Dividend Yield vs Total Return Income in Retirement

[Gumby]

Let me make sure I understand your logic here. Are you telling me during the RMD years, reinvest the dividends and then take the RMD amount required. So, essentially you are taking the dividend amount by taking the RMD amount.

No, you just take the dividends in cash and withdraw cash from your tIRA as needed for your RMD. If you save some of your early year's dividends as cash in your tIRA instead of reinvesting, you'll be able to go much older than 91 before you ever need to sell shares.

 

[G-Man]

No, you just take the dividends in cash and withdraw cash from your tIRA as needed for your RMD. If you save some of your early year's dividends as cash in your tIRA instead of reinvesting, you'll be able to go much older than 91 before you ever need to sell shares.

So essentially taking the dividend income at age 72 and beyond is equivalent to taking the RMD amount.

Does Stock dividends distributions from a 401(k) count toward RMD withdrawal or it must be in a TIRA?


https://ttlc.intuit.com/community/i...idered-a-part-of-my-rmd-withdrawals/00/576513

https://www.simplysafedividends.com...osts/2226-should-i-use-dividends-to-fund-rmds

 

[Gumby]

So essentially taking the dividend income at age 72 and beyond is equivalent to taking the RMD amount.

As I mentioned earlier, the RMD amount will not equal the dividend until you are 90 years old. In the years from 72 to 90, the dividend will exceed the RMD amount. You will only take the RMD amount out of your tIRA, so you will have exactly the same amount of shares of MO, but you will also have cash building up in the tIRA.

For illustration. Let's say it's now December 31, 2022 and you turn 72 tomorrow. You have a tIRA with nothing but 1000 shares of MO in it. Using Friday's close, the current value of your tIRA is $45,880. The RMD life expectancy factor for age 72 is 27.4 years, so in the coming year of 2023, you must make an RMD of 3.65% of your 12/31 balance (1/27.4 = .0365) or, in this case $1674 (.0365 x 48550= 1674). But, at the current dividend rate, you will earn $3760 in MO dividends, which you will keep in cash. So you withdraw $1674 of the cash as your RMD and keep $2086 cash in your tIRA.

Now let's assume that nothing at all changes with respect to the price or dividend of MO and it is now Dec. 31, 2023. You still have 1000 shares of MO worth $48,550, plus you have $2086 cash in your tIRA for a total of $50,636. Your life expectancy factor is now 26.5 years, so your RMD percentage is 3.77%, meaning your RMD for 2024 will be $1910. Again you will earn $3760 in MO dividends from your 1000 shares. You take your RMD of $1910 from the cash. Now you have 1000 shares of MO and $3936 cash ($2086 + $3760 - $1910 = $3936)

Keep this going for the next 17 years until the end of your 90th year. You will find that you still have 1000 shares of MO and a stockpile of cash in your tIRA. At age 91, the dividends will not cover the RMD for the year, so you will start drawing your cash stockpile. I have not done all the math, but that stockpile should last maybe another 7-8 years before you have to start selling any shares of MO stock to make the RMD.

And don't forget that you are not required to spend your RMD, just pay the taxes. So you can invest the net after taxes in more MO in your taxable account if you like.

The main point is that with a high dividend payer like MO, you could go the rest of your life without needing to sell any shares, notwithstanding the RMD requirements.

 

[G-Man]

As I mentioned earlier, the RMD amount will not equal the dividend until you are 90 years old. In the years from 72 to 90, the dividend will exceed the RMD amount. You will only take the RMD amount out of your tIRA, so you will have exactly the same amount of shares of MO, but you will also have cash building up in the tIRA.

For illustration. Let's say it's now December 31, 2022 and you turn 72 tomorrow. You have a tIRA with nothing but 1000 shares of MO in it. Using Friday's close, the current value of your tIRA is $45,880. The RMD life expectancy factor for age 72 is 27.4 years, so in the coming year of 2023, you must make an RMD of 3.65% of your 12/31 balance (1/27.4 = .0365) or, in this case $1674 (.0365 x 48550= 1674). But, at the current dividend rate, you will earn $3760 in MO dividends, which you will keep in cash. So you withdraw $1674 of the cash as your RMD and keep $2086 cash in your tIRA.

Now let's assume that nothing at all changes with respect to the price or dividend of MO and it is now Dec. 31, 2023. You still have 1000 shares of MO worth $48,550, plus you have $2086 cash in your tIRA for a total of $50,636. Your life expectancy factor is now 26.5 years, so your RMD percentage is 3.77%, meaning your RMD for 2024 will be $1910. Again you will earn $3760 in MO dividends from your 1000 shares. You take your RMD of $1910 from the cash. Now you have 1000 shares of MO and $3936 cash ($2086 + $3760 - $1910 = $3936)

Keep this going for the next 17 years until the end of your 90th year. You will find that you still have 1000 shares of MO and a stockpile of cash in your tIRA. At age 91, the dividends will not cover the RMD for the year, so you will start drawing your cash stockpile. I have not done all the math, but that stockpile should last maybe another 7-8 years before you have to start selling any shares of MO stock to make the RMD.

And don't forget that you are not required to spend your RMD, just pay the taxes. So you can invest the net after taxes in more MO in your taxable account if you like.

The main point is that with a high dividend payer like MO, you could go the rest of your life without needing to sell any shares, notwithstanding the RMD requirements.

Does stock dividends distributions from a 401(k) count toward RMD withdrawal or it must be in a tIRA?

 

[Gumby]

....
Does Stock dividends distributions from a 401(k) count toward RMD withdrawal or it must be in a TIRA? ....

Let's clear up a potential misunderstanding. If you hold MO (or any other dividend paying stock) in your tIRA or 401k and do not reinvest dividends, the dividends typically will be held as cash in your settlement account. But they are still in your tIRA or 401k account unless and until you withdraw them (for RMD's or any other purpose) in whole or in part.

RMDs apply separately to tIRAs and 401ks. So, first you add up the total value of all your tIRA accounts as of 12/31 of last year. Apply the RMD percentage based on your age. Withdraw that amount from any one or more of your tIRA accounts and pay tax on it. S[-]econd, add up the value of all your 401k accounts as of 12/31, apply the proper RMD factor and withdraw that amount from any one or more of your 401k accounts and pay tax on it.[/-] NOTE: I was wrong. You need to calculate the RMD separately for each 401k account and withdraw it from that account.

 

[G-Man]

Let's clear up a potential misunderstanding. If you hold MO (or any other dividend paying stock) in your tIRA or 401k and do not reinvest dividends, the dividends typically will be held as cash in your settlement account. But they are still in your tIRA or 401k account unless and until you withdraw them (for RMD's or any other purpose) in whole or in part.

RMDs apply separately to tIRAs and 401ks. So, first you add up the total value of all your tIRA accounts as of 12/31 of last year. Apply the RMD percentage based on your age. Withdraw that amount from any one or more of your tIRA accounts and pay tax on it. Second, add up the value of all your 401k accounts as of 12/31, apply the proper RMD factor and withdraw that amount from any one or more of your 401k accounts and pay tax on it.

Thanks for taking the time to explain this.

 

[Gumby]

Thanks for taking the time to explain this.

Actually, I was wrong. While you can aggregate all IRAs and take the RMD from any of them, if you have multiple 401ks, you must calculate the RMD for each 401k and take it from that specific 401k account.

 

[G-Man]

As I mentioned earlier, the RMD amount will not equal the dividend until you are 90 years old. In the years from 72 to 90, the dividend will exceed the RMD amount. You will only take the RMD amount out of your tIRA, so you will have exactly the same amount of shares of MO, but you will also have cash building up in the tIRA.

For illustration. Let's say it's now December 31, 2022 and you turn 72 tomorrow. You have a tIRA with nothing but 1000 shares of MO in it. Using Friday's close, the current value of your tIRA is $45,880. The RMD life expectancy factor for age 72 is 27.4 years, so in the coming year of 2023, you must make an RMD of 3.65% of your 12/31 balance (1/27.4 = .0365) or, in this case $1674 (.0365 x 48550= 1674). But, at the current dividend rate, you will earn $3760 in MO dividends, which you will keep in cash. So you withdraw $1674 of the cash as your RMD and keep $2086 cash in your tIRA.

Now let's assume that nothing at all changes with respect to the price or dividend of MO and it is now Dec. 31, 2023. You still have 1000 shares of MO worth $48,550, plus you have $2086 cash in your tIRA for a total of $50,636. Your life expectancy factor is now 26.5 years, so your RMD percentage is 3.77%, meaning your RMD for 2024 will be $1910. Again you will earn $3760 in MO dividends from your 1000 shares. You take your RMD of $1910 from the cash. Now you have 1000 shares of MO and $3936 cash ($2086 + $3760 - $1910 = $3936)

Keep this going for the next 17 years until the end of your 90th year. You will find that you still have 1000 shares of MO and a stockpile of cash in your tIRA. At age 91, the dividends will not cover the RMD for the year, so you will start drawing your cash stockpile. I have not done all the math, but that stockpile should last maybe another 7-8 years before you have to start selling any shares of MO stock to make the RMD.

And don't forget that you are not required to spend your RMD, just pay the taxes. So you can invest the net after taxes in more MO in your taxable account if you like.

The main point is that with a high dividend payer like MO, you could go the rest of your life without needing to sell any shares, notwithstanding the RMD requirements.

So essentially you are building up a cash bucket in your tIRA or 401K account and you are satisfying the RMD amount each year from the cash bucket. That way, you do not have to sell any shares of stock.

Once again, the only question is if this cash bucket concept for a tIRA is applicable to a Traditional 401K as well.

 

[Gumby]

So essentially you are building up a cash bucket in your tIRA or 401K account and you are satisfying the RMD amount each year from the cash bucket. That way, you do not have to sell any shares of stock.

Exactly.

 

[G-Man]

Exactly.

Once again, the only question is if this cash bucket concept for a tIRA is applicable to a Traditional 401K as well.

 

[Gumby]

Once again, the only question is if this cash bucket concept for a tIRA is applicable to a Traditional 401K as well.

I don't see any reason why it would not, unless your 401k plan has some odd restrictions on partial withdrawals. If the 401k plan required all or nothing withdrawals, I would just trustee-to-trustee rollover the 401k to a tIRA account to avoid the problem.

 

[G-Man]

Like I said, in retirement, if I could rely on 6 years of dividends for living expenses, I will be golden considering the other income sources I have in retirement.

 

[TheWizard]

Once again, the only question is if this cash bucket concept for a tIRA is applicable to a Traditional 401K as well.

Not sure why you would want a cash bucket in your tax-deferred accounts.
Just use excess dividends, beyond each year's RMD, to buy more MO, presently around $46 a share...

 

[marko]

Not sure why you would want a cash bucket in your tax-deferred accounts.
Just use excess dividends, beyond each year's RMD, to buy more MO, presently around $46 a share...

We hold our dividends in a 'cash bucket' (money market fund) within our IRAs.

Yes, I know......but for us, we get a certain comfort in having the money we will eventually be transferring to spend visible and set aside.

Yes, six of one/half dozen of the other but we don't have to cringe over selling shares in the middle of a big drop just as cash is needed. That discussion has been beat to death here. YMMV

 

[OldShooter]

... Yes, I know......but for us, we get a certain comfort in having the money we will eventually be transferring to spend visible and set aside. ... [so] we don't have to cringe over selling shares in the middle of a big drop just as cash is needed.

Agree completely. This exact strategy worked nicely for us for funding a house we are building this year. About mid-last year when we were committed to the house, I sold equities into that nice high market, not wanting to retain the risk of a down market when we needed the cash. And it worked out. I have had the cash we need parked since last year and it's been going towards monthly progress payments since January of this year.

 

[G-Man]

We hold our dividends in a 'cash bucket' (money market fund) within our IRAs.

Yes, I know......but for us, we get a certain comfort in having the money we will eventually be transferring to spend visible and set aside.

Yes, six of one/half dozen of the other but we don't have to cringe over selling shares in the middle of a big drop just as cash is needed. That discussion has been beat to death here. YMMV

From a tax perspective, when you withdraw from the "cash bucket", is it considered long term capital gains or taxed at ordinary income?

 

[OldShooter]

From a tax perspective, when you withdraw from the "cash bucket", is it considered long term capital gains or taxed at ordinary income?

Inside an IRA there is no distinction. Anything you take out is ordinary income.

 

[Letj]

If you have all MO in your traditional IRA or 401K, when RMD kicks in at age 72, that will force you to sell shares thus reducing your dividend income after age 72.

MO is 17% of IRA so I am planning to sell only from index fund when RMD kicks in. I am hoping to start doing Roth conversions in the next 10 years or so.

 

[Letj]

Not necessarily. Let's cogitate a moment - suppose you have a tIRA with nothing but MO in it. Suppose MO is spinning off 8.2% in dividends and you don't reinvest. Under the new 2022 RMD tables, the distribution period at 90 years old is 12.2 years, so the percentage is 8.2% of your tIRA balance. For all years prior, the RMD period is longer and the percent distribution is lower. That means for every year prior to age 91, your MO dividends will cover your RMD and you won't have to sell shares.



Or, you may have many different assets in your tIRA and may elect to sell off something else.

Thanks Gumby. This is one of the reasons I so love this group. The knowledge and intelligence on this board! This is so good to know. I didn’t realize dividends would count as a distribution.

 

[Letj]

For a taxable account, I'd have to compare the total return of MO to that of my various index funds.
If you're taking dividends out for living expenses, then MO might be ok, but 8% is high compared to the 4% rule of thumb.
But no one's going to have 100% MO in their taxable account, right?

If you're NOT taking dividends out for expenses, like me, then high dividends are suboptimal...

I know a guy who worked in the factory at MO as an electrician. He told me he only invested in MO in his 401K (this was a conversation about 5 years ago). I was aghast at such a gutsy move and advised him to diversify. He said he won’t because he didn’t care since he was getting $150,000 a year in dividends plus a huge pension after working there for 30 years and it was more money than he can spend.

 

[youbet]

I didn’t realize dividends would count as a distribution.

Do note that dividends in an IRA don't automatically count as a distribution. They count as a distribution when you take them as a distribution. That is, dividend dollars are eligible to be used as a distribution, but aren't until you do so.

 

[Gumby]

Do note that dividends in an IRA don't automatically count as a distribution. They count as a distribution when you take them as a distribution. That is, dividend dollars are eligible to be used as a distribution, but aren't until you do so.

Precisely. Let me detail my situation and that may help solidify the message. I have a tIRA at Vanguard that has only MO and SJT in it**, both of which pay really good dividends. I do not reinvest dividends, so when they are paid out (MO quarterly and SJT monthly), they accumulate as cash (actually VMFXX) in my settlement account within that tIRA. At the end of the year, I will take that accumulated cash as a distribution by telling Vanguard to send it to my local bank account. Until I instruct Vanguard to withdraw that cash and send it to me, it does not yet count as a distribution and, hence, would not yet satisfy my RMD obligation.

**yes, I know that is sub-optimal from a tax standpoint, but it is a result of many factors over my working and investing life.

 

[G-Man]

Precisely. Let me detail my situation and that may help solidify the message. I have a tIRA at Vanguard that has only MO and SJT in it**, both of which pay really good dividends. I do not reinvest dividends, so when they are paid out (MO quarterly and SJT monthly), they accumulate as cash (actually VMFXX) in my settlement account within that tIRA. At the end of the year, I will take that accumulated cash as a distribution by telling Vanguard to send it to my local bank account. Until I instruct Vanguard to withdraw that cash and send it to me, it does not yet count as a distribution and, hence, would not yet satisfy my RMD obligation.

**yes, I know that is sub-optimal from a tax standpoint, but it is a result of many factors over my working and investing life.

Thanks for explaining this. I have learnt some much on this forum. The knowledge from the folks on this forum is incredible.

FYI. For Fidelity, there core position/sweep/settlement account is SPAXX or FDIC. You have a choice.

 

[marko]

Agree completely. This exact strategy worked nicely for us for funding a house we are building this year. About mid-last year when we were committed to the house, I sold equities into that nice high market, not wanting to retain the risk of a down market when we needed the cash. And it worked out. I have had the cash we need parked since last year and it's been going towards monthly progress payments since January of this year.

That, plus as dividends have good and bad years, anything we don't spend builds a reserve for a lean year (like this coming year might be)

 

[single2019]

As I mentioned earlier, the RMD amount will not equal the dividend until you are 90 years old. In the years from 72 to 90, the dividend will exceed the RMD amount. You will only take the RMD amount out of your tIRA, so you will have exactly the same amount of shares of MO, but you will also have cash building up in the tIRA.

For illustration. Let's say it's now December 31, 2022 and you turn 72 tomorrow. You have a tIRA with nothing but 1000 shares of MO in it. Using Friday's close, the current value of your tIRA is $45,880. The RMD life expectancy factor for age 72 is 27.4 years, so in the coming year of 2023, you must make an RMD of 3.65% of your 12/31 balance (1/27.4 = .0365) or, in this case $1674 (.0365 x 48550= 1674). But, at the current dividend rate, you will earn $3760 in MO dividends, which you will keep in cash. So you withdraw $1674 of the cash as your RMD and keep $2086 cash in your tIRA.

Now let's assume that nothing at all changes with respect to the price or dividend of MO and it is now Dec. 31, 2023. You still have 1000 shares of MO worth $48,550, plus you have $2086 cash in your tIRA for a total of $50,636. Your life expectancy factor is now 26.5 years, so your RMD percentage is 3.77%, meaning your RMD for 2024 will be $1910. Again you will earn $3760 in MO dividends from your 1000 shares. You take your RMD of $1910 from the cash. Now you have 1000 shares of MO and $3936 cash ($2086 + $3760 - $1910 = $3936)

Keep this going for the next 17 years until the end of your 90th year. You will find that you still have 1000 shares of MO and a stockpile of cash in your tIRA. At age 91, the dividends will not cover the RMD for the year, so you will start drawing your cash stockpile. I have not done all the math, but that stockpile should last maybe another 7-8 years before you have to start selling any shares of MO stock to make the RMD.

And don't forget that you are not required to spend your RMD, just pay the taxes. So you can invest the net after taxes in more MO in your taxable account if you like.

The main point is that with a high dividend payer like MO, you could go the rest of your life without needing to sell any shares, notwithstanding the RMD requirements.

Will MO survive till the OP reaches 90?