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DW is five years younger and five years from her first RMD. We are buy and hold types and have an oversized Bucket 1. The thought of having to sell for RMD funding makes me cringe. It occurred to me that adjusting my DW’s assets for more growth investments and mine for more income makes sense as opposed to matching allocations. Am I crazy? Thanks in advance for your thoughts.
On the surface it makes sense if your goal is to position your more aggressive holdings so that they become subject to RMD later rather than earlier. Of course, there are plenty of unknowns here, including how well you and your DW (dear wife) are able to coordinate your planning (ie “stay on the same page”) - and to continue doing so through what might prove to be widely varying market conditions.
As you’ve explained it, this would garner a few additional (non-RMD) years on the “aggressive” side of the overall portfolio. Of course, a conversion of your own more aggressive holdings to a Roth would also be a way to protect them from RMD and would reduce overall the size of the Traditional IRA so that the RMD would be less in ensuing years.
There is a counter point however. With assets not subject to taxation (in particular the Roth) you own the asset 100%. On the contrary, if the asset is subject to taxation than the government is in effect part owner. Under certain conditions, you might deem it more prudent to take on more risk inside the part of the portfolio that’s subject to taxation - effectively allowing the government share a portion of that risk.
@Hank. Thanks for your thoughtful response. Much appreciated. Your thinking is much more sophisticated than my simple motivation. I just hate to be forced to sell low.
RMDs are merely tax events - moving assets from one pocket (an IRA) to another. They don't require you to sell anything.
If you're relying on IRA distributions to meet cash needs, then your concern is not so much that you have RMDs, but rather that you have to sell assets. The question is thus: which assets do you sell.
You can "replace" the assets distributed and sold from your DW's IRA by repurchasing them in your own IRA. So there's no risk of selling low that's created by distributing one set of assets (i.e. DW's assets) vs. another (i.e. your IRA).
OTOH, if your question is how to maximize sheltered assets, then I suggest looking at post-tax values. Assuming you don't expect your tax rates to change much, there's a simple calculation you can make.
Assume that your tax rate is, and will be, 25%. Then every $100 in a taxable IRA is "worth" $75. If that $100 investment doubles to $200, then it will be "worth" $150. Very straightforward. From your perspective, the government is not sharing risk here. This is the same as if you had $75 in a Roth and it might double to $150. Your risk and your potential reward is the same either way, so long as you think in terms of post-tax dollars.
So, if the objective is to maximize sheltered assets, maximize the post-tax dollars in your IRAs. As hank mentioned, you can do gradual Roth conversions. Then, that $75 (post tax) in your traditional IRA becomes $100 (post tax) in your Roth.
You can also put the dollars with the highest expected growth rates into (a) a Roth, and (b) the younger spouse's T-IRA since those dollars will be allowed to remain there longer. The latter assumes that you don't need to draw dollars out of IRAs for spending cash.
Circling back to the beginning, if the concern is not so much maximizing sheltered dollars as it is controlling which assets to sell, remember that you always have the option of replacing something you sell in one IRA by purchasing it in the other IRA. In this way, you're not at risk of selling low - you have control over which assets, at the end of the day, you sell.
Comments
As you’ve explained it, this would garner a few additional (non-RMD) years on the “aggressive” side of the overall portfolio. Of course, a conversion of your own more aggressive holdings to a Roth would also be a way to protect them from RMD and would reduce overall the size of the Traditional IRA so that the RMD would be less in ensuing years.
There is a counter point however. With assets not subject to taxation (in particular the Roth) you own the asset 100%. On the contrary, if the asset is subject to taxation than the government is in effect part owner. Under certain conditions, you might deem it more prudent to take on more risk inside the part of the portfolio that’s subject to taxation - effectively allowing the government share a portion of that risk.
If you're relying on IRA distributions to meet cash needs, then your concern is not so much that you have RMDs, but rather that you have to sell assets. The question is thus: which assets do you sell.
You can "replace" the assets distributed and sold from your DW's IRA by repurchasing them in your own IRA. So there's no risk of selling low that's created by distributing one set of assets (i.e. DW's assets) vs. another (i.e. your IRA).
OTOH, if your question is how to maximize sheltered assets, then I suggest looking at post-tax values. Assuming you don't expect your tax rates to change much, there's a simple calculation you can make.
Assume that your tax rate is, and will be, 25%. Then every $100 in a taxable IRA is "worth" $75. If that $100 investment doubles to $200, then it will be "worth" $150. Very straightforward. From your perspective, the government is not sharing risk here. This is the same as if you had $75 in a Roth and it might double to $150. Your risk and your potential reward is the same either way, so long as you think in terms of post-tax dollars.
So, if the objective is to maximize sheltered assets, maximize the post-tax dollars in your IRAs. As hank mentioned, you can do gradual Roth conversions. Then, that $75 (post tax) in your traditional IRA becomes $100 (post tax) in your Roth.
You can also put the dollars with the highest expected growth rates into (a) a Roth, and (b) the younger spouse's T-IRA since those dollars will be allowed to remain there longer. The latter assumes that you don't need to draw dollars out of IRAs for spending cash.
Circling back to the beginning, if the concern is not so much maximizing sheltered dollars as it is controlling which assets to sell, remember that you always have the option of replacing something you sell in one IRA by purchasing it in the other IRA. In this way, you're not at risk of selling low - you have control over which assets, at the end of the day, you sell.