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Managing Cash & Roth Conversions (Separate Topics)
Old 07-26-2011, 01:13 PM   #1
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Managing Cash & Roth Conversions (Separate Topics)

We have done very well in the accumulation phase, but having just retired, spending it now is all new to me. My questions are on managing cash, and another topic, Roth conversions.

Q1) We have about 2.5 years in taxable money market, mostly just on the sidelines, not so much planned. And we have 4-5 months in checking, just received several large checks on retirement that I left in checking to get started in retirement. I've always heard to have a chunk of cash on hand to avoid being forced to sell other assets in a down market (I've heard anything from 1 to 7 years worth). The concept makes sense, though it would seem that whenever it's time to replenish, you're still ultimately forced to sell assets at what may be a bad time.

At any rate, my plan was to keep my taxable cash between 1-2 years and my checking at 3-6 months (replenish quarterly). I have no pensions or other income if that matters.

Q1A) I have always reinvested all dividends. I am starting to wonder if it's time to let dividends go to cash?

Q2) We have 4 IRAs, both of us have TIRA's and Rollover IRA's from previous employers. I expect marginal rates to increase so I was planning to convert it all to Roth IRA's beginning next year (we have too much work income this year to begin). Thought I'd convert such that we stay in the lowest tax bracket, and expecting it to take several years to complete conversions.

This spending stuff is all new to me, so any insights or suggested reading could be most helpful.
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Old 07-26-2011, 02:37 PM   #2
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Q1A) I have always reinvested all dividends. I am starting to wonder if it's time to let dividends go to cash?
We keep two years' cash on hand, and part of that comes from taking dividends in cash. If the cash piles up to more than two years, or if a nasty recession gives you a buying opportunity, then you can put some of it back to work at a discount.

I hate having the dividends reinvest at what turns out to be the top of the market...

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Q2) We have 4 IRAs, both of us have TIRA's and Rollover IRA's from previous employers. I expect marginal rates to increase so I was planning to convert it all to Roth IRA's beginning next year (we have too much work income this year to begin). Thought I'd convert such that we stay in the lowest tax bracket, and expecting it to take several years to complete conversions.
We've been doing that for a few years now and have a couple years left. Tax form 8606 is one way to work through the amount to be converted, and tax software may also give you a good estimate.
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Old 07-26-2011, 02:49 PM   #3
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Interesting topic, especially to me as I am right on your heels, Midpack, and have had the same questions

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Q2) We have 4 IRAs, both of us have TIRA's and Rollover IRA's from previous employers. I expect marginal rates to increase so I was planning to convert it all to Roth IRA's beginning next year (we have too much work income this year to begin). Thought I'd convert such that we stay in the lowest tax bracket, and expecting it to take several years to complete conversions.

For several years, I had been planning to take this approach with the end goal of having all tax-deferred funds in my main retirement accounts (403b) moved into a Roth version. But I am rethinking this in favor of making "tax-managed withdrawals" annually. I will not be in the lowest tax bracket due to a pension, so I would mix withdrawals between the tax-deferred 403b and Roth 403b to allow myself to stay in the bracket I land in due to pension income. In other words, I would not concern myself with a goal of converting everything. I've got a few years to consider strategies, but that's my thought right now.
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Old 07-26-2011, 04:09 PM   #4
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We are in the same situation as you are, Midpack. I have 2 years of cash in savings and checking accounts. A month before I ER'd, I changed all my investments in my taxable account to take the dividends and cap gains in cash instead of reinvesting. Those distributions will contribute about 40% of my needed annual living expenses. Even though interest rates on savings are poor, I have great peice of mind that I have enough in cash and dividends to go 3 years, or more, without selling bonds or secutities, if I wish. If the market goes up, I may sell some equities each year to pad the savings. If the market goes down, I can sit tight for a while. (I did transfer some of my cash out of MM and into an online savings account for better interest).

On the deferred side of the portfolio I am keeping some funds in my old employer's 401k (we are under age 59.5) and planning to move a bit to the taxable side each year and pay taxes on it since our tax bracket would be low.
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Old 07-26-2011, 04:27 PM   #5
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Hi Midpack -
We have been retired 11 years and have arrived at the following:
-Maintain a taxable MM account of varying amount for emergencies and larger purchases (e.g., car) but not specific timeframe of expenses.
-Maintain a MM in IRA for making periodic withdrawals. We currently move money from IRA MM to taxable MM monthly.
-Quarterly we review for possible rebalancing and to ensure there is enough in IRA MM for next 3 months withdrawals. If not, we move 3 months of withdrawals from other funds. We use short term and gnma bond funds for relative price stability instead of keeping a large slug of cash to avoid selling stock in a down market.
-We route all IRA dividends to the IRA MM which reduces how often we have to sell something else. Prefer doing this to re-investing; we choose when and where to invest/reinvest our dividends.

Not sure what is happening in DC so not sure I would target converting all of my IRAs to Roths. Would definitely do some though for account diversification. We did that earlier in our retirement. You may want to look at an online calculator called I-Orp which addresses optimizing taxes and withdrawals using both IRAs and Roths. It usually gives advice on how much to convert if you have a taxable account balance.

http://www.i-orp.com/
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Old 07-26-2011, 04:30 PM   #6
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Q1A) I have always reinvested all dividends. I am starting to wonder if it's time to let dividends go to cash?
I think so. Some of us let our dividends in taxable accounts go to cash, to become part of our spending money. Dividends in a taxable account are taxed in any event.

I am no financial guru, but the following will give you an idea as to how some (or at least one) of us handles cash in retirement.

I keep several years' expenses in VMMXX money market, so that I won't have to sell low in the event of a multi-year market crash. Besides, it's nice to have the option of buying low when the market is down. I am not recommending that particular money market account, because the interest is low, but for now that is what I do.

At the beginning of the year, I move my year's spending money from VMMXX to my bank. After that transfer my bank account is equal in size to the prior year's dividends at Vanguard, since I don't want to spend more than that from that source. While my dividends shower down to VMMXX throughout the year, I don't move any more money out of Vanguard until the next January. This is not something that is necessary to do, but it ensures that I don't withdraw too much during the year.
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Old 07-26-2011, 04:57 PM   #7
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Hi Midpack.

My first year of ER I did not need to draw from investments because of bonus checks etc.

At the end of the year I stopped dividends reinvesting in my taxable accounts and send them to a MM account and then into savings accounts for spending throughout the year.

We also have tIRAs and Rollover IRAs and have started converting them to Roths but because of our tax bracket they will not be fully converted for many years.
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Old 07-26-2011, 04:59 PM   #8
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Getting ready to FIRE myself and working the same problem.


Till the fed gets done, I am going to use short-term bond funds and stable value funds to hold most of our fixed security allocation.

Right now... for fixed, I have too much in cash in the taxable account. Once this debt decision (fiasco), I will deploy all but about 2 years of income in a short duration bond fund and then wait and see what happens rates.

I have enough cash in the bank to fund our income for the rest of the year.

I will probably buy a some CDs for income for the next couple of years.

We are solid green zoners with just our portfolio... but a major part of my income management strategy is still going to be guaranteed income (Pension, SSx2, and a nominal SPIA - probably in 3 rungs).

But as those guaranteed income sources come on line over the next 15 years... I will need to get the rest of the income from our portfolio.

I am considering building a bond ladder (using taxable account) for income 3 + years out (part of our fixed allocation). Still working on the details.

The remainder the rest of the fixed assets will be held in open end mutual funds for the long term (some indexed bond and some balanced funds).

But I am not going to lock in to any contracts (SPIA) or bonds (Treasuries) till the fed gets done meddling and we see what happens with rates. I am taking a wait and see approach and will do what makes sense.


We intend to convert our tax deferred assets to RIRA and use money from the taxable account to pay taxes for the roll.
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Old 07-26-2011, 06:11 PM   #9
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We keep two years' cash on hand, and part of that comes from taking dividends in cash....

I hate having the dividends reinvest at what turns out to be the top of the market...
We do the same, except we keep a larger amount in cash to carry us 3-5 years (includes taxes due).

I tried the dividend reinvestment / sell for cash to restock my cash bucket, early in retirement. It got to be a bit of a hassle. This works a bit better.
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Old 07-28-2011, 09:48 AM   #10
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I am rethinking this in favor of making "tax-managed withdrawals" annually. I will not be in the lowest tax bracket due to a pension, so I would mix withdrawals between the tax-deferred 403b and Roth 403b to allow myself to stay in the bracket I land in due to pension income. In other words, I would not concern myself with a goal of converting everything. I've got a few years to consider strategies, but that's my thought right now.
Agreed. The wholesale take all taxable first never made sense to me, thanks for the post.
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Old 07-28-2011, 09:55 AM   #11
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My first year of ER I did not need to draw from investments. At the end of the year I stopped dividends reinvesting in my taxable accounts and send them to a MM account and then into savings accounts for spending throughout the year.
Quote:
Originally Posted by WilliamG
-We route all IRA dividends to the IRA MM which reduces how often we have to sell something else. Prefer doing this to re-investing; we choose when and where to invest/reinvest our dividends.
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Originally Posted by W2R
I think so. Some of us let our dividends in taxable accounts go to cash, to become part of our spending money. Dividends in a taxable account are taxed in any event.
We have more in cash than I want as well, so we'll probably stop dividend reinvestment when cash falls to 2 years worth.

I was wondering how much to divert to cash and how much to reinvest, but WilliamG and W2R made that decision easy for me, they're absolutely correct IMO. If cash gets too high (no idea what to expect at the outset, and I'm sure it will vary considerably), I'll just invest some of it. And I will have avoided selling something too.

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Old 07-28-2011, 10:20 AM   #12
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Quote:
Q1A) I have always reinvested all dividends. I am starting to wonder if it's time to let dividends go to cash?
Another reason to not reinvest dividends: If your dividends happen to be reinvested around the time you redeem some shares, you may have the extra headache of dealing with a wash sale on your taxes.
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