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  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]
    "This is not a concept that should be encouraged as it is in violation of the IRS regulations, that requires the tax be withheld at the time of the income. It can be cause for IRS penalties."

    Well, sort of.

    You can certainly pay quarterly estimated tax that matches that quarters income tax...or because you may have the IRA custodian withhold part or all of the distribution and send it to the IRS, you can qualify for the tax withholding safe harbors....making your total household withholdings equal to at least 90% of your tax, at least 100% of the previous years tax (110% if your AGI is over, I believe, $150,000) or if your tax liability is less than $1,000. As long as your withholdings meet at least one of those, you don't have to pay quarterlies, and a withhold you do on a TIRA withdrawal in December is considered by the IRS to be withheld equally each month over the tax year. Meeting one of these safe harbors will avoid any under-payment penalty.

    And then there's this as described by Natalie Choate....After your RMD withdrawal in January, shortly thereafter do another withdrawal to cover the tax on the RMD and the Tax on this second withdrawal, have the custodian withhold 100% of it and send it to the IRS, and within 60 days replace the second withdrawal. This works to keep as many dollars as you can in the tax deferred TIRA...if that's what you would like to do. Of course, it assumes you have the extra cash and you haven't done an indirect rollover within the past 12 months.

    Mar 12, 2015. 04:51 PM | Likes Like |Link to Comment
  • Retirement Strategy: Selling One Dividend Aristocrat And Buying Another Makes Sense When Reaching For Income [View article]
    Thanks RS...and I enjoy reading yours. In fact, you are the first one to look at replacing the income stock you're selling.

    And I just noticed...the heading for the two columns I replied above with got cut off. The first column of metrics is WBA and the second ED. Most would probably already deduce this, but thought I might mention it anyway :-)

    Mar 11, 2015. 06:37 PM | 3 Likes Like |Link to Comment
  • Retirement Strategy: Selling One Dividend Aristocrat And Buying Another Makes Sense When Reaching For Income [View article]
    Hi RS
    This is a subject I find most interesting!

    So the question I'd ask....was replacing WBA with ED consistent with the primary investment goal (of the vast majority of retirees) of reliable and inflation-growing income? Let me try some numbers....

    You don't give the basis in the shares of WBA, but since you have 'very solid gains', lets say your basis is $60/share. This would be a LTCG at sale of $23.11/shares, X 200 shares = $4,616 (less $8 trade cost). If you're in the 25% or higher Fed tax bracket, this will be a tax of $692 (15% LTCG tax rate).

    So this leaves you with a net (83.11 X 200) - 16 - 692 = 15,914 to put towards ED.

    At the current price of $59.73, this means you can buy 266 shares (plus $26.82 in cash for fractional shares), which at the current dividend of $.65/qtr = $692/year at the current dividend. With the WBA dividend of $.3375/qtr X 4 X 200 = $270/yr

    Looks like a good decision! But wait, there's one more criteria we need to look at: Income Risk. I mean, you could sell WBA and go to something like WMC with a current 18+% yield and REALLY improve your least for a while. But you really can't compare WBA and WMC, can you. They are two different income animals for reasons I probably don't need to go into. So can you compare the income risk of WBA and ED? Without going too deeply into fundamental details, here are what I consider the most important comparative income-risk metrics....


    2014 Div-Net OpCF POR______31%_______26%
    2013 Div-Net OpCF POR______24%_______28%

    2014 interest-to-Net OpCF____<1%_______25%
    2014 interest-to-Net OpCF____<1%_______23%

    1 year Div Growth rate_______11%_______2.4%
    5 year Div Growth rate_______21%_______1.5%
    10 year Div Growth rate______21%________.9%

    Anything jump out at ya?

    The POR looks good for ED and ok for WBA, considering their industries...actually, ED looks very good!. WBA has virtually no debt to deal with in an increasing interest rate environment, while ED looks ok for a regulated utilitiy, but clearly will carry more interest rate risk. But the major difference is how dividends have grown and, likely, how they will continue to grow.

    Even at a 10% growth rate, it will take 14 years for the faster growing WBA dividend to reach the slower growing ED dividend, and 22 years for the nominal cumulative dividends of WBA to catch up to the cumulative total provided by ED (sorry, too hard to show that Excel SS here). And if WBA can sustain an average annual 15% dividend growth rate, those catchup-years drop to 9 years and 15 years, respectively.

    Bottom line: based on these assumptions, the move to ED was probably a good one, depending on your time horizon, actual tax due and your need for current income.

    And note: none of this comparative analysis looks at 'gains', as it simply does not matter except to the extent of increasing the tax bill thus reducing the amount available to reinvest (taxable accounts). This calculation would look even more favorable to the above investment objective if you had NO GAINS.

    Mar 11, 2015. 04:32 PM | 7 Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]

    Proof positive that we're all learning!

    Mar 9, 2015. 01:45 PM | 1 Like Like |Link to Comment
  • Market Sell-Off Makes Vodafone PLC An Income Opportunity [View article]
    VOD is an interesting study

    Here is the 10 year dividend to Net OpCF

    2005 .....23%

    and the 5 trailing year return on investments to Net OpCF


    VOD clearly had a few rough years, and from the statement of cash flows, they have been liquidating some assets that seem to have improved their ability to convert investments into cash flows. The POR is high, even for a utility. Last year's dividend growth was 10.9% and the year prior was 5%.

    Like most Euro stocks, the dividend is paid biannually.

    Although the numbers are not as consistent as I'd want them to be, at a 5.4% CY, the income investor is being compensated for this income risk.

    Mar 9, 2015. 01:41 PM | 1 Like Like |Link to Comment
  • Tapping Into The Dividend Secrets Of Connecticut Water [View article]
    If one can meet income needs through a 2.8% yield and an annual dividend growth rate of 1.5% to 3% per year, CTWS should definitely be a consideration.

    Mar 9, 2015. 01:03 PM | 1 Like Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]

    Interesting idea.....

    You do your annual RMD with shares in-kind at the start of the year and then use the cash from these dividends during the year...that may be Fed tax free if they are qualified and you're in the 15% pay the RMD tax. Had you left the shares of (whatever) stock in the TIRA and transferred them in-kind at the end of the year, all the dividends would have been ordinary income.

    Sounds like a good strategy! In fact, sitting here and thinking about it, I can't think of any reason not to use this strategy. I mean, the RMD is fixed, its got to come out at some point. If the RMD isn't needed for living expenses, wouldn't it make sense to always do it as you've described?

    Mar 9, 2015. 12:48 PM | 2 Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]
    Hi Earl

    Thanks for sharing your thoughts. Always good things out there to intellectually chew on!

    Mar 9, 2015. 11:28 AM | Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]

    There are two issues you raise: The first is using the cash build-up in the TIRA that is used to pay the tax on the RMD that is in excess of the real 4% annual withdrawal, and that there will also be tax on this cash withdrawal. That was an oversight on the above sheet that I've since corrected (in my exchange with FinancialDave) by multiplying the cash withdrawn from the TIRA by 1+MTR (Marginal Tax Rate).

    The second issue is the idea of using an in-kind transfer to meet the amount of the RMD that is in excess of the real 4% annual withdrawal. I think I've been consistent in using this throughout the 3rd and 4th sheets, that look in closer detail at the future cash flows. The reason for using the in-kind transfer instead of sell=>cash=>with... is to maintain the portfolio dividend without having to sell=>cash=>with... the same income stock shares + any transaction costs.

    Not sure what you mean by 'in-kind transfer to fund the cash'. On sheets 3 and 4, the in-kind transfers are added back to column O that is the sum total of the TIRA (investments and cash) + In-Kind transfers = Income portfolio, that is providing each year's required household income.

    And yes, until the TIRA owner figures it out, this does get confusing. But if its confusing here on paper, it'll definitely be confusing when the future day arrives and we have to sit down and do the real calculations on what and how much goes where.

    Thanks for your concern.

    Mar 9, 2015. 10:50 AM | Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]

    One of the better assessments I've read...particlularly the 3rd paragraph.

    I used to do portfolio management for a fee-only investment advisory firm, and what you've described is a good description of my experience. What most retirees were extremely fearful of was 'losing our savings'. I'm not aware of any objective studies on this topic, but from my experience (and that only), the average retiree going into retirement is risk averse, associates the stock market with Bernie Madoff and requires a great deal of hand-holding in their early retirement years, until their confidence builds and they are more comfortable with the stock market.

    But the willingness to take time and learn and let go of old biases is one of the hardest obstacles for retirees to overcome...and this kind of stands to reason for this age group.

    Thanks for the cogent comment

    Mar 8, 2015. 04:06 PM | 1 Like Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]
    Hey FreeSoccerMom
    Looks like this is your first post at SA. Welcome to this...and hopefully future....discussions on such an important topic.

    Interesting ideas. Are you comfortable with a building a SS to show how this would flow out? It would certainly be a better way of managing dividend payers whose dividends are showing increased risk. But how much cash would this generate relative to need? At what rate would stock have to be sold to meet income need AND to pay tax on distributions?

    Intriguing idea!

    Mar 8, 2015. 03:56 PM | Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]
    Hi David and thanks for your comments.

    I think we're talking about two different things. The sheets above are long term in order to address the question of whether a pure income portfolio may be able to generate sufficient dividends such that dividend paying stocks will not have to be sold and the portfolio managed for total return....or would this simply not be possible without taking considerable and likely unsustainable income risk. It is not intended to be a year-to-year assessment of how to calculate your taxes and meet your quarterly estimated payments. In short, it is a strategic..not

    Mar 8, 2015. 03:19 AM | Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]
    Hey Dave
    Good to hear from you!

    "However, if you were using a 7.4% total return then when the RMD's got above 7.4% (which is I believe age 87) the portfolio balance should be going down - this seems hard to reconcile as it is growing."

    In the first sheet, the TIRA balance peaks at age 88 and then begins declining. Yes, this is due to the RMD rate increase growing up to the portfolio return rate.

    What makes the dividend inordinately large at age 95 is the long term sustained 8% dividend growth rate without underlying price increase (the presumed 5.4% capital appreciation remains constant...which in real life it wouldn't...unless it were something like a Royalty Trust). But my point in doing this is to show how a low yield/high growth dividend portfolio can be used early in retirement, while the dividends rise and 'catch up' to portfolio income needs so that additional shares no longer need to be sold. And the reasons companies like JNJ have sustained a low (sub 4%) dividend yield over the years is because it has had a 45 year TR of 13.2%, meaning its price has 'kept up' with its dividend growth.

    "Also, I believe one of your original goals seemed to be to sort out how much of your dividends were being taken up in taxes?? Did I miss that column somewhere?"

    My goal was not to correlate dividends and taxes...but to see if growing dividends by themselves can be sufficient to meet household income needs that grow each year with inflation AND pay the added tax due to the RMD. IOW, a TIRA whose distributions...elective and mandatory...can be managed without selling any stock. By 'funding' the RMD with a transfer in-kind, cash can be preserved, overall (in and out of the TIRA) dividends preserved and this cumulative cash used to pay the additional RMD tax. The third sheet with the 4.1% yield and 4% dividend growth rate pretty clearly shows that it can.

    And since you've mentioned this, I realize I did make an oversight...although I don't think its a very big one. The cash in the TIRA used to pay the excess RMD tax is not being shown as itself being taxed. Thus the cash taken from the TIRA should be increased by the marginal tax rate. So instead of taking out $100 to pay the RMD tax, if the marginal rate is 15%, I should be subtracting $115 from the 'Net Cash in the TIRA.

    Thanks for helping me find that!

    Shows that no matter how thorough one tries to be, there's always something.

    But Thanks generally for your queries.

    Mar 8, 2015. 01:37 AM | 1 Like Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]
    "For example, if I was to take a qualified ROTH IRA distribution of $100K at age 62 and also receive 15K from SS, and 10K in earned income, would I have to pay taxes on the SS?"

    No. Qualified Roth withdrawals, as of today, are not included in Provisional Income (today called MAGI) in determining how much of your SS must be included as ordinary income.

    How much of your household SS you must include as ordinary income can vary between 0% and 85%. Remember, SS is not taxed separately...when it must be included in income, it is taxed as ordinary income.

    Author: IRA: A Quick Reference Guide
    Mar 8, 2015. 12:17 AM | 3 Likes Like |Link to Comment
  • The Challenge Of Managing An Income Portfolio In A Traditional IRA [View article]

    Your inference is 'big-picture' and is is exactly right! TIRAs and their cash-flow management oddities is really just part of one's total investment picture in retirement...they are not an island to themselves.

    To prevent this from complicating this articles any more than it already is, one of my assumptions was that this couple had little taxable account savings. This is possible but unlikely, as most 64 year olds do have taxable savings. So it would be a great exercise to tie one's tax deferred accounts and their cash-flow eccentricities with a much more sane taxable account where the owner(s) have far more control and are not forced to do anything with the account balance that they don't wish to do. your question....yes, it would be good to tie together the tax deferred and the taxable, something I would have to give a good deal of thought to...but to which another wise contributor here may wish to undertake.

    Mar 7, 2015. 03:04 PM | Likes Like |Link to Comment