Golden Butterfly asset location when retired with RMDs

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mathjak107
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Sat Apr 24, 2021 6:09 pm

pp4me wrote:
Sat Apr 24, 2021 1:33 pm
Yes, TLH was something I forgot to mention in my defense of stocks in taxable.

There is no such thing as TLH in tax advantaged accounts. If you sell something in the red in a tax-deferred account, not only can you not take the loss but you have to pay ordinary tax on the entire proceeds from your pitiless stock transactions.

I think mathjak's basic problem is that he has too much money. Glad I'm not him (just kidding).

Also, I think Roth IRA's are an essential part of this juggling act when it comes to managing taxes in retirement. I only wish I could have started sooner but we've been maxing ours out since we became eligible. Allows you to raise extra cash when you need it without triggering any tax obligations. Haven't done that yet but I'm sure we will eventually.
I would rather not pay taxes up front on a deferred account and use the money not being paid out to grow new money I wouldn’t be able to use in the taxable account since I have to account for taxes today ....

That is what makes a retirement account space so valuable ...plus as little as a 2% dividend wipes out the lower capital gain rate over time so there is no advantage
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Re: Golden Butterfly asset location when retired with RMDs

Post by pp4me » Sun Apr 25, 2021 3:20 pm

mathjak107 wrote:
Sat Apr 24, 2021 6:09 pm
I would rather not pay taxes up front on a deferred account and use the money not being paid out to grow new money I wouldn’t be able to use in the taxable account since I have to account for taxes today ....
Me too but I'm no longer eligible to put money into a tax deferred account. Now I have to either put it in Roth or taxable but there is a $7k limit on Roth. When we reach that limit ($14k) we have no choice left but to put the money in taxable.

My wife is still eligible for tax-deferred and most of hers goes into stocks like mine used to. When she retires we'll have to look at where we're at and re-think everything. And the Roth option will also be closed completely for both of us, of course, unless we do rollovers.

(And BTW just discovered the beauty of HSA's this year when it became an option for my wife. Great place to park extra pre-tax money for someone nearing retirement IMO).
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Sun Apr 25, 2021 9:50 pm

I really appreciate all the responses to my original post. Here is my current reasoning (no decisions yet made), and I'd really appreciate any additional thoughts on it.

After one starts taking RMDs at age 72, the only differences between Tax Deferred and After Tax (often called "taxable") accounts seem to be:

1) one is required to take money out of one's Tax Deferred accounts every year in the form of RMDs whereas one isn't required to take money out of one's After Tax accounts (obvious)

2) Realized long term gold gains (whether physical or ETFs) in After Tax accounts are taxed at your regular tax rate, but not more than 28% (thank you stuper1!); whereas, realized long term gains in Tax Deferred accounts are taxed at one's regular tax rate (including long term gold gains)

3) Basis in Tax Deferred accounts is taxed, but basis in After Tax accounts has already been taxed and so is not taxed again.

4) Long term capital gains taxes, which are less than income tax, are charged for After Tax gains. Income tax is charged for Tax Deferred gains.

After I am required to start taking RMDs in 2024 when I turn 72, my wife and I won't need the RMDs, but they are "required." Our annual spending is such that our Social Security and several small pensions will meet all our spending needs. However, our RMDs will drive up our income such that we will be well into the 22% (25% after 2025), and perhaps into the 24% (28% after 2025) marginal tax bracket (MTB). Over time, RMDs increase, and likely will drive us to the 24% (28% after 2025) MTB if we're not there already. If our Tax Deferred does well, then our RMDs will increase even more, perhaps driving our income to the 33% (after 2025) MTB.

Given the above, it seems best to minimize growth in tax deferred accounts, so as to minimize RMDs (since they are not needed). That is why I'm thinking it best to put all the STTs (Short Term Treasuries = cash) in tax deferred. For the remaining 20% to fill out the 40%, I then have a choice between LTTs (Long Term Treasuries = bonds) and Gold, or some of each. With LTT returns being so low these days, and with interest rates rising driving existing LTT values down, and the continuing fears of inflation in which, if realized, presumably gold would have a lot of growth, it seems that LTTs should make up the other 20% of the Tax Deferred, and that gold should go in Tax Free.

However, as I mentioned in an earlier post, I'm stuck with half the gold (10% of our portfolio) in After Tax because its value is so much higher than its basis. Since realized gold gains in After Tax are taxed as income tax (not capital gains tax) to a max of 28%, it seems best to place the rest of the gold in Tax Free.

Now, to fill the remaining 20% in After Tax and 20% in Tax Free, from my reading half to all of the SCV (Small Cap Value) should go in Tax Free, and half to all of the TSM (Total Stock Market) should go in After Tax.

The above approach would seem to minimize our un-needed RMDs into the future. Were we to instead put TSM and SCV into Tax Deferred, then the value of the Tax Deferred account would grow faster and therefore be larger than were we to place STT and LTT in Tax Deferred. With a larger account value, our unneeded RMDs would be greater, as would our taxes. Therefore, I'm having a hard time understanding why one would want to put TSM and SCV into Tax Deferred.

I look forward to your finding holes in this, my current reasoning.

Here is a graphic showing the results of the above reasoning.
20210425_TrgtAsstLctn.PNG
20210425_TrgtAsstLctn.PNG (59.22 KiB) Viewed 6318 times
Last edited by LittleDinghy on Sun Apr 25, 2021 10:38 pm, edited 6 times in total.
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Re: Golden Butterfly asset location when retired with RMDs

Post by stuper1 » Sun Apr 25, 2021 10:13 pm

I think that gold and other collectibles are taxed at your regular income tax rate, but no higher than 28%. So, if you are in say the 22% tax bracket, then you pay 22% taxes on your gold gains. I could be wrong about this, but this is what somebody on this board told me. Somebody else please chime in.
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Re: Golden Butterfly asset location when retired with RMDs

Post by stuper1 » Sun Apr 25, 2021 10:16 pm

If you do charitable giving, you can earmark part or all of your RMD as a Qualified Charitable Distribution (I think up to $100k per year), and neither you nor the charity has to pay any taxes on it. Of course, it has to be an IRS-qualified charity.
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Sun Apr 25, 2021 10:47 pm

Because we are self ensuring for long term care for both of us, our charitable giving will be part of our estate.
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Mon Apr 26, 2021 10:09 pm

The degree of opinion difference on the question I posed is interesting. Sophie and pp4me are at one extreme, and mathjak107 (supported by Kitces) and I Shrugged are at the opposite extreme. Here are quotes from posts by all four:

sophie » Wed Apr 21, 2021 7:57 am
I would do what I'm already doing:

pack the tax-deferred accounts with cash, gold and bonds. These are the assets that are likely to gain the least over time.

use tax-exempt (Roth and HSA) for stocks. I put some gold in here also.

In taxable you want stocks, savings bonds, and "deep" physical gold. Cash is fine while interest rates are near zero, just be aware that as soon as interest rates climb, you'll need to get it out of there.


pp4me » Wed Apr 21, 2021 8:32 am
1. Prefer long term growth in our Roth IRA's - right now they are exclusively SCV (like I said, just a guess but working pretty well so far).
2. Taxable comes in second as far as growth considerations while also minimizing taxes. Joint Taxable is all VTI and Cash.
3. "Safe" assets belong in my deferred IRA as I'm already taking RMD's. So that's where most of my Bonds and Gold ETF's are, sprinkled with some more SCV and cash. (WAY outperformed my expectations since I retired, BTW, though maybe not as great this year).


mathjak107 » Fri Apr 23, 2021 3:36 am
I would never take up valuable retirement account space with short term treasuries at zero.

mathjak107 » Fri Apr 23, 2021 11:08 am
Kitces found for most of us the best place for equities is the deferred accounts ...that space is valuable and at these rates bonds unless they have big gain potential should be kept out.
https://www.kitces.com/blog/asset-locat ... io-design/


I Shrugged » Fri Apr 23, 2021 5:59 am
To the extent you can fine tune it, I would compare the yields of the stock funds with the bond funds. Put the higher yields into tax deferred or tax free.
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Mon Apr 26, 2021 10:25 pm

The wide differences of opinion on the correct answer to the question I posed is interesting. Sophie and pp4me are at one extreme, Tyler is in the middle, and mathjak107 (supported by Kitces!) and "I Shrugged" are at the opposite extreme. Below are excerpts from posts by each of them that when compared, reveal their wide differences of opinion.

sophie » Wed Apr 21, 2021 7:57 am
I would do what I'm already doing:

pack the tax-deferred accounts with cash, gold and bonds. These are the assets that are likely to gain the least over time.

use tax-exempt (Roth and HSA) for stocks. I put some gold in here also.

In taxable you want stocks, savings bonds, and "deep" physical gold. Cash is fine while interest rates are near zero, just be aware that as soon as interest rates climb, you'll need to get it out of there.


pp4me » Wed Apr 21, 2021 8:32 am
1. Prefer long term growth in our Roth IRA's - right now they are exclusively SCV (like I said, just a guess but working pretty well so far).
2. Taxable comes in second as far as growth considerations while also minimizing taxes. Joint Taxable is all VTI and Cash.
3. "Safe" assets belong in my deferred IRA as I'm already taking RMD's. So that's where most of my Bonds and Gold ETF's are, sprinkled with some more SCV and cash. (WAY outperformed my expectations since I retired, BTW, though maybe not as great this year).


Tyler » Sat Apr 24, 2021 11:22 am
I've elected to not over-think it and keep full portfolios in both taxable and tax-deferred accounts. Although for reference, it's better to describe me as an early/semi retiree rather than one of "traditional" age. It allows for tax loss harvesting opportunities, and also keeps the account balances steady rather than wildly swinging relative to one another due to being over-stuffed with isolated asset types. Doing it that way maximizes flexibility and helps me with planning.

mathjak107 » Fri Apr 23, 2021 3:36 am
I would never take up valuable retirement account space with short term treasuries at zero.

mathjak107 » Fri Apr 23, 2021 11:08 am
Kitces found for most of us the best place for equities is the deferred accounts ...that space is valuable and at these rates bonds unless they have big gain potential should be kept out.
https://www.kitces.com/blog/asset-locat ... io-design/


I Shrugged » Fri Apr 23, 2021 5:59 am
To the extent you can fine tune it, I would compare the yields of the stock funds with the bond funds. Put the higher yields into tax deferred or tax free.
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Re: Golden Butterfly asset location when retired with RMDs

Post by sophie » Tue Apr 27, 2021 9:03 am

Another consideration: inheritance.

This is going to be extra tricky to manage because we simply don't know whether Biden's current proposals will pass. These include reducing the estate tax exclusion from $11.5M to $3.5M, which will devastate small businesses that will effectively be forced to liquidate or be sold at the owner's death, eliminating the step-up in basis, virtually eliminating the current tax-free gifting, and removing the ability to use trusts to bypass inheritance taxes. Taxes for amounts above $3.5M, depending on state rules, could really wipe you out: capital gains at 20% or greater depending on what new rules get passed, or ordinary income tax rates >39% (since for that one year in which you inherit an estate you are in the super-rich category) plus 40%+ for inheritance taxes plus state inheritance and capital gains tax. If you're lucky these won't add up to more than 100%, but who knows, they might.

Roth IRAs are your friend. I want as much gains in there as possible!!! And, never simply withdraw from tax-deferred. Roth convert it and spend down taxable instead.
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Re: Golden Butterfly asset location when retired with RMDs

Post by barrett » Tue Apr 27, 2021 3:03 pm

sophie wrote:
Tue Apr 27, 2021 9:03 am
Roth IRAs are your friend. I want as much gains in there as possible!!! And, never simply withdraw from tax-deferred. Roth convert it and spend down taxable instead.
I've set things up similar to Tyler in that our asset allocation in each type of account is roughly the same. But the argument that Roths should be supercharged with stocks (with their higher expected return) always makes me wonder if our Roth accounts are just too conservative. So I am following this thread with interest.

sophie, why the opinion that one should never just withdraw from tax-deferred? I remember Desert liking that as an option in certain cases and it's something that we (wife and I, not Desert and I!) are considering. I did see an interesting post a while back on Bogleheads talking about a tax-deferred rule of thumb dollar threshold below which Roth conversions might not make sense. The reason had to do with the 15% tax bracket being so big and RMDs not being designed to be particularly burdensome.

Doesn't the convert/not covert & just spend down decision depend on where assets are placed leading up to retirement? I mean, for different reasons, not everyone has a huge percentage of their assets in tax-deferred. I think in our case we may have high enough tax-deferred balances so that some Roth conversions could make sense. But I don't think that's necessarily the best strategy for everyone.
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Tue Apr 27, 2021 3:32 pm

Doing Roth’s early on in ones career is way different than conversions later on ..

Most of us who are not doctors or lawyers work our way up over decades from very low to much higher pay over our careers

The mistake many make is they look at their final working years and go , we will be in a lower tax bracket when we retire and that is fundamentally flawed .

Roth’s carry a lot more value early on since odds are our long term average tax brackets over decades is going to be lower most likely than our retirement income which is likely to be somewhere around our final earning years .

So Roth’s started early can be very effective .

Roth conversions lose most of that ramping up benefit so they are less valuable done in our later years .

For someone delaying ss who has not a whole lot of other income the tax gods give you a gift as a couple and you can take tax free up to 24k at zero tax out from retirement accounts and up to 44k at very very low levels ..

So the best way is going to be different based on individual situations
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Tue Apr 27, 2021 6:23 pm

sophie wrote:
Tue Apr 27, 2021 9:03 am
Roth IRAs are your friend. I want as much gains in there as possible!!! And, never simply withdraw from tax-deferred. Roth convert it and spend down taxable instead.
Can conversions from traditional IRAs (Tax Deferred) to Roth (Tax Free) count as RMDs?
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Re: Golden Butterfly asset location when retired with RMDs

Post by stuper1 » Tue Apr 27, 2021 6:32 pm

An RMD cannot be rolled over to a Roth. If you are above the age at which RMDs are required, you must take your RMD before you do any Roth conversions.
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Tue Apr 27, 2021 7:06 pm

stuper1 wrote:
Tue Apr 27, 2021 6:32 pm
An RMD cannot be rolled over to a Roth. If you are above the age at which RMDs are required, you must take your RMD before you do any Roth conversions.
Looks like I can't follow Sophie's advice then!
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Re: Golden Butterfly asset location when retired with RMDs

Post by sophie » Tue Apr 27, 2021 9:12 pm

stuper1 wrote:
Tue Apr 27, 2021 6:32 pm
An RMD cannot be rolled over to a Roth. If you are above the age at which RMDs are required, you must take your RMD before you do any Roth conversions.
Ah, didn't know that.

If you don't have a lot of money in tax-deferred I guess you wouldn't need to worry so much about withdrawals kicking you into high tax brackets. Many of us though, will end up retiring stuffed to the gills in tax-deferred, and with little option but to make large withdrawals throughout retirement. The usual plan is to delay taking social security as long as possible, and use the intervening years to aggressively Roth convert as much of the tax-deferred accounts as you can.
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Re: Golden Butterfly asset location when retired with RMDs

Post by barrett » Wed Apr 28, 2021 6:41 am

sophie wrote:
Tue Apr 27, 2021 9:12 pm
If you don't have a lot of money in tax-deferred I guess you wouldn't need to worry so much about withdrawals kicking you into high tax brackets. Many of us though, will end up retiring stuffed to the gills in tax-deferred, and with little option but to make large withdrawals throughout retirement. The usual plan is to delay taking social security as long as possible, and use the intervening years to aggressively Roth convert as much of the tax-deferred accounts as you can.
Definitely planning to delay starting SS to age 70. Two other factors are 1) MFJ versus single filer (and, in the case of MFJ, how much of the tax-deferred balances are spent down before one spouse passes), and 2) what the age 70 SS benefits actually are. In our case we never had amazing earnings but were good savers. So our tax-deferred account balances are decent but our SS payments will be nowhere near the maximum. So the torpedo we face with SS & RMDs probably won't be terrible.

I am revisiting the Roth conversions, but, depending on tax-deferred account balances when the time comes, they may be quite modest.

Still mulling over having a higher stock allocation in our Roths.
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Wed Apr 28, 2021 6:52 am

remember medicare looks back two years so watch those conversion and income combined amounts .you dont want any iirma surcharges
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Re: Golden Butterfly asset location when retired with RMDs

Post by I Shrugged » Wed Apr 28, 2021 1:40 pm

mathjak107 wrote:
Wed Apr 28, 2021 6:52 am
remember medicare looks back two years so watch those conversion and income combined amounts .you dont want any iirma surcharges
Best I can tell without putting a ton of effort into it, a person is still better off doing Roth conversions even after the medicare hit.
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Wed Apr 28, 2021 3:24 pm

It Depends on how much and on tax brackets .

I have a very large ira , there is no way at this stage I can do any meaningful conversations without triggering all kinds of bad repercussions….living with the rmds is likely my best outcome
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