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You don’t need to distribute cash. There’s no need to sell an asset in order to make the RMD. You can take the RMD in property, known as an in-kind distribution. That keeps your asset allocation unchanged.
For most IRAs, this involves simply directing the custodian to transfer a certain number of shares of a mutual fund or stock from the IRA to a taxable account. You have to be sure the value of the shares on the day of the distribution is at least equal to your RMD. The value on the day of the distribution is your tax basis in the asset. So, you’ll owe capital gains taxes in the future only on the appreciation after that day.
An in-kind distribution can be especially profitable when an asset’s value has declined and you believe the decline is temporary. Distribute the depressed asset and the value on that day will be taxed as ordinary income to you. But you’ll owe only tax-advantaged capital gains taxes on the appreciation that occurs after that.
I simply transfer my RMD amount from my brokerage IRA, into my brokerage joint tenant/taxable account. It is a cash to cash transfer, but once the RMD amount is in my joint tenant/taxable account, I then move the cash into a brokerage MM account that pays a decent dividend. I weigh my longer term options and can choose a variety of alternatives to the MM account, that fits my investing style.
Note, @bee linked article above from Forbes is out of date and incorrectly states when RMD's must be started. SECURE 2.0 Act is now law. Owners of retirement accounts must start taking RMDs at age 73.
- If you mean you have to take some $$ out of the tax shelter (what I think you mean) than depending on tax bracket you might want to invest it in municipal short-term bonds or any number of taxable options like CDs and cash. My understanding is that short term T-Bills are exempt from federal income taxstate and local taxes. I-bonds were a very hot item here a year ago. The yield has come down some, but look into those if investing up to $10,000. On the muni-bond side I have in the past used PRIHX. It really stunk up the joint in ‘22. But what didn’t? I’d have no problem steering someone to that if it met their needs.
- If you mean what to do with money still under the tax-deferred umbrella, but which you plan to take as a RMD at some future date, than why not sell off some of your different assets in a way that maintains your current allocation and move the proceeds into a money market fund until you need to actually withdraw it? That’s what I do. And it can be a cumbersome process if maintaining existing allocation is important to you; so some fore-planning recommended. In doing that you can also accomplish at the same time any rebalancing you may need to do by moving funds first from those assets than have done better and grown in proportion.
”With sell in May & go away, I'm thinking fixed or possible split 50-50 equity & fixed.” Here you add a new wrinkle. “Sell in May”’s staunchest advocate left the board a while back. I’ve never put much sock stock in the approach - although it has many advocates. But, yes, if you’re planning on reducing market exposure soon, then taking some of that out as a RMD would make sense.
Your last point raises the question of how aggressive one may want to be positioned at this time. Personally I’m currently skewed a bit to the aggressive side. Just slightly overweight growth compared to fixed income, but not by a whole lot.
IRS: Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes.
Thanks for all the replies. As of today I'm thinking of taking 1/2 of required RMD & placing after taxes the remaining amount into another T- note of two years.
@yogibearbull : Thanks for the info. If buying a five year does one replace the 2 with a five when multiplying ? First thought is NO, probably another formula.
@Derf, this concept of forward rates works best for 2 bonds with the maturity of the 2nd just the double of the 1st. Otherwise, there are too many variables and assumptions. So, it will work for 2-yr Note (3.76%) and 4-yr Note (3.40% ?).
So, the key value then will be 2 x 3.40 - 3.76 = 3.04% for 2-yr in 2 yrs.
There is a formal name for these forward rates, e.g. 1-yr, 1-yr forward; 2-yr, 2-yr forward, 5-yr, 5-yr forward, etc. The idea can be applied to interest rates, loan rates, inflation rates, etc.
Comments
- If you mean you have to take some $$ out of the tax shelter (what I think you mean) than depending on tax bracket you might want to invest it in municipal short-term bonds or any number of taxable options like CDs and cash. My understanding is that short term T-Bills are exempt from
federal income taxstate and local taxes. I-bonds were a very hot item here a year ago. The yield has come down some, but look into those if investing up to $10,000. On the muni-bond side I have in the past used PRIHX. It really stunk up the joint in ‘22. But what didn’t? I’d have no problem steering someone to that if it met their needs.- If you mean what to do with money still under the tax-deferred umbrella, but which you plan to take as a RMD at some future date, than why not sell off some of your different assets in a way that maintains your current allocation and move the proceeds into a money market fund until you need to actually withdraw it? That’s what I do. And it can be a cumbersome process if maintaining existing allocation is important to you; so some fore-planning recommended. In doing that you can also accomplish at the same time any rebalancing you may need to do by moving funds first from those assets than have done better and grown in proportion.
”With sell in May & go away, I'm thinking fixed or possible split 50-50 equity & fixed.” Here you add a new wrinkle. “Sell in May”’s staunchest advocate left the board a while back. I’ve never put much
sockstock in the approach - although it has many advocates. But, yes, if you’re planning on reducing market exposure soon, then taking some of that out as a RMD would make sense.Your last point raises the question of how aggressive one may want to be positioned at this time. Personally I’m currently skewed a bit to the aggressive side. Just slightly overweight growth compared to fixed income, but not by a whole lot.
(i) buy 1-yr around 4.32% now and roll into another 1-yr on maturity (03/2024)
vs
(ii) buy 2-yr around 3.76% now.
You will be AHEAD with (i) if the rate for 1-yr in 03/2024 is MORE than 2 x 3.76 - 4.32 = 2.84%.
You will be BEHIND with (i) if 1-yr in 03/2024 is LESS than 2.84%.
1-yr would be around 2.84% in 03/2024 if the Fed switches to aggressive cuts.
So, the key value then will be 2 x 3.40 - 3.76 = 3.04% for 2-yr in 2 yrs.
There is a formal name for these forward rates, e.g. 1-yr, 1-yr forward; 2-yr, 2-yr forward, 5-yr, 5-yr forward, etc. The idea can be applied to interest rates, loan rates, inflation rates, etc.