The complexities of tax-deferred portfolio management in retirement
I am posting a current conundrum I am dealing with in the hopes that some of you have had similar issues and maybe somebody has developed software or strategies that solve the problem. Here is the issue. I am (well) over 70 1/2 and perhaps foolishly, bagged away my life savings into tax-deferred investment vehicles. This creates an asset management problem. I have a taxable account that my RMDs flow into. Each year I have to liquidate equities to produce enough cash OR move whole funds from the tax-deferred accounts to the taxable account to meet RMD requirements, making sure I withhold enough transferred cash to meet income tax requirements (else I get a penalty). Note that the taxable account must also be included in any asset management strategy. Add to this picture the issue of tax efficiency of the taxable account as it grows in size.
The problem: it is cumbersome to try and manage any kind of investment diversification and tax strategy for portfolios scattered across taxable and tax-deferred accounts, especially when one has to be careful to move enough cash to meet RMD income tax requirements.
Has anyone developed software (maybe an opportunity?), spreadsheets, or a strategy for managing this messy situation? Balances are dynamic, liquidations in a down market sometimes require taking losses on equities, and trying to execute a strategy, whether the bucket system or another allocation strategy, is tedious and time-consuming. Suggestions, anybody (not hire an advisor, please!)?
ps What would be particularly helpful is to have a solution utilizing ITA portfolios and their built-in risk assessment.
When November rolls around I check the broker accounts where the tax deferred accounts are located and make sure there is sufficient cash in the accounts to cover the mandatory withdrawals.
Then I fill out the forms (on-line) specifying this is a one-time withdrawal. The most difficult decision is deciding what percentage to send to the Federal Government and what percentage to send to the state. I have a good idea what percentage to allocate to each based on historical experience. The remaining percentage is then allocated to taxable accounts.
I don't see the problem any more complicated that what I describe above. Perhaps I don't fully understand the problem.
Lowell, one immediate problem is one may be forced to liquidate equities at a loss in a down market to raise the RMD cash. That is not a disaster and perhaps unavoidable, but undesirable.
The first basic problem is the following. Suppose I have an investment strategy, e.g., the bucket system (or pick any other investment strategy). The first issue is managing that strategy across taxable and tax-deferred accounts. And, what about tax efficiency in the taxable account that doesn't exist in the tax-deferred account? Or, does one manage the taxable account according to one strategy and the tax-sheltered account according to another strategy? That adds the complication of managing two accounts with two strategies.
In the end, the goal is to preserve capital in retirement while providing income for living expenses.
I maintain that this is a complex issue, or maybe I don't understand something.
If one is extremely careful about investing, one would manage tax deferred accounts differently than taxable accounts. I don't pay too much attention to the differences. I have sufficient losses in the taxable accounts to last me a few lifetimes. (vbg).
I carry sufficient cash in tax deferred accounts near the end of the year to cover charitable contributions and taxes.
If one is using one of the ITA models there are likely sell recommendations that will raise the necessary cash for taxes sometime in the fourth quarter.
Lowell, thanks. I wonder if other ITA members are in the same boat, i.e., having significant tax-sheltered investments requiring RMDs into a growing taxable account? Both must be managed. If so, would it be worthwhile to put forward an article on an approach to structuring taxable and tax-sheltered accounts using ITA portfolios? This article would consider target risk factors appropriate for one's age. Such an article would certainly be helpful to me.
@ernies - The primary difference between taxable and tax deferred accounts, as I see it, is to try to keep high income generators in the tax deferred accounts and growth oriented securities in the taxable accounts. Otherwise, I handle them in much the same manner.
Generally, an individual will have only one tax deferred account. This could vary if one held different jobs and the funds were never merged.
As for taxable accounts, I see this is where one develops diversification of management models. This is what I emphasize with the Copernicus, Schrodinger, Sector BPI Plus portfolios, etc.