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Pete's question: how to manage your portfolio when you enter the "required distribution" phase

Dear friends,

A reader emailed me a couple questions expressing his annoyance that he's got to start dismantling the portfolio that he and his wife built so carefully. He was wondering how best to handle it, but I had to admit that I'm completely ignorant on the subject. I did allow that folks on the board were almost certainly able to offer some guidance, and I offered to post the questions of Pete's behalf. Here's what he asked:
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?
Pete reads the discussion board and mayhap this might topic might even draw him into conversation!

Thanks, in advance and on his behalf, for whatever insights you can offer.

David

Comments

  • While I do manage our taxable and Roth IRA accounts, the bulk of our retirement savings are managed by TIAA-CREF. I rely on professional advice for that portfolio's construction (after specifying my goals and risk tolerance) and leave the decisions about from which funds to take my RMD up to the pros. The RMD is complicated, especially if one has a combination of 403b and 457 accounts. It's not just a matter of taking out a certain percentage every year. My advice to this couple would be to consult a fee-based advisor.
  • @BenWP Does TIAA-CREF allow you (or your pro) to specify from which funds to take your RMDs? I ask because my wife (who is 20 years from retirement age) inherited a couple of 403b accounts at TIAA from which she has to take RMDs but when we tried to get TIAA to let us designate which funds to take them the distributions, they weren't capable of doing that. Instead her RMDs are paid proportionately from all her investment funds which makes it more difficult to maintain her preferred portfolio.

  • beebee
    edited January 2015
    RMD is a tax event that executes each year after age 70.5. It roughly equals 4% of one's tax deferred assets the first year and is recalculated each year thereafter based on your tax deferred balance and your life expectancy. The IRS finally wants to collect taxes due on your tax deferred investments.

    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.
  • edited January 2015
    bee, I would agree that RMD would seem to be for collection of taxes. But, the fact that RMD tax payment can't be used for Roth conversion when non-RMD tax payment can leads me to think that the policy is really to encourage both tax payment and spending. (Retirement money is not for savings if it is part of that amount earmarked for retirement spending). Admittedly you can reinvest in taxable.
  • edited January 2015
    How do you spell ROTH?

    ---
    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.

  • Anna said:

    bee, I would agree that RMD would seem to be for collection of taxes. But, the fact that RMD tax payment can't be used for Roth conversion when non-RMD tax payment can leads me to think that the policy is really to encourage both tax payment and spending. (Retirement money is not for savings if it is part of that amount earmarked for retirement spending). Admittedly you can reinvest in taxable.

    Step 1: Calculate RMD
    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.


  • RMDs (I haven't started) but they are for "SPENDING" money hopefully not for normal living expenses, think of all those years of Saving/investing for WHAT?, more Saving and investing.....I don't think So....SPEND IT....
  • I don't have much of an issue with RMDs at retirement age but the rules on non-spousal inheritance seem designed purely for tax collection. My wife inherited a 403b from her father and has 35 years of RMDs before she hits 70 1/2. We don't need the money now (and we're at the max on IRAs and 401ks) so it's essentially a conversion from a tax-deferred investment to a taxable one at a time of peak earnings.
  • Tampabay said:

    RMDs (I haven't started) but they are for "SPENDING" money hopefully not for normal living expenses, think of all those years of Saving/investing for WHAT?, more Saving and investing.....I don't think So....SPEND IT....

    Couldn't agree more! For me life begins at 70 and 1/2 in about 2 and 1/2 years. Spending is very hard for me being I was pretty much lost and adrift as well as dead broke in my 20s and 30s. Just not sure what I will spend it on. My passion is hiking (the more remote the better) and that's not exactly an expensive passion unless I want to hike more out west.

  • All good advice here. Especially Bee and Tampabay. If your wealth has reached a self-sustaining level or you aren't afraid of depleting your assets, enjoy it while you can, whether that means spending on you or others. A fee based advisor might be able to help see if you've reached that point.

    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?
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