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Help rebalancing parents' investments

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  • Help rebalancing parents' investments

    My parents need to rebalance by selling some stock funds and buying bond funds. I'm trying to advise them on which account to use. They are mid 70s, retired, with income from pension, SS, and investments. They have Roths, Traditional IRAs, and taxable accounts.

    For 2018, income will probable be around $90k, all from pension, SS, and RMDs from IRA, so most likely they will be above the threshold for married filing jointly to pay 0% long term capital gains. Is that correct?

    If so, should they rebalance out of stocks into bonds in the traditional IRA or the Roth? We are thinking it makes more sense to leave the higher stock percentage in the Roth. He doesn't need any of the Roth money to live on yet, and doesn't plan on using it. He mentioned to me also he wants to maximize our inheritance and minimize tax implications for any inheritance as well.

     

  • #2
    Is the 90k prior to deductions?  Remember, standard deduction goes up to 24k this year for MFJ, and that would drop taxable income to the 0% LTCG rates.

    At those rates, I think bonds make sense in the Traditional IRA. They may have some room to do Roth Conversions up to the rest of the 12% bracket.

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    • #3
      The Capital Gains brackets are based on Taxable Income and not AGI.  Also, only a portion of your parents Social Security benefits will end up being taxable. So if your parents are earning $90k (of which only a portion of SS is taxable) and receive a $24,000 Standard Deduction they will be under the 0% threshold for Capital Gains.

      The only account that could potentially generate capital gains from rebalancing is the taxable account.  The IRA's you can rebalance without any worry of tax consequences.  I would think about partial Roth Conversions of the Traditional IRA's while their tax rates are low.

      If your parents can currently live on the income they are receiving, they may not need much of a shift to more bonds.  Do you know their current asset allocation and what allocation you are thinking about moving to?

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      • #4
        Have to look at the whole picture with the pension (survival benefits?) and ss along with RMDs - balance that with the expenses and then determine the drawdown amount per year needed.   That will determine the rebalancing percentages more accurately.   The taxes and gains are all secondary but should come out relatively unscathed with the higher deductions.

        Too late for DAF for 2017

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        • #5




          Is the 90k prior to deductions?  Remember, standard deduction goes up to 24k this year for MFJ, and that would drop taxable income to the 0% LTCG rates.

          At those rates, I think bonds make sense in the Traditional IRA. They may have some room to do Roth Conversions up to the rest of the 12% bracket.
          Click to expand...


          So, I got more details, and it looks like they will be at taxable income of around $80k after the $26,600 of deductions (standard $24k plus $2600 personal for over age 65). So looks like we will rebalance in the traditional IRA. I like the Roth conversion idea, but tax bite might be too high for them at 22%. Thanks for the advice

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          • #6




            The Capital Gains brackets are based on Taxable Income and not AGI.  Also, only a portion of your parents Social Security benefits will end up being taxable. So if your parents are earning $90k (of which only a portion of SS is taxable) and receive a $24,000 Standard Deduction they will be under the 0% threshold for Capital Gains.

            The only account that could potentially generate capital gains from rebalancing is the taxable account.  The IRA’s you can rebalance without any worry of tax consequences.  I would think about partial Roth Conversions of the Traditional IRA’s while their tax rates are low.

            If your parents can currently live on the income they are receiving, they may not need much of a shift to more bonds.  Do you know their current asset allocation and what allocation you are thinking about moving to?
            Click to expand...


            They like a somewhat conservative asset allocation and have gradually decreased stock percentage as they have aged. They are at around 35% stocks. The rebalancing is mainly due to gains in the stock portion. They are keeping the same allocation.

            After getting more details from my dad, they will be at about $80k taxable, so will have capital gains tax. So, I think they will sell stock and buy bonds in the traditional IRA.

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            • #7
              35% stocks seems low for how much life they have left, but as it last them and they can sleep at night is fine.  Like you said, I would use the two IRA accounts to get to their target allocation.

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              • #8
                > He mentioned to me also he wants to maximize our inheritance and minimize tax implications for any inheritance as well.

                Ok, so they're in a non-capital gains tax bracket and they have Roth, 401k and taxable accounts.

                Assuming they're not going to be hit by estate taxes (what state are they in/how much money are we talking?), their #1 goal is to spend down what will be taxed on death-- the 401k. The taxable accounts will get their basis stepped up and the Roth won't be taxed.

                The goal is minimizing the $$ in the 401k for the long term. They do that by putting mostly non-risky assets there, as you already mentioned. If that's not enough bonds, put the rest in the Roth.

                As mentioned above, they should be doing partial Roth conversions all along to reduce what gets taxed on death. More here-- http://vanguard.com/pdf/s623.pdf. Once they finish that, they can tax-gain harvest with the taxable. That will let them rebalance cheaper in case they need to start (gasp!) putting bonds in a taxable account.

                If they ever run out of the 401k, they should tap the Roth. They should continue rebalancing by only purchasing bonds in the Roth. The taxable account gets used last and stays untouched as long as possible.

                But for now:

                Bonds in the 401k, more in the Roth if necessary. Stocks in the taxable.

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