RMD: cash sweep account or sell shares

[Mike93]

Hi,

I've got an IIRA with about 350k. Most of it is
in very broad stock indexes, domestic and international.
The current RMD is about 12K. I was wondering if directing
all the accruals from the mutual funds/stocks to go to the cash
sweep account, would be better than selling shares
each year to supply the RMD. Or would
there be any difference? I guess how the market
does would be the dividing line, but I'm not sure
about this one.

Thanks,

Mike

 

[LOL!]

There would not be much difference from a monetary standpoint, but from a behavioral standpoint there would be. Also from a rebalancing standpoint.

If you auto-reinvest distributions (is that what you mean by "accruals") then you are not using them for rebalancing.

If you have to sell something to withdraw the RMD, then you have control which you may not want because you will have to decide what you sell in order to create the RMD. Presumably you would sell to help with rebalancing, too.

Many people who collect dividends do so because they subconsciously do not want to make the decision to sell since if they sell something that goes up, they tend to regret it. So it is just better to have the company or fund pay out the dividend (sell something for the investor).

 

[kaneohe]

One variable is whether you are depending on the RMD for current living expenses.
If you are, then you might want to have a stable source of funds. If you are just going to reinvest the RMD, then that may not be so important since the reinvested funds will just follow the market whether they are inside or outside of the IRA.

 

[Souschef]

I used to transfer shares or mutual funds from my IRA to a taxable account. We are blessed that we do not need the money for current expenses.
I take part of the RMD funds and split them among our 4 sons. I would rather have them get the money now when they need it.
Any thing other than that I use for my own pleasure, like flying a P-51 this year for my birthday

 

[Mike93]

Thanks for the input. I guess I'll have to dig into the
account and do a little math to see exactly what is coming
off the funds each month.

 

[OldShooter]

Your issue is based on what Richard Thaler calls "mental accounting." More here: https://www.behavioraleconomics.com/mini-encyclopedia-of-be/mental-accounting/

Mental accounting not a bad thing, but since money is fungible no real economic distinction exists between your alternatives.

Another look at this type of decision is here: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[Hermit]

I agree that in an IRA where the money comes from is of little consequence. Keeping the portfolio balanced is more crucial.

I am also struggling with deciding how to manage RMDs. My IRA, which is most all of my investments, will be subject to RMD in two years. All RMDs will be spent (via QCDs). Do I allocate a portion of the IRA to cash to protect against a down market? To me it would be equivalent to those who keep a balance of two to three years' spending in a cash account in case of a down market. A lot of those people don't consider the cash as part of their investment portfolio, but that seems to be one of those mental accounting things.

As things are, I am leaning toward maintaining a cash fund. Loose a little because of the cash allocation while hopefully protecting against selling in a down market.

 

[Badger]

I haven't really tapped into my or my wife's IRA accounts other than RMD for her. (I will start RMD next year.) In the process of keeping things simple for me to be comfortable and for her to understand and manage if I am no longer around I have been having the dividends put into each of our IRA MM accounts for the past 4 years instead of reinvesting. It is from those IRA MM accounts that we draw the RMD so no shares are sold, we pay the taxes on the RMD withdrawls, and the shares remain stable. The RMD money is transfered to a taxable MM account. Because of our lifestyle, our medical taken care of by Medicare and Tricare, and our house paid off we have yet to touch the taxable MM account.

Everyone has their own situations and lifestyle and needs to figure out what will work for them and will be comfortable for them to sleep at night.

Cheers!

 

[gerntz]

I'd direct dividends/interest to cash sweep account to avoid paying for shares' sales. Shouldn't upset your asset allocation much at all, but when it does you can sell then. Following AA closely is not very important at all. Results & risk change little.

 

[Hermit]

I'd direct dividends/interest to cash sweep account to avoid paying for shares' sales. Shouldn't upset your asset allocation much at all, but when it does you can sell then. Following AA closely is not very important at all. Results & risk change little.

IMHO you comments are true for most years, but in extreme markets, maintaining a balance according to a plan is very helpful. It forces you to buy low and sell high. My personal process is to rebalance once a year or when the allocation is off more than 3% with a required rebalance at 5%. That forced me to buy more stocks when the market was at a low in 2009. It worked out for me quite nicely. I have also sold stocks this year in my annual rebalancing which I am confident will be considered a high price. Only time will tell on the last one, but that is how it works for me. My assets are in Vanguard index funds and there are no sales fees involved.