Golden Butterfly asset location when retired with RMDs

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LittleDinghy
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Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Tue Apr 20, 2021 7:41 pm

If you were retiring at the end of 2022, having just turned 70 in 2022, and so had RMDs starting in 2024, and had:

- 40% in tax deferred
- 30 % in after tax, and
- 30% in tax free

and had 20% each in:

- US Total Stock Market index ETFs
- US Small Cap Value index ETFs
- Long term US treasuries (20-30 yr)
- Short term US treasuries (0-3 yer)
- Gold (15% physical, remainder in ETFs),

How would you want to distribute these 5 assets over the 3 types of accounts, and why?

Thank you!
Last edited by LittleDinghy on Wed Apr 21, 2021 5:24 am, edited 1 time in total.
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Re: Golden Butterfly asset location when retired with RMDs

Post by Mark Leavy » Tue Apr 20, 2021 9:39 pm

LittleDinghy wrote:
Tue Apr 20, 2021 7:41 pm

how would you want to distribute these 5 assets over the 3 types of accounts, and why?
At 70, you can't make those decisions based on percentages of asset allocations. You need to use real dollar amounts.

And are the pictures on your desktop your grand kids or are they the single mothers you are helping through troubled times?
Is your idea of long term care buying blood transfusions from virgins like Kriegs or to die mumbling in your sleep like Mathjak and Vinny?
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Wed Apr 21, 2021 5:00 am

Here is more info that may help you answer my question. Assume that:

1) Neither RMDs, nor other portfolio returns, will be needed for income initially after retiring. SS and several small pensions more than cover annual expenses, including income taxes. Of course inflation and changes to SS payouts by the government may eventually drive a need to spend the RMDs.
2) We would like to minimize federal income taxes over the long term. We live in US in a state with no income tax
3) We have no debt
4) We own our home (mortgage is paid off) and have no plans to relocate after retiring
5) We do not have long term care insurance. Portfolio size is adequate to remain in home as long as possible and to pay for any eventual long term care that might be needed, whether at home or in a long term care facility
6) We have no children and will leave any estate to a much younger sibling and to selected charities.
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Re: Golden Butterfly asset location when retired with RMDs

Post by Kriegsspiel » Wed Apr 21, 2021 5:58 am

Mark Leavy wrote:
Tue Apr 20, 2021 9:39 pm

And are the pictures on your desktop your grand kids or are they the single mothers you are helping through troubled times?
Is your idea of long term care buying blood transfusions from virgins like Kriegs or to die mumbling in your sleep like Mathjak and Vinny?
Is your idea of long term care buying blood transfusions from virgins like Kriegs
virgins like Kriegs
ONCE YOU SEE IT YOU CAN'T UNSEE IT
"You haven't, I suppose, ever mixed with politicians at close quarters. They're awful. I think some of these must have been the dregs anyhow, but I've discovered, what previously I didn't believe possible, that politicians behave in private life and say exactly the same things as they do in public. Their stupidity is inhuman.
- John Maynard Keynes
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Re: Golden Butterfly asset location when retired with RMDs

Post by I Shrugged » Wed Apr 21, 2021 8:20 am

Are you just setting it up now, or do you already have the assets? The reason I ask is, if you already have the assets, I don't see how i can be worthwhile to move them around, given the tax consequences of the trades.
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Re: Golden Butterfly asset location when retired with RMDs

Post by sophie » Wed Apr 21, 2021 9:57 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.

Initially, you want to spend down taxable savings (except for the deep gold) while Roth-converting as much of the tax-deferred assets as you can stomach before taking Social Security. How much to convert depends on your situation. An estate plan worked out with a good lawyer may be well worth it, if Biden's inheritance tax changes pass.

By the time you take SS, you want to have most of your assets in a Roth, with the amount in 401Ks limited so that RMDs/withdrawals don't kick you into too high a tax bracket. Take into account the structure of SS taxes and any local property tax rebates for seniors.

You'll probably want to test-run a few scenarios with a spreadsheet. Also check out the i-ORP retirement calculator for drawdown strategies.
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Re: Golden Butterfly asset location when retired with RMDs

Post by I Shrugged » Wed Apr 21, 2021 10:12 am

I used the Wm Bernstein strategy:
Higher income/ interest producing assets in tax deferred. Especially bonds.
Lesser producing/ lower tax rate/ self-deferring assets in taxable

Of course when we hit 70.5, the tax bills are going to come due. But supposedly all the years of deferral have made it worthwhile. Obviously tax rates can and do change.
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Re: Golden Butterfly asset location when retired with RMDs

Post by pp4me » Wed Apr 21, 2021 10:32 am

This is not a hypothetical question to me as I'm 71 years old, retired, and use the Golden Butterfly.

Without giving you exact breakdowns, my design is to try to arrange things taking into account taxes + long term growth potential. (The latter is just a guess, of course, while the former is as certain as death). So the strategy is...

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).
4. My wife is 17 years younger and still working so her deferred IRA's are more aggressive with stocks - probably about 70% right now including both SCV and Large Caps, plus a sprinkling of all the other GB stuff.
5. About 2 year's worth of living expenses in the form of gold bullion coins tucked away some place safe.

I'm sure someone can poke holes in my strategy but that's basically it.

Also I'm not yet in the Drawdown phase. We still have a sizeable positive cash flow with my SS check and my wife's income, even maxing out her 401k and HSA, so we won't be drawing down until she retires. Which might be as soon as the end of this year.
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Re: Golden Butterfly asset location when retired with RMDs

Post by sophie » Wed Apr 21, 2021 11:59 am

Thanks pp4me! That's virtually identical to what I'm doing. I'm still saving and not drawing down of course, but the asset distribution among accounts should be the same.

Main difference is that when I retire, I'll dump out all my 401K/403b accounts into a single IRA so that I have full control over the investments, and add it to my GB. Except I'm planning to leave some in TIAA-CREF and convert to an annuity when ready. I know it may not be optimal, but I like the idea of having a good slug of guaranteed income. I hope that I'll be able to avoid the family curse (every woman gets Alzheimer's) but realistically...probably not. I would like to have things as simplified and out of my direct control as possible by then.
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Re: Golden Butterfly asset location when retired with RMDs

Post by pp4me » Wed Apr 21, 2021 3:28 pm

sophie wrote:
Wed Apr 21, 2021 11:59 am
Main difference is that when I retire, I'll dump out all my 401K/403b accounts into a single IRA so that I have full control over the investments, and add it to my GB. Except I'm planning to leave some in TIAA-CREF and convert to an annuity when ready.
Not really a difference except for how you intend to handle TIAA-CREF.

I began consolidating all my tax-deferred accounts into one at Fidelity a long time before I retired. On my last job I was able to roll the company 401k over to the Fidelity IRA because I was 60 years old so I kept doing that, though not every year.

But speaking of TIAA-CREF I had an account there MANY years ago from my very first job as a computer programmer. Didn't think much of it later until they contacted ME and told me I had $85k accumulated due to growth from just working a couple of years at the company. I also rolled that over into my Fidelity IRA although it had to be done over a period of 10 years for some reason. Not sure that was the right decision but who knows? At almost the same time I had almost the exact same amount in a pension plan at a former company which they offered me to cash out and roll over. I did that too, even though I could have collected $850/month at age 65.

I could go back and figure if those decisions were correct but what is the point, really? Too old to learn from my mistakes now and if I did the math I'm not even sure I would have come out any better.
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Re: Golden Butterfly asset location when retired with RMDs

Post by barrett » Thu Apr 22, 2021 7:14 am

I Shrugged wrote:
Wed Apr 21, 2021 10:12 am
Of course when we hit 70.5, the tax bills are going to come due. But supposedly all the years of deferral have made it worthwhile. Obviously tax rates can and do change.
You probably know this and just forgot when posting, but the new age for RMDs is 72, not 70.5. This changed in either late 2019 or early 2020 when the SECURE Act passed. But make sure to read the fine print because it makes a difference at what point in the year you turn 72. I was born in September so pushing the RMD age back 18 months really only gained me one extra year of tax deferral. My wife was born in February and in effect has two additional years before she has to take her first RMD.

This is from Investopedia:

"In 2020, the age for withdrawing from retirement accounts changed. You must begin withdrawing from a retirement account by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old)."
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Re: Golden Butterfly asset location when retired with RMDs

Post by I Shrugged » Thu Apr 22, 2021 8:44 am

I knew something had changed but had not internalized it. I thought maybe it was a temporary covid thing. Thanks for the correction!
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Re: Golden Butterfly asset location when retired with RMDs

Post by LittleDinghy » Thu Apr 22, 2021 7:58 pm

Thank you everyone, especially Sophie, pp4me and "I Shrugged."

In line with your responses, here is what I'm thinking as a target asset location at start of retirement.
20210422_TrgtAsstLctn.PNG
20210422_TrgtAsstLctn.PNG (53.33 KiB) Viewed 947 times
In line with "I Shrugged's" post, a little of the gold in the After Tax account is physical and the rest in that account is in an ETF. But its basis value is quite a bit lower than its current value, so I can't sell it without owing taxes. This is in line I put it there before I knew that I shouldn't.

It seems to me that my other choices are reasonably in line with both pp4me's and Sophie's posts.

With RMDs going from Tax Deferred to After Tax, and with market movements, I'll be rebalancing, And I think that rebalancing over time will result in having LTTs and STTs in both After Tax and Tax Free. But that is ok.

Any thoughts from anyone on these asset locations when starting retirement?
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Fri Apr 23, 2021 5:36 am

I would never take up valuable retirement account space with short term treasuries at zero.

Unless you are in the zero capital gains bracket a tax advantages account is still the best place for equities
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Re: Golden Butterfly asset location when retired with RMDs

Post by jatwell » Fri Apr 23, 2021 6:14 am

barrett wrote:
Thu Apr 22, 2021 7:14 am
I Shrugged wrote:
Wed Apr 21, 2021 10:12 am
Of course when we hit 70.5, the tax bills are going to come due. But supposedly all the years of deferral have made it worthwhile. Obviously tax rates can and do change.
You probably know this and just forgot when posting, but the new age for RMDs is 72, not 70.5. This changed in either late 2019 or early 2020 when the SECURE Act passed. But make sure to read the fine print because it makes a difference at what point in the year you turn 72. I was born in September so pushing the RMD age back 18 months really only gained me one extra year of tax deferral. My wife was born in February and in effect has two additional years before she has to take her first RMD.

This is from Investopedia:

"In 2020, the age for withdrawing from retirement accounts changed. You must begin withdrawing from a retirement account by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old)."
I checked on the IRS site, looks like they clarified and the April 1st deadline only applies if you turned 72 in 2019/2020:

You must take your first required minimum distribution for the year in which you turn age 72 (70 ½ if you reach 70 ½ before January 1, 2020). However, the first payment can be delayed until April 1 of 2020 if you turn 70½ in 2019. If you reach 70½ in 2020, you have to take your first RMD by April 1 of the year after you reach the age of 72. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.
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Re: Golden Butterfly asset location when retired with RMDs

Post by I Shrugged » Fri Apr 23, 2021 7:59 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. Don't feel bad about the location of the gold etf. I'm in the same boat. I can't complain about having unrealized gains. You will never completely beat the system. OTOH because they are unrealized, the taxable space is not such a bad place. Up till now you have not paid a dollar of taxes on them. So they have been tax deferred, in a taxable space.
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Fri Apr 23, 2021 8:47 am

I Shrugged wrote:
Fri Apr 23, 2021 7:59 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. Don't feel bad about the location of the gold etf. I'm in the same boat. I can't complain about having unrealized gains. You will never completely beat the system. OTOH because they are unrealized, the taxable space is not such a bad place. Up till now you have not paid a dollar of taxes on them. So they have been tax deferred, in a taxable space.
It is about appreciation too ..we have a taxable account with 6 figures of gains in two funds that if I sold would not only create tax havoc but Medicare surcharges....the lowest growers should be in the taxable account
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Re: Golden Butterfly asset location when retired with RMDs

Post by pp4me » Fri Apr 23, 2021 11:50 am

mathjak107 wrote:
Fri Apr 23, 2021 8:47 am
I Shrugged wrote:
Fri Apr 23, 2021 7:59 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. Don't feel bad about the location of the gold etf. I'm in the same boat. I can't complain about having unrealized gains. You will never completely beat the system. OTOH because they are unrealized, the taxable space is not such a bad place. Up till now you have not paid a dollar of taxes on them. So they have been tax deferred, in a taxable space.
It is about appreciation too ..we have a taxable account with 6 figures of gains in two funds that if I sold would not only create tax havoc but Medicare surcharges....the lowest growers should be in the taxable account
Depends on your tax bracket, doesn't it? As I said somewhere else before, I was able to sell enough VTI in taxable to buy my wife a new car the first year I retired. It's no longer an option since I started collecting SS, but when my wife retires I think I might be able to pull it off again.
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Fri Apr 23, 2021 1:08 pm

Actually unless you are in the zero capital gains tax bracket as little as a 2% dividend over the long term wipes out the lower capital gains rates and fund turnover makes it even worse in the taxable account

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 .

Kitces looked in this

https://www.kitces.com/blog/asset-locat ... io-design/
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Re: Golden Butterfly asset location when retired with RMDs

Post by I Shrugged » Fri Apr 23, 2021 2:23 pm

mathjak107 wrote:
Fri Apr 23, 2021 1:08 pm
Actually unless you are in the zero capital gains tax bracket as little as a 2% dividend over the long term wipes out the lower capital gains rates and fund turnover makes it even worse in the taxable account

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 .

Kitces looked in this

https://www.kitces.com/blog/asset-locat ... io-design/
Hence, use index funds for stocks in taxable to eliminate (defer) capital gains distributions. At least with Vanguard in my experience for many years. They push the realized CGs internally to the institutional arms of the various funds. I virtually never see a CG distribution from my VG index funds.
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Fri Apr 23, 2021 2:52 pm

It has been a dog compared to just an s&p fund for at least 15 years ...I never let the tax tail wag the tax dog. My contra fund surpassed Berkshire for more like 20 years .

Buffett’s time came and went in the 1980s and 1990s
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Re: Golden Butterfly asset location when retired with RMDs

Post by mathjak107 » Fri Apr 23, 2021 2:54 pm

I Shrugged wrote:
Fri Apr 23, 2021 2:23 pm
mathjak107 wrote:
Fri Apr 23, 2021 1:08 pm
Actually unless you are in the zero capital gains tax bracket as little as a 2% dividend over the long term wipes out the lower capital gains rates and fund turnover makes it even worse in the taxable account

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 .

Kitces looked in this

https://www.kitces.com/blog/asset-locat ... io-design/
Hence, use index funds for stocks in taxable to eliminate (defer) capital gains distributions. At least with Vanguard in my experience for many years. They push the realized CGs internally to the institutional arms of the various funds. I virtually never see a CG distribution from my VG index funds.
Even index funds can be a problem when you want to rebalance or make portfolio changes ..

They can be tax torpedoes down the road...

There really is no better place Than the deferred account for equities
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Re: Golden Butterfly asset location when retired with RMDs

Post by pp4me » Sat Apr 24, 2021 11:35 am

If you don't put some stock in your taxable account then what else are you going to put there instead if you need to fill some space? Cash is the obvious choice but only right now while it's returning near zero. Coupon payments on Long Bonds would be taxed at the ordinary rate every year and could incur a significant tax liability when sold. Gold ETF's are taxed the same as physical gold without the long term cap on capital gains.

As long as the 15% capital gains cap on long term holdings and the 0% option based on income remain it doesn't seem like a bad deal to me compared to the alternatives.

Also gains from stocks taken in the form of RMD's from a tax-deferred account are going to be taxed as ordinary income and also not able to take advantage of any capital gains tax treatment.

P.S. Technovelist was working on a program to figure all of this stuff out before he left. Too bad he's not here to comment and/or maybe sell his product if he finished it.
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Re: Golden Butterfly asset location when retired with RMDs

Post by Tyler » Sat Apr 24, 2021 1:22 pm

mathjak107 wrote:
Fri Apr 23, 2021 1:08 pm
Actually unless you are in the zero capital gains tax bracket as little as a 2% dividend over the long term wipes out the lower capital gains rates and fund turnover makes it even worse in the taxable account
That's true. But it's helpful to keep in mind that the 0% tax bracket for long-term capital gains extends up to $80,800 of taxable income for a married couple filing jointly. Add in the $24,800 standard deduction (which offsets dividend and interest income), and the fact that only a portion of your stock sale is taxable (the gain over the initial principal, so never 100%), and many retired couples with no outside income and average expenses can easily withdraw money from their investments tax-free.

In my experience, it only becomes a problem when 1) expenses get really high (like New York or San Francisco, which are not normal relative to the rest of the country), 2) your portfolio gets so large that the dividends overwhelm the tax-free limit (we're talking many millions), or 3) your tax-deferred portion is large enough that the RMDs cause problems (which can be planned for ahead of time with Roth conversions while staying under the 0% limit). Long story short, for lots of people this is totally manageable even before talking about things like tax-loss-harvesting.

Personally, 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.

But obviously everyone is different, and I absolutely think targeted asset planning in different accounts can make sense in some situations. Just keep in mind that many of the people who write about the topic are financial advisers targeting readers of high net worth who may be in a very different situation than you.
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Re: Golden Butterfly asset location when retired with RMDs

Post by pp4me » 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.
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