CDs and IRAs

[copyright1997reloaded]

Thank you for spelling that out. You don't know how helpful that was to me.

You are most welcome and yes it is nice to get positive feedback!

 

[PaunchyPirate]

My IRAs (traditional and Roth) are now at Schwab. I also have a larger taxable account there as well. These are all "brokerage accounts".

All of my CDs (I currently only have 1) and all of my Treasury T-Bills are inside the traditional IRA account. I don't have as much free cash floating around in the taxable account, so I buy them in the IRA. The IRA also has a significant Money Market balance and a small domestic bond index mutual fund. So, basically, my entire traditional IRA is a bond fund, CDs, and Money Market. The amount in each varies as things mature and as I buy replacements.

 

[Earl E Retyre]

All withdraws from a traditional IRA (incluing rollover IRA's) come out as ordinary income. This suggest putting assets which have no tax advantages (such as CD's and other taxable fixed income) in this bucket.

Stocks (or equity funds) have several tax advantages: First, they are subject to long term capital gains rates on gains which are lower than ordinary income rates. Second, they get a step up in basis upon death, which can be very beneficial to your beneficiaries. Thus, these are typically better to have in normal (taxable) accounts. Another factor here would be to emphasize stocks or stock funds with good qualified dividends, as these also get the lower LTCG/Qualified Div tax rates.

I learned the above on this site ... up until recently, I used to buy CDs in my taxable account and equities in my IRAs. I had it backwards. So, with the increase in CD rates lately, I have now flipped it. I sold almost all my equities in my IRA and bought the equivalent equities in my taxable account so as to keep my Asset Allocation. And, I now have almost 100% of my IRAs invested in CDs and my taxable is a combination of equities and CDs.

 

[Earl E Retyre]

I had a question related to this topic. If I wanted to pull some of the brokered CD's interest from my IRA's cash account into my taxable account at the beginning of the year for living expenses, since I am now over 59 1/2, I believe the transfer of funds is taxed as ordinary income with no penalty. So, it would be no different than if I had the CD in my taxable account. Correct? My primary question is, does Fidelity/Vanguard know I am over 59 1/2 so they tell the IRS not to apply an IRA withdrawal penalty or is this something I do when filing taxes?

 

[copyright1997reloaded]

I had a question related to this topic. If I wanted to pull some of the brokered CD's interest from my IRA's cash account into my taxable account at the beginning of the year for living expenses, since I am now over 59 1/2, I believe the transfer of funds is taxed as ordinary income with no penalty. So, it would be no different than if I had the CD in my taxable account. Correct? My primary question is, does Fidelity/Vanguard know I am over 59 1/2 so they tell the IRS not to apply an IRA withdrawal penalty or is this something I do when filing taxes?

Yes, the distribution from the tIRA is taxed as ordinary income. It will be coded on the 1099-R as '7' (in box 7), aka Normal Distribution. If you were under 59 1/2, it would be coded '1', Early distribution, no known exception (in most cases, under age 59½).

Correct, taking the CD's *interest* would be no different than getting the interest in your taxable account. (Well, except it shows up on a 1099-R vs. a 1099-INT). (ETA: This iis from a federal tax perspective, see below regarding states.)

Further: In some states, there *is* a difference in that 1099-R income is tax free (if 59 1/2). For example, in PA it is not subject to state income tax. Other states vary. For example, in NY the first 20K of 1099-R or other pension income is not subject to NYS states.

 

[Earl E Retyre]

Awesome reply. Thanks so much for all those details.

 

[jazz4cash]

Dumb question: How do RMDs work in an IRA that is invested exclusively in CDs? (Wow, that's a lot of acronyms!) Are there any early withdrawal penalties associated with RMDs in that situation?

I am a long way from RMDs, but I believe most of the CDs I own waive the early withdrawal penalty for RMDs. I have noticed a checkbox on the withdrawal request. Now that I think about it, it's probably not possible for the bank/credit union to monitor this.

 

[rmorris50]

All withdraws from a traditional IRA (incluing rollover IRA's) come out as ordinary income. This suggest putting assets which have no tax advantages (such as CD's and other taxable fixed income) in this bucket.

Stocks (or equity funds) have several tax advantages: First, they are subject to long term capital gains rates on gains which are lower than ordinary income rates. Second, they get a step up in basis upon death, which can be very beneficial to your beneficiaries. Thus, these are typically better to have in normal (taxable) accounts. Another factor here would be to emphasize stocks or stock funds with good qualified dividends, as these also get the lower LTCG/Qualified Div tax rates.

Roth's provide the ultimate in terms of - no taxes on any withdraw. So, if you could pick what assets to put there, it would be assets that have the best risk/reward ratio for good growth. The issue with ROTH holdings is that (at least for me), they are precious and small compared to the other two categories. Because of this, I am always in a quandary as to what to use my Roth for..."safe" stocks/funds or the biggest income producers?

This is very helpful to me going forward as overtime I move more towards fixed income and less towards stocks. However I would suspect most people won’t be able to have all stocks outside retirement accounts and all fixed income inside, especially high income earners who max out all pre-tax accounts. But knowing to allocate your fixed income allocation into the retirement accounts first then allocate stocks among the rest helps.

 

[mickeyd]

My IRA is a simple collection of VG index funds (45/45/10) with a MMF tagged on for the cash. I collect RMD proceeds annually and use that $ for fun stuff.

 

[meleana]

We have bond mutual funds in traditional and rollover IRA’s and stock mutual funds in Roth IRA’s.

We have money market accounts in all of them where interest and dividends go.

 

[rkser]

Our IRAs are all BND, but have converted some of that to CDs seeing the high rates they are paying nowadays.

All our stocks i.e… VTI & VXUS are in the taxable Brokerage & some Muni Bonds & tiny bit in short term Bond Index.
We needed these bonds in taxable to maintain the intended Asset Allocation of 65/35, otherwise the AA would have been too aggressive.

A question to confirm our understanding -
Do the Bonds in the Taxable account have the same step up as stocks in taxable

Our Roth IRA is all VTI

Regards

 

[pb4uski]

...A question to confirm our understanding -
Do the Bonds in the Taxable account have the same step up as stocks in taxable ...

Yes, for both bonds and stocks the cost basis is reset at fair value on the date of death.