in a TIRA. We auto transfer enough monthly cash to supplement SS to pay all bills and estimated discretionary spending. We’re about 50% above our RMD only because of the end of year value swoon in our TIRA.*

           Answering your question any yearly excess, we keep cash at 5-10% of that account value, goes to the muni (mostly tax free) or VTI (mostly qualified) depending on which did worse that year. 

            * My calculation of the current RMD table shows it compounds at 4.6% to age 90. Our personal inflation rate is well below that so far. So eventually this method breaks down, we lose control, and positions would be transferred that produce ordinary income. I also saw when reading a committee report there’s talk of dropping RMD’s completely because 80% of retirees take out more and the whole process is too confusing. You just continue to pay taxes on withdrawals. 
          

[marpro]

RMDs are pain like an annuity income, pushes your marginal tax rate for life (especially with your SS income), and should be avoided as much as you can using the backdoor ROTH conversion.

[hondo]

We have been taking RMDs for 14 and 15 years. I try to make everything as simple as possible. Our IRAs are all in 3 funds, (2 balanced funds and 1 bond fund). Our RMDs are withdrawn automatically and proportionally from the 3 funds in the account.  By using balanced funds and withdrawing proportionally, rebalancing is not necessary.   We then reinvest the cash into our taxable accounts, 3 low or no tax funds, (not the same funds as are used in the IRAs).

[Capital]

When I get to RMD time I plan to roll my RMDs into our Brokerage Account. probably will invest it in ETFs or MFs.
From there I will make decisions as to what I need to pull out based upon the balance of my checkbook.

[marpro]

Feb 15, 2023 23:12:51 GMT Capital said:

When I get to RMD time I plan to roll my RMDs into our Brokerage Account. probably will invest it in ETFs or MFs.
From there I will make decisions as to what I need to pull out based upon the balance of my checkbook.

I would start planning to use backdoor Roth conversion starting from the age of 591/2  =60, when you do not need to pay penalty but only taxes. I wish I had learned a lot of these techniques well in advance to avoid RMD 100%. I could not avoid it. I had to draw RMD for two years. If you want to know, how I learned this? From the current senator Romney, then the presidential candidate back in 2008 or 2010? People were questioning his tax rates during his campaign, and how he had something like $110 million of ROTH account. Now, it is a very common knowledge about this technique.

[retiredat48]

My guidance...

--0% fed tax bracket...do ROTH conversions.

--to 12% : optional. I generally recommend NO.

--above 12% fed tax bracket...DO NOT DO CONVERSIONS TO ROTH.

Long story why.

R48

[retiredat48]

Some more guidance:

.Hi. (re setting up taxable versus IRA account holdings)

Regarding the main thrust of many forum questions...it depends.


It depends on how active an investor you are, in placing assets into tax deferred spaces such as IRAs. Here are the two scenarios:

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):

Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Balanced Funds
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds
---------------------------------------------------


The second scenario...if you will be an investor who actively manages their portfolio, selling mutual funds from time to time, either for market conditions, selling laggards, any form of timing, entering and leaving international spaces, etc, then you should keep some of these assets in IRA (tax deferred) spaces.

For instance, let's say you invest in Emerging Market Fund..and it doubles in 3 years; doubles again in three more years...getting very bubble like. You decide to take some off the table...perhaps even exiting altogether. In an IRA this is a nontaxable sale; in taxable spaces you have a capital gain. So you are not reluctant to sell if in an IRA.

NOTE THIS TAX ADVANTAGE CAN BE REPEATED OVER AND OVER AGAIN WITH THE SAME MONEY. A bond fund only uses the advantage essentially only once.

So I recommend those funds you envision may be sold for any reason, be kept in IRAs.

Also, remember, your stock equity funds held over several decades are expected to grow much more than fixed income bond funds.

It was a fundamental reason I was able to retire a little early. Having the fund capital gains be tax free, as well as any exchange cap gains, was a huge advantage when the IRA assets became very large.


Now, in the past couple years, cap gains taxes have been zero for moderate to lower income folks. This has been extended, but difficult to plan on this being the case, long term. Ditto for dividend levels,and nontaxable features thereof.


Also consider...if you have a very high tax bill when you begin taking RMDs, this means you saved "More than a Comfortable Retirement." You could have retired earlier!

A final point. The use of ETFs can also be a big benefit. ETFs have this special structure and tax status such that they pay out very little in capital gains each year. Long story. Open ended funds must distribute such annually. With ETFs you essentially only pay the cap gains when you actually sell them. Thus, holding a small cap stock ETF in taxable, has advantages. The cap gains annually are small, and the dividend on small caps is usually small. Thus taxes are mitigated. One can make good use of ETFs this way in taxable spaces, with core holdings that are not sold, if ever.

-------------------------------

Good luck choosing,...

R48

[marpro]

Feb 16, 2023 15:51:32 GMT retiredat48 said:

My guidance...

--0% fed tax bracket...do ROTH conversions.

--to 12% : optional. I generally recommend NO.

--above 12% fed tax bracket...DO NOT DO CONVERSIONS TO ROTH.

Long story why.

R48

I would recommend even if I were in 12%, which was my case. It is not straightforward, as R48 says. It depends. Your SS income need not be taxed to the full 85% as it happened after I finished backdoor ROTH. My effective rate (Fed Tax/Taxable income) came down to just 1.5%, and went back up to 2-3%. Besides, it also depends on the CGs and qualified dividends. CGs and qualified dividends may not be taxable directly, but will increase the taxable part of your SS income. However, I intentionally increased my taxable income using the CEFs (PDI and ECC) this year, I expect my effective rate is to be less than 6.1%. This is a nonlinear problem, and there is no one size fits all.

[Fearchar]

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):

Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Balanced Funds
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds
-------------------------------------------..

R48

[/quote]



Thanks R48,

I do not believe the list of tax effiency is this simple.

BRK and SPGI held over the long term is very tax efficient and has provided superior returns at higher bracket rates than Tax Exempt Bonds.

Short term TEB may make sense, but unlikely over longer terms unless one buys at great point. Longer term being 10+ years and maybe less too.

[retiredat48]

Feb 16, 2023 16:01:31 GMT marpro said:

Feb 16, 2023 15:51:32 GMT retiredat48 said:

My guidance...

--0% fed tax bracket...do ROTH conversions.

--to 12% : optional. I generally recommend NO.

--above 12% fed tax bracket...DO NOT DO CONVERSIONS TO ROTH.

Long story why.

R48

I would recommend even if I were in 12%, which was my case. It is not straightforward, as R48 says. It depends. Your SS income need not be taxed to the full 85% as it happened after I finished backdoor ROTH. My effective rate (Fed Tax/Taxable income) came down to just 1.5%, and went back up to 2-3%. Besides, it also depends on the CGs and qualified dividends. CGs and qualified dividends may not be taxable directly, but will increase the taxable part of your SS income. However, I intentionally increased my taxable income using the CEFs (PDI and ECC) this year, I expect my effective rate is to be less than 6.1%. This is a nonlinear problem, and there is no one size fits all.

I also factor in an expectation that Roths will be further taxed within a decade.  Like, expect the roth withdrawals to be means-tested.  Above a threshhold, you pay a tax.  Various ways exist to tax, including a "wealth tax."  Standby.

R48

[retiredat48]

Fearchar,...who posted: "Thanks R48,

I do not believe the list of tax efficiency is this simple. BRK and SPGI held over the long term is very tax efficient and has provided superior returns at higher bracket rates than Tax Exempt Bonds.

Short term TEB may make sense, but unlikely over longer terms unless one buys at great point. Longer term being 10+ years and maybe less too."

---------------------------------------------------------
Agree. Note the standard list was made before ETFs came into wide usage. ETFs have a special tax aspect in that minimum annual cap gains distributed. Thus one can avoid taxes in taxable. Such as: own a small cap growth fund etf. You have almost no income annually, and zilch for cap gains. Only pay cap gains if you sell. Hold a lifetime and step-up basis is no cap gains also.

R48

[marpro]

R48 "I also factor in an expectation that Roths will be further taxed within a decade. Like, expect the roth withdrawals to be means-tested. Above a threshhold, you pay a tax. Various ways exist to tax, including a "wealth tax." Standby."

Amen. True, but not necessary. Move to the state of Capital and Chahta. Pass them to your granddaughters. They are in my will. They are poor, and they may not pay as much. 

[Deleted]

Feb 16, 2023 15:51:32 GMT retiredat48 said:

My guidance...

--0% fed tax bracket...do ROTH conversions.

--to 12% : optional. I generally recommend NO.

--above 12% fed tax bracket...DO NOT DO CONVERSIONS TO ROTH.

Long story why.

R48

I agree with this wholeheartedly. No way I am taking a big tax hit while I am in the 22% tax bracket and foregoing deferred taxation and growth on the higher balances, while hoping a conversion works out in the long run. My tax calculations put me well below a 10% effective tax rate in retirement, at least until RMD time. I will deal with that when the time comes. Bird in hand.  

Meanwhile, I continue to max out 401K and annual Roth contributions. 

Though I'd love to hear the Cliff's Notes version of your "long story". 

I am not so certain that Roth income will be subject to taxation in my lifetime and at my "means" level. In conjunction with that, I have been hearing for many decades about how "so and so" is coming for my 401K. I consider it fear-mongering, with an agenda. Anything is possible, but undermining retirement savings seems unlikely. Though a change for the 1%ers, is not out of the question. I just doubt it will impact the other 99%. JMHO.

[anovice]

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts

R48

[/quote]


I am missing the distinction between 1 and 2.

[fishingrod]

Feb 16, 2023 18:22:41 GMT anovice said:

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts

R48

I am missing the distinction between 1 and 2.

[/quote][/div]

____________________________________________________________________________________________________________

I believe he is referring to after one has added up to the allowed limit each year into #1 then start filling your Roth(s) up to the limit each year, then after that the rest into taxable account.

Fishingrod

[Deleted]

Feb 16, 2023 18:22:41 GMT anovice said:

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts

I agree with all of that. I put my most aggressive investments in Roth, followed by TIRA/401K, then taxable.

Not seeing the point of putting FI into tax-advantaged accounts, unless they are throwing off big income, like CEFs or preferred stock or HY.

Of course, LT CG is less subject to tax, than ordinary dividends, so that may factor in.

[marpro]

Feb 16, 2023 20:04:23 GMT @theycallmenobody said:

Feb 16, 2023 18:22:41 GMT anovice said:

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts

I agree with all of that. I put my most aggressive investments in Roth, followed by TIRA/401K, then taxable.

Not seeing the point of putting FI into tax-advantaged accounts, unless they are throwing off big income, like CEFs or preferred stock or HY.

Of course, LT CG is less subject to tax, than ordinary dividends, so that may factor in.

Exactly. And, you can, if you make a lot a more than the inflation, and pay 25% tax. PDI pays around 13%, and you get to keep 9.75%. That is a pretty after-tax income. So, I went ahead and bought some when the prices fell below $19/sh. I am making, after tax, almost 10%. Pretty good deal to pay for groceries. Who cares the price of eggs, if they are $7/dozen?

[Chahta]

Feb 16, 2023 20:04:23 GMT @theycallmenobody said:

Feb 16, 2023 18:22:41 GMT anovice said:

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts

I agree with all of that. I put my most aggressive investments in Roth, followed by TIRA/401K, then taxable.

Not seeing the point of putting FI into tax-advantaged accounts, unless they are throwing off big income, like CEFs or preferred stock or HY.

Of course, LT CG is less subject to tax, than ordinary dividends, so that may factor in.

The theory is bonds (FI) should move opposite equities. Do you really want to sell equities for RMDs when they are down 20%? Makes more sense to me to store divs and CG distributions in MM to withdraw RMDs. Could be a huge sequence of return risk.

[Chahta]

Feb 16, 2023 15:51:32 GMT retiredat48 said:

My guidance...

--0% fed tax bracket...do ROTH conversions.

--to 12% : optional. I generally recommend NO.
 
--above 12% fed tax bracket...DO NOT DO CONVERSIONS TO ROTH.

Long story why.

R48

Depends on your marginal rate down the road. You have no idea when the current reduced tax brackets will go up. Plus if big inheritance comes in then it could really foul up your tax rate. For now I think 12% is reasonable because 10% is very hard to do more than $17-18k, depending on your SS pay, other income and any other stray divs. Logically you realize the mess the country is in financially taxes are going up.

[Birdman96]

We have two different 403b companies where rmds are drawn. The smaller of the two is withdrawn monthly for living expenses. The larger one is drawn in one lump sum. In 2021 we harvested enough gains from VDADX into a mmkt account for use as the rmd during 2022. This went into a mmkt fund in our taxable account. These funds have been our dry powder for investing. The past year *sucked* (an economist term) so we were unable to harvest in anticipation this year.

[retiredat48]

Feb 16, 2023 18:15:01 GMT @theycallmenobody said:

Feb 16, 2023 15:51:32 GMT retiredat48 said:

I am not so certain that Roth income will be subject to taxation in my lifetime and at my "means" level. In conjunction with that, I have been hearing for many decades about how "so and so" is coming for my 401K. I consider it fear-mongering, with an agenda. Anything is possible, but undermining retirement savings seems unlikely. Though a change for the 1%ers, is not out of the question. I just doubt it will impact the other 99%. JMHO.

Well, ROTH IRAs have already become much more taxable in your lifetime.  The change to a ten year drawdown by beneficiaries (other than spouse) means must less value in a ROTH.

The reason ROTHs will be taxed:  My grandkids were projected to have from $8-10 million in a Roth IRA, by their age 62.  Ain't gonna happen.  Gvt will tax this.  Why?  Because that is where the money is!

BTW, separately, I started Trad IRAs for my kids at their age 12.  Grandkids have IRAs started at age 12 also.

R48

[marpro]

Feb 16, 2023 22:38:37 GMT retiredat48 said:

Grandkids have IRAs started at age 12 also.

They have to have earned income. Don't they?

Well, my sons started working in the fast food places, when they became 16. That was ok. I did that to avoid the “kiddie” tax. I put my money, and in fact, when they graduated from college, they had a few thousands. Not bad to start.

[anovice]

Feb 16, 2023 20:01:09 GMT fishingrod said:

Feb 16, 2023 18:22:41 GMT anovice said:

The conventional guidance (accreditation T. Larimore) is to put more fixed income into IRAs, avoiding the definite tax on interest and dividends if kept in taxable. Here is a handy guide for placing such assets into IRAs:

Four Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..

2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-

3. Put what's left into your taxable account.

4. Try to use only tax-efficient funds in taxable accounts

R48

I am missing the distinction between 1 and 2.

[/div]

____________________________________________________________________________________________________________

I believe he is referring to after one has added up to the allowed limit each year into #1 then start filling your Roth(s) up to the limit each year, then after that the rest into taxable account.

Fishingrod

[/quote]

[anovice]

What is throwing me off is why the "next most tax-inefficient funds in your Roth(s)"?

Why not the next most tax-inefficient funds in your 401ks, 403bs, Traditional IRAs and similar retirement accounts?

[retiredat48]

Feb 16, 2023 23:07:01 GMT marpro said:

Feb 16, 2023 22:38:37 GMT retiredat48 said:

Grandkids have IRAs started at age 12 also.

They have to have earned income. Don't they?

Well, my sons started working in the fast food places, when they became 16. That was ok. I did that to avoid the “kiddie” tax. I put my money, and in fact, when they graduated from college, they had a few thousands. Not bad to start.

Yes...most kids have earned income at age 12 and up.  Babysitting money; etc.  I filed a form 1040, showing/claiming kid's  income, then deducting the IRA.  This established in fact an IRA exists.

R48

[fishingrod]

retiredat48 , anovice ,

What is throwing me off is why the "next most tax-inefficient funds in your Roth(s)"?

Why not the next most tax-inefficient funds in your 401ks, 403bs, Traditional IRAs and similar retirement accounts?

______________________________________________________________________________________________________________________________________

I am not sure retiredat48 is making that distinction as much as sequence of investing in different vehicles because of higher limits, matching perhaps and tax breaks for before tax monies. I could very possibly be wrong and probably am.