A Second Look At RMD And IRMAA Issues With A Dose Of Fixed-Income Duration Planning And Yield Investing

This past week has been good for my equity portfolio. Still, I will admit that my conservative portfolio has underperformed compared to the equal weighted S&P 500. My long-term perspective leaves little for me to do other than reinvest dividends in fixed-income instruments. To the extent that I have advocated listening to the Federal Reserve (Fed), my judgment regarding yields has been on the mark until the past month or two. I expected an additional .25% rate hike. Recent Consumer Price Index and Producers Price Index data triggered a fall in yields and in turn, a broader equity mini-rally. The Market has decided that there will be no rate hikes and potentially a number of rate cuts in 2024. More on that later.

In my last article, I focused on mitigating Medicare Part B and Part D premiums by remaining cognizant of the Income Related Monthly Adjustment Amount (IRMAA). Five days after my article was published, the 2024 Medicare Parts A & B Premiums and Deductibles were announced. Unmarried, most important to me was the $103,000 threshold for avoiding the IRMAA. Assuming that future inflation will rise no less than 2% annually, I am well positioned for the 2025 and 2026 tax years.

I also discussed planning ahead for the Required Minimum Distributions (RMDs). A comment I received from a reader is worth sharing. An individual can complete an “in-kind” distribution of securities from a 401(k) to a taxable account (i.e., brokerage account) equal to their RMD. Transactions are valued using the market price at the time of the transfer. The tax basis of the securities changes to equal the value at the time of the transfer. The holding period for the securities also resets. The benefit in completing an in-kind distribution is that an investor is safeguarded from market volatility. Selling securities in a 401(k) only to repurchase them in a taxable account may take a few days. This past week is a perfect example of how a brief market surge (or fall) can be missed.

In turn, one negative of an in-kind transfer is that the actual value of the transfer in unknown until it is completed. Unlike cash, the security may reprice before the transaction is completed. This issue can be addressed by completing an in-kind transfer a few hundred or thousand dollars less than required and then completing a second RMD in cash in the specific dollar amount necessary.

Allow me a disclaimer of what I have written. I failed to find a specific IRA reference regarding “in kind” distributions in Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs), as well as other IRS sources. I was able to find a couple of articles that discussed the transaction (Charles Schwab and R.L. Brown Wealth Management). Unfortunately, neither provided an IRS reference.

I am still in a tax-planning mode. On November 9^th, the IRS published tax inflation adjustments for tax year 2024. I updated my tax projection spreadsheet with the new tax brackets and standard deduction. Once again, I am in a good-news bad-news scenario. By reinvesting dividends and interest to fixed-income and with significantly higher yields, my taxable investment income in 2023 is 70.6% higher than in 2022. I project a more modest 6.1% increase in total taxable investment income in 2024.

I am already invested in high dividend paying equities, enjoying a qualified dividend tax rate of 15%. Staying disciplined, I am not going to change my current allocations between equities and fixed income for the sole purpose of decreasing my income taxes.

Now back to the current state of the economy. There seems to be a hunger for good news and thus, an overreaction to single points of data. We may be in the midst of a soft landing, justifying recent market moves. I do not believe there is enough data and far too little certainty in the immediate future to forecast 2024 rate cuts. I hear the echo of “higher for longer.” I also know that 3% inflation is not the same as 2%.

Here is where humility grounds my investment perspective. I have mentioned extending the duration of future fixed-income investments. I like my current earnings and do not want to revert to lower yields. Always at the ready of creating a new spreadsheet to analyze my investments, I have listed all my certificates of deposit (CD) and bond investments by date, noting in what account they reside [brokerage (B), ROTH (R) and 401(k) (K)]. I documented their par value and their maturity year. I have mapped out how I intend to invest all maturities between now and December 2024. I can change my mind when the time comes to reinvest. Still, by reviewing the chart, I will be revisiting my thought process and will have to justify to myself that there is a reason to veer away from my original plan. Below is a fictional sample. You may find it a worthwhile tool.

Finally, in search for yield, I compared the yields of FDIC insured CDs and uninsured AAA Agency bonds. I currently own three Agency bonds with maturities in 2027 and 2028. Their 3.6% yield, at the time of purchase, seemed worthwhile.

Currently, in the secondary market, I noted a divergence in non-call protected 2028 Agency yields from a high of 5.9% to a low of 4.46%. Similar CDs yielded from 5.547% to 4.609%. Interestingly, call protected CDs at a high of 5.03% (low of 4.466) yielded better than Agency CDs at a high of 4.833 (low of 4.346). The moral to this exercise is that though risk is rewarded when assuming a callable note, it is not always rewarded when comparing CDs and Agency bonds.

I did not have it in mind to illustrate a variety of issues that an investor must weigh when taking responsibility for their investments. And yet, that is what has resulted. The year-end is a time of review and planning. Whether taxes, Medicare premiums or fixed-income investments, I hope this sampler informs your efforts.