AA Thoughts

[savory]

Hi,

I am a few years from my RMD. My IRA represents about 30% of assets. With pension, SS, and investment earnings, I will reach or go slightly above the top of a tax bracket. So, most of an IRA withdrawal places me in the next tax bracket.

To date, I have not looked at my entire portfolio as one investment. So, there is a split of stocks and bonds in each account (IRA and non-IRA). It does turn out (by coincidence or luck) that my AA is in-line with my objectives.

Now that I am developing a 'single' portfolio and recognizing the tax implication of my RMD, I am considering an investment approach that I am requesting input which will not change my AA but is designed to be a better tax solution without disrupting growth. Here is what I am considering:

- Execute all bond funds in IRAs that will require RMDs. This is to slow the growth of what I expect will be income that will be taxed at the next level
- Place all equities in taxable accounts and do my best to manage them for long term gain so they are taxed at 15% (under todays tax code).
- Money left at the end of the plan will mostly be left for inheritance but some will be donated. The allocation of inheritance and donation will likely be informed by the amount.
- I am aware of the RMD charity opportunity and am prepared to donate a portion of the RMD. The remaining RMD after taxes are paid will be reinvested in one of the taxable accounts.

Does this strategy make sense from an investment and tax basis? Or should I be considering something else? Clarifying questions are welcomed

 

[pb4uski]

Yes, what you outlined makes sense. Also, read https://www.bogleheads.org/wiki/Tax-efficient_fund_placement if you haven't already done so.

 

[Golden sunsets]

You have described the same approach that we use. The only caveat that I would insert is, don't create unnecessary unwanted tax consequences in your taxable accounts in order to achieve your goal. EG, don't sell appreciated bond funds in your taxable account, unless you can offset with long term losses. We also reallocate annually for the entire portfolio AA, within our IRA's, avoiding taxable events.

As you stated, we reinvest the net RMD after taxes in our Taxable accounts. We also focus on purchasing international equities with the new Taxable account money. That way you'll get the Foreign Tax credit.

 

[pb4uski]

....The only caveat that I would insert is, don't create unnecessary unwanted tax consequences in your taxable accounts in order to achieve your goal. EG, don't sell appreciated bond funds in your taxable account, unless you can offset with long term losses. ...

Keep in mind that in your early years of retirement with no earning but before SS or pensions start, your income may be such that your capital gains are 0% rather than 15%.... an ideal time to reposition taxable account assets with gains the way you want... even if bond fund sales result in a gain it would be 0%.

 

[Golden sunsets]

Good point. Having never been in that position unfortunately, the thought did not occur to me, so I would revise my advice to sell bonds only to the threshold that there are 0% cap gains in any given year. Hopefully over time the OP can reorganize his AA distribution without affecting his taxes.

 

[Sunset]

OP can consider to buy a (I forget the actual name, but someone will tell us) delayed annuity from OP's IRA money up the cost of $125,000 to be paid when OP is much older.

This takes that $125K out of the RMD calculation for many years, and gives OP a big boost to income when much older and possibly needing it, plus gives some protection in case of 1929 Depression type stock market returns.

 

[Sunset]

OP could consider within the taxable account, to move $$ into really tax efficient ETF's and broad conservative non-dividend paying investments like BRK.

 

[savory]

Thanks all for your input. It was helpful and raised my confidence.

 

[Scratchy]

Keep in mind that in your early years of retirement with no earning but before SS or pensions start, your income may be such that your capital gains are 0% rather than 15%.... an ideal time to reposition taxable account assets with gains the way you want... even if bond fund sales result in a gain it would be 0%.

Also, if this is the case, OP may want to consider Roth conversions.

 

[pb4uski]

Also, if this is the case, OP may want to consider Roth conversions.

Agreed, in fact I decided to prioritie Roth conversions over capital gains trading... in part because of the stepped up basis.