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Pete reads the discussion board and mayhap this might topic might even draw him into conversation!I would like to know if you ever focus on the topic of how best to make required withdrawals of our IRAs and how to best reinvest the money you don't need.
My wife and I are retired teachers who invested religiously and at the maximum for as many years as possible. We lucked out finding Peter Lynch in his second or third year and rode his work to his end and then on to other funds. We're good savers and this issue of mandatory withdrawals really hurts as we have been, I believe, unusually successful in our investments.
So having to start disassembling all of this is a reality but since we hardly need much of it, enjoy saving and investing (using such sources as yours), we have some questions. Should we pull out the money in a reverse of dollar cost investing? Take it all out at the last minute? How about taking all of the taxable accounts immediately, reinvesting in our trust and use dividends when we need money thus ending any concern about taxes and deconstruction of our efforts forever?
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Though it's a distribution I consider it a conversion. The taxable distribution is converting in tax status from "tax deferred" to "taxable". Depending on your tax bracket you will pay taxes on the entire incremental Required Minimum Distribution, but the remaining distribution (that is not needed for income) can and should be reinvested.
From an inheritance perspective, RMDs are a great opportunity to help younger loved ones (beneficiaries) fund their Individual Roth IRAs.
My thought here is,
"Money that one plans on "passing on" to their heirs can "pro-actively passed on" in incremental amounts (your RMDs) to help your heirs fully fund (their Roth IRAs)."
If, later in life, you need financial assistance or you have personal wishes (help your beneficiary with a down payment on a house) beneficiaries can tap these Roth accounts funded with these RMDs. By following Roth distribution rules there would be no further tax consequence on these "RMD funded Roth dollars" and more importantly no undue financial burden to your beneficiaries.
So, after taxes are paid, I like to think of RMD as an opportunity to creatively reinvest the remaining distributions with one's beneficiaries in mind.
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I'll add a bit.
TampaBay further down has a point. Spend it while you can. We're not quite at RMD but have been taking annual distributions equal to 4-5% yearly to supplement a DB Pension & SS for many years. To simplify record keeping, we take the entire sum every January and move it to the household budget which operates from non-sheltered accounts. (Theoretically ... it would be better to allow it to grow tax-deferred until the last minute when needed). We've been fortunate to continue growing the nest-egg even after those distributions.
How to go about withdrawing it? We simply plan ahead and attempt to stay as close to our allocation model as possible after withdrawing $$ from the various mutual funds. It's not hard. We're "Agnostic" re heirs. If they inherit a bit ... that's fine (probably will). But we don't plan our investments with that intent.
Roths are exempt from RMD. We had none when we retired about 18 years ago, but have taken advantage of a couple sharp market downturns to do conversions. Net result is about 50% in Roth and 50% in Traditional at this time. Our distributions are coming from the Traditional side. In effect, we've chosen to pay the taxes every year and allow the Roth to grow.
Just some thoughts. I realize there's at least 2 sides to the ROTH issue - may not work for everyone.
Step 2: Pay taxes on RMD
Step 3: If the remaining distribution is not needed for living expenses (spending) than the remaining RMD is available to be reinvested...why not gift your beneficiaries early by helping them fund their Roth rather than your taxable account?
This moves asset out of the retirees name, but remains in the "family". I like the idea of gifting to fund Roth accounts, but there are probably other creative ideas.
Off the top of my head, two things to think about:
1) Look at your tax bracket. If you want to keep the money at hand for loved ones or what have you, figure out how much you can roll per year before you bounce into a higher bracket and start incrementally moving assets in kind into a Roth. This will have the added benefit of lowering your RMDs per year.
2) Figure out what your RMDs will be per year. Now go back to your assets and figure out what you're yielding. If you turn off DRIPs, do you have your RMDs covered?