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Cash buffer in IRA?
Old 01-26-2013, 09:40 PM   #1
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Cash buffer in IRA?

Guys, I'm 67 (but I look 32. Really...). I have a number of investments. My qualified money is in a Vanguard account and is, as might be expected these days, doing very well.

Since I'll be doing the RMD dance in a couple of years would it be most prudent to take a chunk of my money (it's in Wellesley, Wellington, Total Bond Mkt and a small amount in Vanguard REITs) and put it in a MM account. Maybe a two or three year "just in case the world comes to an end like everyone thinks it will" amount?

Would be interested in your views.

Rich

I should mention that I will take out the required RMD only because it's the law. Otherwise I'd just leave it alone.
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Old 01-26-2013, 09:48 PM   #2
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You could consider letting all distributions be paid out in cash within your IRA (not reinvested). That might be enough to meet your RMD at first - or at least get you a good part of the way there, then you could just trim the rest from whatever had done best any given year.
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Old 01-26-2013, 09:52 PM   #3
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I'm ~5 years behind you and have similar Vanguard IRA investments. I have a small amount in a Vanguard MM account, enough (when combined with SS and dividends) to pay our bills for a couple of years, and from where I plan to draw my RMD when the time comes.
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Old 01-26-2013, 10:40 PM   #4
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You could pick a short term bond fund to cover that as well, the volatitly of the short term funds is low but they do pay better interest than the MM funds.
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Old 01-27-2013, 09:38 AM   #5
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You could pick a short term bond fund to cover that as well, the volatitly of the short term funds is low but they do pay better interest than the MM funds.
Interesting idea. Reading another thread here seems to indicate that putting money from "normal" investments into cash has a lower chance of success than just leaving the money in the investments.
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Old 01-27-2013, 09:50 AM   #6
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Originally Posted by meierlde View Post
You could pick a short term bond fund to cover that as well, the volatitly of the short term funds is low but they do pay better interest than the MM funds.
+1

I did move some of my 'cash buffer' money from a MM fund to a short-term bond fund for that very reason.
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Old 01-27-2013, 10:50 AM   #7
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From my reading there appear to be 3 main approaches:
1) Establish a cash buffer within TIRA (like emergency fund in taxable) so that
RMDs don't have to come from depreciated assets in a down market.
2) Pull the RMDs from the better performing asset class for the same reason
3) Pull RMDs from any asset class (or all in proportion to value) and re-establish the asset classes in taxable (LOL approach)

In addition to this decision, there is the manual control (you do it) vs auto-pilot approach where you let the institution do things automatically which usually means pulling from all asset classes in proportion to their value.

Originally I thought of doing 1) because I didn't like the idea of pulling from
depreciated assets. One disadvantage of doing this is that perhaps 3-5% of assets, esp. these days, would be lazy earning virtually 0. Then I thought of doing 2). One disadvantage of doing that is that it is a manual process risking forgetting or not doing it on time w/ the 50% penalty at stake.
Also thinking here that DW won't be doing this when I'm gone so there is risk of that penalty unless it's an automatic process.
Now I am thinking of doing 3) which can be put on auto-pilot so you at least get the RMDs out on time. The disadvantage is that you need to re-establish the AA in taxable so you don't get hurt by pulling from depreciated assets but after living w/ the idea for a while, this doesn't seem so bad. I guess this works better if you're not spending the RMD.
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Old 01-27-2013, 11:20 AM   #8
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I think it depends on what you are going to do with the RMD. Since you don't really want to make the RMD, I think you should leave it in your normal AA. Make the RMD and invest it as part of your AA in a taxable account. If you sell mutual fund shares in your retirement account and buy the same shares in your taxable account on the same day you will have a seamless transition. You might spread out the withdrawal in order to stay within the taxable account cash you have to buy shares. Then RMD the cash from the share sale and use it to replenish the taxable cash.

If you were going to spend the RMD within the next year, then I'd probably have it sitting in a very short-term investment or MM/cash to make sure I didn't have to take it after a big market drop. Although again you could have that cash reserve outside the retirement account and effectively transfer shares as described above.
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Old 01-27-2013, 11:22 AM   #9
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I don't see any point in putting the money in cash ... especially if you wouldn't withdraw it unless you were forced to by RMD.

You can donate your RMD to charity. Look up QCD. So that would be

4) Donate RMD via QCD.

In the meantime, why not convert to Roth IRA while staying in the same tax-bracket that anything you would do with RMD would put you in. Roth IRAs have no RMDs and are better for heirs, too.
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Old 01-27-2013, 11:44 AM   #10
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You can donate your RMD to charity.
My understanding is that the American Taxpayer Relief Act of 2012 only extended the QCD provision through December 31, 2013, so it may not be something that OP can count on when he reaches the RMD age.
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Old 01-27-2013, 02:47 PM   #11
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My IRA's are split between Fidelity and Vanguard. Fidelity requires a core cash account within the IRA. Any withdrawals from the mutal funds in the IRA go into the cash account first and to the local bank second. Any outside deposits to the IRA would have to go through the cash account first.

Personally, I like that format and I have set up my Vanguard IRA's the same way.
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