(PUB) Morningstar FundInvestor - page 551

17 Morningstar FundInvestor March 2013
you maximum control over when you realize capital
gains and could enable you to defer them many
years into the future. But if you’d rather keep things
simple and low-maintenance—a worthy goal
once you’ve hit RMD age—broad stock market index
trackers and exchange-traded funds have also
historically done a good job of keeping a lid on tax-
able capital gains while providing a lot of diver-
sification in a single low-cost shot. Tax-managed
mutual funds do the same. If bonds are in order,
use Morningstar.com’s Tax-Equivalent Yield calcula-
tor (found on the site’s Tools tab) to determine
whether municipal bonds or taxable bonds are a
better option given your state and federal tax rates.
Strategy 3: Deploy in Line With Asset-
Allocation Needs
RMDs typically come out of your account toward
year-end, and that’s also a good time to revisit your
portfolio’s overall asset allocation, especially because
removing the RMDs from your IRA can throw your
current asset mix out of whack with your targets. If
you plan to reinvest your IRA distribution in a Roth
IRA or taxable account, you can deploy it into the
asset class(es) in which your portfolio is light. At the
same time, bear in mind your time horizon for the
RMD proceeds you’ll be investing. Generally speaking,
you’ll want to invest IRA assets to meet near-term
RMD needs in liquid assets such as cash or short-
term bonds. Taxable assets would be next in the
queue for withdrawal and therefore can step out a
little on the risk spectrum, while Roth assets
would generally be last in line and therefore should
be the longest-term in nature.
Strategy 4: Assess an In-Kind Distribution
If you’re not holding cash to meet your RMDs,
you may run into a situation where you’ll need to sell
longer-term securities to meet your distribution
amount. If you’d like to maintain an economic position
in those securities or you don’t want the withdrawal
to affect your asset allocation, your financial-services
provider may be able to provide you with an in-kind
distribution—meaning you take those shares out of
the IRA and move them to a taxable brokerage
account. Your new cost basis in the securities is the
price on the day of the distribution. The hitch is that
you’ll owe taxes, just as you would with any other
RMD, but your RMD won’t have yielded any new cash.
So you’ll need to have the money on hand to pay the
taxes that are due. This maneuver can be particularly
attractive when less-liquid securities are involved.
Strategy 5: Consider Charitable Giving
Finally, if you’re not using your RMD s and you typi-
cally make charitable contributions every year, you
can donate all or part of your RMDs, up to $100,000,
directly to a qualified charity. By doing so, you won’t
owe income tax on the amount of the donation.
Ask your financial-services provider to deal directly
with the charity to handle the transfer—to avoid
having the RMDs count as taxable, it’s important that
you never take possession of the money.
This move is generally preferable to pocketing the
RMDs, donating to charity, and taking a charitable
deduction later on. By sending your RMDs directly to
charity, you don’t see the increase in adjusted
gross income that generally accompanies an RMD.
Lowering your AGI, in turn, makes it more likely
that you’ll qualify for deductions and credits, which
typically hinge on AGI. Keeping your AGI down
also reduces the chance you’ll be affected by the
3. 8% Medicare surtax that went into effect ear-
lier this year. œ
Contact Christine Benz atchristine.benz@morningstar.com
RMDs Force Your Distribution Rate Higher as the Years Go By
Age Distribution Period (Years) Distribution (%)
70 27.4 3.65
75 22.9 4.37
80 18 .7 5.35
85 14 .8 6.76
90 11.4 8.77
95 8 .6 11.63