Which fund to take my RMD from?

[Graybeard]

Normally I don't ask for investing advice as I think I know how to handle things. This has me stumped because I rarely have taken any distributions from any investments.

I need to take the remainder of my RMD from my Vanguard IRA which is about $23,500. The funds were rolled over from my 401k 15 1/2 years ago and I always reinvested dividends and cap gains. It has grown a lot and of course there is no cost basis so it isn't easy to know but it is a lot.

So I have the choice of taking it from either the Vanguard Total Stock Market Index (TSMI) mutual fund or my Settlement Fund. The TSMI's nav is down $25 YTD which is -14.5%. Whichever fund I take it from, the net after taxes will be put into my taxable account's Settlement Fund and assuming we have a recession next year at a lower point, I will move those funds to the TSMI. That would have me selling higher today vs months from now when I'd buy those shares at a hopefully lower nav. The other option is just take it from the Settlement Fund, move it to the taxable Settlement Fund and again when the market is lower next year put the money into the TSMI.

So the result is the distribution will eventually be placed into the TSMI but does it make sense to sell shares that are down 14.5% YTD but still have appreciated a lot over the years or just take the money from the Settlement Fund and don't incur the "loss" as it will just go back into the Settlement Fund?

I realize I can put the distribution from the TSMI into the taxable account's TSMI but I'm looking at the appreciation should the recession occur which seems inevitable.

Thanks!

ETA it just occurred to me, the money in the Settlement Fund came from selling bond mutual funds from the IRA back in May that were also down a lot, maybe 10-12% so maybe it is 6 of 1 and a half a dozen of the other?

 

[audreyh1]

Doesn’t really matter. If you are reinvesting in taxable accounts and trying to maintain some type of asset allocation you can repurchase in your taxable accounts or withdraw in kind and pay taxes with other funds. If this is money you need for spending next year, then you’ll have to think about that.

You’ll drive yourself crazy by trying not to sell things when they are “down” from a recent high. Just pick the lesser of the evils I suppose.

 

[Graybeard]

Doesn’t really matter. If you are reinvesting in taxable accounts and trying to maintain some type of asset allocation you can repurchase in your taxable accounts or withdraw in kind and pay taxes with other funds. If this is money you need for spending next year, then you’ll have to think about that.

You’ll drive yourself crazy by trying not to sell things when they are “down” from a recent high. Just pick the lesser of the evils I suppose.

Yeah, I don't need the money for anything and it'll just go back into investments. It has been driving me crazy, on one hand it seems reasonable to take the "profit" from the past 15 1/2 years and sell at a higher price now and buy that TSMI fund say 3 or 6 months from now assuming it'll be down say another 10 or 15% if/when we are in a recession. The other side of that is I'm selling those shares for far less than they were worth on 1/3/2022!

I need to just do this today and get it done before I end up having to take 2 in 2023, that would be a financial mistake taxwise for 2023 to say the least!

 

[RunningBum]

Use this as an opportunity to rebalance to your desired AA. Ignore the relatively short term volatility.

 

[audreyh1]

Like I said you’ll drive yourself crazy by comparing how much things are down from a recent peak. And you’ll drive yourself even more crazy by trying to sell now and buy again 3 to 6 months from know hoping it’s down another 10 or 15% because that is not guaranteed.

 

[Graybeard]

Use this as an opportunity to rebalance to your desired AA. Ignore the relatively short term volatility.

I agree, I will add to the Settlement Fund to bring the fixed income AA up a bit.

Like I said you’ll drive yourself crazy by comparing how much things are down from a recent peak. And you’ll drive yourself even more crazy by trying to sell now and buy again 3 to 6 months from know hoping it’s down another 10 or 15% because that is not guaranteed.

I know, it's an assumption but a likely assumption! I have a large amount coming from my 401k that I have rolled over to my IRA so I'll have plenty of cash to buy T bills or put into the TSMI next year to further get my AA to a more desirable level.

 

[audreyh1]

I know, it's an assumption but a likely assumption! I have a large amount coming from my 401k that I have rolled over to my IRA so I'll have plenty of cash to buy T bills or put into the TSMI next year to further get my AA to a more desirable level.

We really don’t know how much is baked in already or even how things will pan out next year in terms of the economy. Generally everyone gets surprised.

 

[SecondCor521]

So the result is the distribution will eventually be placed into the TSMI but does it make sense to sell shares that are down 14.5% YTD but still have appreciated a lot over the years or just take the money from the Settlement Fund and don't incur the "loss" as it will just go back into the Settlement Fund?

I think you're missing two, and arguably three things:

1. You're expressing a bit of loss aversion which is misplaced to begin with. You seem to think that selling or not selling the shares that are down this year means something about the loss. It has absolutely no bearing - the value of the shares you hold is already down regardless of whether you sell or not.

2. You seem to be connecting the AA in your IRA with your RMD. The two are entirely independent, because you can take your RMD either way and the day before or after your RMD, you can completely rearrange your IRA AA to whatever you like. And you can take your RMD in cash or TSM into your taxable account and convert to/from TSM<->cash the day after your RMD in your taxable account. Except for some very minor tax and transaction cost implications, it's the same. I would take the RMD however is convenient, then rebalance my IRA to my target AA.

#3 is arguable, I know:

3. You seem to be making investment decisions based on short term volatility in the market. Nobody knows what the market or TSM will do over the next year. Not only will you drive yourself crazy, it probably isn't necessary for success, and it very likely will be counterproductive in the long run.

Yes, we're likely heading into a recession. But the timing, duration, magnitude, Federal Reserve response, Congressional response, market response, resemblance to prior historical patterns, and relationship to investment prices are all highly uncertain. And of course, to the extent that the "fact that everyone knows" (or, as you put it, that it is a "likely assumption") we're headed into a recession is already baked into investment prices. Finally, you likely overestimate your ability to pick "highs" and "lows" on a consistent basis.

 

[pb4uski]

IF your investment hypothesis is that stocks will drift lower and then rebound and you are confident that you can catch near the bottom, then sell Total Market to satisfy your RMD.

 

[VanWinkle]

Just do what is the most simple. Simple answers are usually better than trying to worry about the market timing and the future.

VW

 

[Graybeard]

I think you're missing two, and arguably three things:

1. You're expressing a bit of loss aversion which is misplaced to begin with. You seem to think that selling or not selling the shares that are down this year means something about the loss. It has absolutely no bearing - the value of the shares you hold is already down regardless of whether you sell or not.

2. You seem to be connecting the AA in your IRA with your RMD. The two are entirely independent, because you can take your RMD either way and the day before or after your RMD, you can completely rearrange your IRA AA to whatever you like. And you can take your RMD in cash or TSM into your taxable account and convert to/from TSM<->cash the day after your RMD in your taxable account. Except for some very minor tax and transaction cost implications, it's the same. I would take the RMD however is convenient, then rebalance my IRA to my target AA.

#3 is arguable, I know:

3. You seem to be making investment decisions based on short term volatility in the market. Nobody knows what the market or TSM will do over the next year. Not only will you drive yourself crazy, it probably isn't necessary for success, and it very likely will be counterproductive in the long run.

Yes, we're likely heading into a recession. But the timing, duration, magnitude, Federal Reserve response, Congressional response, market response, resemblance to prior historical patterns, and relationship to investment prices are all highly uncertain. And of course, to the extent that the "fact that everyone knows" (or, as you put it, that it is a "likely assumption") we're headed into a recession is already baked into investment prices. Finally, you likely overestimate your ability to pick "highs" and "lows" on a consistent basis.

Thanks, I know but sometimes I can't help myself! We all like to buy something for less.

I did the RMD this morning and frankly I am so relieved. I have fretted over this all year watching the market drop and rebound hoping for some nice up tick but then it became December and now it is the last week of December!

With the Settlement Fund 7 day SEC yield at 4.2%, I am happy to get such a nice return on something that is totally liquid. My equity AA is too high and I need to lower it, my days of high equity AA are over and I should not be so concerned to milk every last dollar out of an investment. If the market is lower this coming year and at a point I like (say S&P 500 around 3400) then I can use that money to buy some TSMI in my taxable account, 5 years from now it probably won't matter if I did that today, next month of 12 months from now.

I'm even thinking about doing my 2023 RMD in January just to have that money in the taxable Settlement Fund and then I'd have almost double the money to buy if/when the markets are a lot lower. Having all the tax deferred investments at Vanguard vs also in a 401k will make the RMD a bit simpler next year also.