Inflation-protected in taxable, short-term bonds in Inherited IRA?

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jefmafnl
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Joined: Sun Mar 25, 2007 7:11 am

Inflation-protected in taxable, short-term bonds in Inherited IRA?

Post by jefmafnl »

I recently inherited some money, which (for now) is in money market funds in a (previously existing) joint taxable account and in bond funds in an Inherited IRA. We are recent retirees with a life expectancy of 10 to 20 years. We plan to deploy these funds to rebalance to our present AA: 40 / 60, with the 40% divided evenly between Short-Term Treasury Index Fund (VFISX for Investor shares, or VSBSX for Admiral shares) and the Inflation-Protected Securities fund (VIPSX for Investor shares, or VAIPX for Admiral shares). (Please, no discussions here about the choice of the short-term rather than intermediate-term fund, or about a Treasury fund vs. a broader fund.) The Inherited IRA has no RMD's but need to be emptied within 10 years, which we would probably spread over 2029, 2030, and 2031 (to delay the huge Dutch taxes, see below).

Our tax-free and tax-deferred spaces were previously very limited. We hold primarily the Inflation-Protected Securities Fund and the Real Estate Index Fund (VGSLX for Admiral shares) in our Roth IRAs, and primarily the Short-Term Treasury Index Fund in our Traditional IRAs. The Inherited IRA presently has a roughly 50/50 mix of the two bond funds. Stock funds, Short-Term Treasury Index Fund, and a bit of the Inflation-Protected Securities fund are in our taxable account.

As we have decided to keep our primary residence in the Netherlands, at least for now, our tax situation is as follows.
We pay high taxes in the Netherlands...without being rich, one quickly gets to a marginal 49.5% bracket on pension income and IRA distributions, and a marginal 1.35% bracket on assets (everything except Traditional IRA's). Due to the US-Netherlands tax treaty, in the US we pay a maximum of 15% on all dividends (even non-qualified). US taxes on capital gains and interest are offset by our Dutch taxes.

The question now is, which bond funds should we hold in which accounts? In order to minimize growth in the Inherited IRA, should we put the short-term fund in the Inherited IRA and the inflation-protected fund in our taxable account? Or does the lack of annual RMD's in the Inherited IRA suggest a different strategy?

Thanks!

J
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grabiner
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Re: Inflation-protected in taxable, short-term bonds in Inherited IRA?

Post by grabiner »

If the tax rate on the IRA is relatively flat, then you should just assume that the tax authorities own X% of the IRA and you own the rest tax-free; there isn't a need to minimize growth. (Often, for US investors, the tax isn't flat, which is why it is usually better to put stocks in a Roth IRA; if the traditional IRA grows too large, you will pay tax in a higher bracket or have RMDs you don't need.)

It is still better to hold lower-yielding bonds in your taxable account, since the taxation in the IRA will be about the same for either type of bonds. Even if there is a tax bracket issue, the tax bracket won't depend much on which bonds you hold in the IRA.
Wiki David Grabiner
Topic Author
jefmafnl
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Joined: Sun Mar 25, 2007 7:11 am

Re: Inflation-protected in taxable, short-term bonds in Inherited IRA?

Post by jefmafnl »

Thanks David!

But, since the Dutch tax rate of 49.5% on withdrawals from the Inherited IRA is far higher than the 15% maximum US tax on dividends in the taxable account, don't we want to put assets in the IRA that will have the smallest increase in value (including reinvested distributions in the IRA)?

J
ivgrivchuck
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Re: Inflation-protected in taxable, short-term bonds in Inherited IRA?

Post by ivgrivchuck »

jefmafnl wrote: Fri Oct 22, 2021 3:17 am Thanks David!

But, since the Dutch tax rate of 49.5% on withdrawals from the Inherited IRA is far higher than the 15% maximum US tax on dividends in the taxable account, don't we want to put assets in the IRA that will have the smallest increase in value (including reinvested distributions in the IRA)?

J
No.

If we presume that the tax rate will always be 49.5%, then:
$1M IRA = $505k Roth IRA
and you should invest accordingly.

Any expected future tax rate changes of course change the equation.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
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