Another Asset location thread

[donheff]

Just wanted to revisit the asset location topic to make sure I am not missing something. I added Morningstar's RSS feed to my reader and occasionally click on a link if the article title is intriguing. This morning I looked at "Is Your Retirement Portfolio Ready to do the Twist." The gist of this article is that the conventional recommendations on fund location flip to a degree as you get older. The basic concept most of us follow is to keep income (and tax) producing funds like bond funds in tax protected accounts and equities in taxable accounts. But, according to Morningstar, you need to change that as you reach the withdrawal stage and particularly as you approach RMD years or you will be forced to liquidate from the wrong categories as the market moves up and down -- you need a much more balanced distribution in your taxable accounts when you are withdrawing. The article rambles on with lots of scary sounding worries that would lead the average reader to seek out a financial advisor.

I haven't carefully thought out the RMD process since I am 5 years away and DW is 9 years out but I don't get the worry. Based on advice I gleaned from this forum I am 100% equities in taxable except for funds I have liquidated for current year expenses. I sell equities from taxable to generate those current expense dollars. If I am forced to sell in a down period I simply simultaneously buy equities in an IRA or 401K. I don't see any advantage to holding bond funds in taxable regardless of withdrawal stage.

Trying to think this through in RMD years, I don't see any reason to change. I would still assume that I would keep equities in taxable (assuming I have taxable left) and move cash to taxable only to the extent needed for current expenses. The tax advantaged accounts are becoming increasingly balanced (bonds and equities) as we spend down taxable and the tax advantaged are becoming a greater portion of the overall portfolio. As RMDs are required I would pick and choose which funds to sell in tax advantaged based on current market conditions. Basically, the sell and rebalance concepts would be unchanged. I don't see any reason why a more balanced AA would ever be needed in taxable. DW and I have by far the largest bulk of our portfolio in tax advantaged accounts. I can see how this could get much more complicated for people who have large taxable accounts and small tax advantaged. Other than that, am I missing something obvious?

 

[Midpack]

Thanks for pointing out the article, an important topic. I have always thought it might be best to withdraw from taxable and sheltered both before and after 70 if RMDs will induce an unwanted income spike. Still debating whether to convert TIRAs or just withdraw some for income.

 

[donheff]

Thanks for pointing out the article, an important topic. I have always thought it might be best to withdraw from taxable and sheltered both before and after 70 if RMDs will induce an unwanted income spike. Still debating whether to convert TIRAs or just withdraw some for income.

The topic is complicated for many since tax brackets make a big difference. With my and DW's taxable pensions inescapably kicking us into relatively high brackets, things seem to remain pretty straightforward.

 

[aja8888]

My RMD withdrawl strategy

I started taking RMDs this year. It really was not a concern of mine where the money came from as it comes out of the tax sheltered account(s) anyway.

I set up an IRA at PenFed and put $100K in it last year (I had the IRA cash available in another IRA account and transferred it there). I put 1/2 that IRA in PenFed CDs to generate some income and have PenFed fund the RMD into a checking account on a monthly basis from the remaining cash.

I combined my IRA RMD calculations (three IRA accounts: Schwab, Vanguard and PenFed) and just have the total removed from PenFed. I know this sounds complicated, but I have a PenFed checking account and this makes it convenient.

The other IRA accounts are left as is (for now) and are in equities and fixed income. I have a taxable account that I supplement spending with that receives our SS checks and some earnings from my consulting practice.

In addition, I set up a Solo 401K and that consulting income is used to fund it to offset most of the taxes I would have to pay for the consulting income. My tax bracket this year will be 10% (I hope).

Oh, the Solo 401K REQUIRES a separate RMD pull for me each year as I am over 70. So you put it in, then you take some out in the same year!

 

[karluk]

My initial reaction is the same as yours, donheff. This author doesn't seem to have grasped the concept of simultaneously selling stocks from a taxable account and repurchasing them in a tax advantaged account. Unless I am missing something, that makes the whole article completely worthless both pre and post RMDs. I'll be interested in seeing if anybody else can find any nuggets of useful information in this article. I certainly can''t.

 

[aja8888]

My initial reaction is the same as yours, donheff. This author doesn't seem to have grasped the concept of simultaneously selling stocks from a taxable account and repurchasing them in a tax advantaged account. Unless I am missing something, that makes the whole article completely worthless both pre and post RMDs. I'll be interested in seeing if anybody else can find any nuggets of useful information in this article. I certainly can''t.

One nugget (which is pretty self-obvious to a person who has to take an RMD):

"And, as previously discussed, when you have to begin taking RMDs from IRA and 401(k) assets, you'll want to draw it from more liquid pools of capital; that's another reason to hold some bonds and cash in those accounts."

 

[karluk]

One nugget (which is pretty self-obvious to a person who has to take an RMD):

"And, as previously discussed, when you have to begin taking RMDs from IRA and 401(k) assets, you'll want to draw it from more liquid pools of capital; that's another reason to hold some bonds and cash in those accounts."

I guess I don't understand. Tax advantaged accounts such as 401ks and traditional IRAs are SUPPOSED to be overloaded with bonds and other tax inefficient investments. So nothing the author says changes anything at all about asset location.

Even if you for some reason had a stock heavy 401k, it still doesn't make any difference when faced with RMDs. You sell the stocks from the 401k to meet the RMD and simultaneously purchase the same amount of stocks in a Roth IRA or taxable account. There is no advantage whatsoever to making the RMD from a specific type of account, bonds or stocks. You can always adjust your other investments to maintain the exact same asset mix.

 

[aja8888]

I guess I don't understand. Tax advantaged accounts such as 401ks and traditional IRAs are SUPPOSED to be overloaded with bonds and other tax inefficient investments. So nothing the author says changes anything at all about asset location.

Even if you for some reason had a stock heavy 401k, it still doesn't make any difference when faced with RMDs. You sell the stocks from the 401k to meet the RMD and simultaneously purchase the same amount of stocks in a Roth IRA or taxable account. There is no advantage whatsoever to making the RMD from a specific type of account, bonds or stocks. You can always adjust your other investments to maintain the exact same asset mix.

Yes, the author must like to see herself in print. When you face the RMD guy, you need to sell something in your IRA or 401K. I did.

 

[karluk]

Incidentally, I have been making this kind of simultaneous withdrawal/purchase for three months now, even though I am still below RMD age. I have scheduled a monthly withdrawal from my 457 plan. If the plan allowed it, I would have chosen to make the entire withdrawal from my stable value fund. But unfortunately the only option is to prorate the withdrawal across all investment options. That means on the date of the distribution, I have to remember to schedule a bond purchase in DW's 457 plan and a stock purchase in my Roth IRA. The net effect is the same as if the entire withdrawal were from the stable value fund. It's darned annoying that I have to schedule transactions elsewhere to offset the effects of the distribution, but my experience shows that it can be done.

 

[BBQ-Nut]

Agree with the previous posts - or must be missing something subtle from the linked article.

RMDs are asset agnostic - you must take a distribution of $X based on age and the balance at that time.

What you do with that distribution afterwards then becomes a strategy as to what is 'best' for the individual's situation.

 

[pb4uski]

My initial reaction is the same as yours, donheff. This author doesn't seem to have grasped the concept of simultaneously selling stocks from a taxable account and repurchasing them in a tax advantaged account. Unless I am missing something, that makes the whole article completely worthless both pre and post RMDs. I'll be interested in seeing if anybody else can find any nuggets of useful information in this article. I certainly can''t.

+1 No reason that I can't keep my taxable accounts in equities and my retirement accounts in fixed income then sell as needed in my retirement accounts to provide cash for my RMD as part of my periodic rebalancing. I don't see why my pre and post RMD strategy would be any different other than RMDs are forcing me to take defined amounts of money out of my retirement accounts and pay taxes on it. As long as I have taxable accounts I am still best off to invest it in equities due to qualified dividends, capital gains preference and foreign tax credit.

 

[W2R]

DW and I have by far the largest bulk of our portfolio in tax advantaged accounts. I can see how this could get much more complicated for people who have large taxable accounts and small tax advantaged. Other than that, am I missing something obvious?

With small tax advantaged accounts, one can fill them up entirely with bonds (G Fund in my case) and still not meet one's bond AA. So, some bonds end up in taxable, oh drat, but nothing one can do AFAIK. All the rebalancing is done in taxable.

Right now I am doing this with a federal income tax level of 7% last year. In addition to withdrawals from my taxable account, I am also withdrawing more each month than my future RMDS from the TSP, as equal monthly payments. However when SS begins, my tax rate will probably go up because of the increase in income.