Reinvest dividends or take the cash, in TIRA

[zaqxsw]

I think the important thing to do with your TIRA is get it converted to a ROTH IRA over your few remaining years before Social Security kicks in, let alone RMD's.

Pay the extra taxes with whatever you want.

 

[Alex The Great]

Yes , but that's not quite what I meant.
An investor might own three ETFs in an account: an S&P 500 fund, a REIT fund, and an international stock fund.
He might be wanting to increase his international fund holding. So at the end of March, dividends from all three ETFs hit his settlement fund within two or three days and then BANG, he moves all (or most) of his settlement fund balance into the international fund...

OK I see. If all three funds are within tIRA then I'd call it rebalance rather than taking cash into the settlement fund. There is indeed nothing wrong with this approach. Actually at Fidelity it is possible to sell and buy almost at the same time in order to stay invested, unless it is a total market or S&P index fund.

 

[TheWizard]

I think the important thing to do with your TIRA is get it converted to a ROTH IRA over your few remaining years before Social Security kicks in, let alone RMD's.

Pay the extra taxes with whatever you want.

I don't completely agree.
How much of your tax-deferred accounts to Roth convert depends on a lot of things such as how much other money you have to start with in taxable and Roth accounts.

What you want is an RMD obligation at age 73 or 75 that is modest in comparison to your other retirement income streams. My RMD amount, for example, is less than my annual SS payout.

Additionally, if you're reasonably well off and charitably inclined, it's much better to leave money in tax-deferred and do QCDs with some/most/all of it, depending on your situation...

 

[rk911]

For us it's a binary option question...do we need the extra cash or do we let it ride and grow (hopefully). When we started investing in the mid-80's we re-invested dividends. We still do that today.

 

[Badger]

For no other reason than for my convenience I have my tIRA mutual fund dividends swept into a settlement fund inside the IRA. Then I use the cash for my RMD and never touch the shares of the mutual fund. Does this make financial sense? I don't know. I am at a place where I am no longer trying to beat the system. In my Roth IRA I use the dividends to buy more shares.

 

[TheWizard]

For no other reason than for my convenience I have my tIRA mutual fund dividends swept into a settlement fund inside the IRA. Then I use the cash for my RMD and never touch the shares of the mutual fund. Does this make financial sense? I don't know. I am at a place where I am no longer trying to beat the system. In my Roth IRA I use the dividends to buy more shares.

Not a terribly bad idea, no.
But dividends on a lot of indexed mutual funds are just 2% or thereabouts.
So you'll need to take additional distributions to meet your RMD which is just fine...

 

[lem1955]

I like diy investing. It’s a hobby for me. I got away from Bond funds and now manage about 30-35 CD’s and Treasuries for my fixed asset allocation in seven different accounts. I also have money in a CDFI, a passive real estate investment, two private equity orgs, and an HSA.

 

[sengsational]

It doesn't make that much difference, I don't think. I like to reinvest dividends, otherwise I'd have a small pump running all the time sucking from the equity bucket and flowing into the cash bucket. If my asset allocation needs adjustment in that direction, I rebalance.

 

[Midpack]

I must be misreading the OP. Instead of reinvesting tIRA dividends, is he/she considering adding cash to tIRA settlement fund, or taking an additional tIRA cash distribution into taxable account settlement fund. That might generate different questions and answers to me - comparing capital gains from taxable vs marginal ordinary income bracket. 'Selling something' might have less tax impact than more ordinary income.

 

[MarieIG]

My Roth has been set to consistently set to reinvest. With my IRA, I have toggled back and forth, with reinvest, re-balancing, and sending dividends and / or capital gains to cash - depending upon the value of the shares at the time.

In the taxable, I reinvest dividends in holdings I would like to grow, and send to cash dividends of stocks wherein I am overexposed, use those to fund income tax payments, and purchase funds, i.e. as a slow way of re-balancing.

 

[COcheesehead]

We live off our taxable account so I don’t need cash in deferred accounts though they generate cash through individual bond interest. So all divies are reinvested especially now with most things flat to down. It’s just a good way to DCA back into assets.

 

[Exchme]

I don't understand worrying about it in an IRA, you can rebalance at any time without tax consequences. From your description though, you are just market timing. As John Bogle (the late CEO of Vanguard) said:

"I've never known anyone that could consistently time the market. In fact I've never known anyone that knew anyone that could do it".

The odds that you are the exception that can do it are very poor.

If spending from your IRA is profitable by reducing future RMDs, Roth Conversions are likely more so. I recommend you investigate them more thoroughly, many folks can benefit handsomely from a good Roth Conversion plan, our plan is projected to increase terminal wealth by hundreds of thousands.

Be aware that there are many bad tools are there for those calculations and a couple of good ones. The free Retiree Portfolio Model is a nice spreadsheet available at bogleheads.org. If you can figure it out, have relatively simple needs and don't mind its very manual approach to things, it's pretty good.

My favorite is Pralana (pralanaretirementcalculator.com). It has way more features and optimizers and does a really good job on taxes and allows you to hold your bonds tax efficiently by keeping them preferentially in tax deferred. Other tools tend to be long on flash and sexy looks, but have glaring holes in their tax packages, ignore taxes due by heirs or give cosmically bad answers if you hold your bonds preferentially in tax deferred.

 

[tominboise]

For more information, our current allocation of our funds between taxable, Roth and TIRA is:

TIRA - 79.25%
Roth - 2.25%
Taxable brokerage/bank account - 18.5%

I haven't been aggressive on Roth conversions in the past few years due to managing an income level for ACA subsidy, but I went on Medicare this year so I am planning on converting more going forward. Neither of us are drawing SS at the moment (age 65/63).

Our overall allocation of investments, across all accounts, is:
CDs & T Bills - 5.8%
Cash - 8.4%
Bond Funds - 26.2% (only hold these in the TIRA accounts)
Stock funds - 59.6%

 

[ERD50]

I must be misreading the OP. I took it to mean he/she was considering taking an additional tIRA distribution of cash into taxable account settlement fund (not tIRA settlement fund) instead of reinvesting dividends in his/her tIRA. That might generate different questions and answers to me - comparing capital gains from taxable vs marginal ordinary income bracket. 'Selling something' might have less tax impact than more ordinary income.

+1 Are we both the only ones misreading the OP? I started reading the replies, and they seemed to miss the point. But I was hesitant because it seemed so many were looking at this from a different angle. Am I misreading? Maybe the remaining posts were working off the first few (possibly misguided?) posts

People seem to be responding to the 1st part, which, IMO, is very minor, since for a tIRA, all w/d are taxed as income (barring any non-deductible contributions). So reinvesting divs or not, while doing withdrawals (assuming withdrawals are greater than divs, just means the divs are sitting in cash a while. Probably best to keep them invested, but not much practical difference if that is the case. But then, it seems OP wants to build a cash balance (but is it useful in a tIRA?), so sure, not reinvesting divs will increase the cash balance, that's just a numerical fact.

I have always had the dividends reinvested inside our TIRA funds. I am thinking of changing that and taking the dividends as cash into the settlement fund.

But then OP goes on:

We are 65/63 and have been using withdrawals from our after tax brokerage account for our living expenses (and doing some small Roth conversions from the TIRA) and I am thinking about taking some $$ from the TIRA's going forward.

For me, this is the important part of the OP. At 65/63, not subject to RMDs yet. So it appears it is a question of choice of taking withdrawals for living expenses from tIRA or their after tax brokerage account.

Well, the entire tIRA w/d will be taxed as income. Any divs from their brokerage account are already taxed, additional sales are only taxed on the gains (not the entire w/d), and that is likely taxed @ 15%. So ~ 7.5% for example, if the cost basis is one half the sales price (IOW, the investment has doubled since purchased). Assuming long term holdings (> 1 year).

So it seems a w/d from tIRA results in more taxes. Isn't that the important part? My advice is to review the tax situation and support living expenses with the taxable brokerage account, spending divs 1st (do NOT reinvest divs in the brokerage account), then selling the highest cost basis holding first, to reduce taxes (unless there are other reasons to sell specific investments).

 

[pb4uski]

I don't fret whether to do tIRA withdrawals or Roth conversions. I think it best to focus on optimizing Roth conversions and doing them where I pay less tax today than what I would pay later if taken as RMDs.

If it turns out that you need funds for spending the just withdraw from the Roth if needed because a Roth conversion combined with a Roth withdrawal is the same as a tIRA withdrawal..