The recent thread about TIPS ladders and RMD withdrawals made me question the manner in which I was modeling a recently built TIPS ladder in PRC.
To model the ladder in PRC, I removed the money from my IRA account balance that was used to purchase the ladder, and then added an annuity that generated income each year for the duration of the ladder. I set the annual increase in the (nominal) annuity payout equal to my assumed inflation rate given the real return offered by TIPS.
I think this approach will mess up RMD calculations because the TIPS don't show up as retirement assets in PRC.
What's the right way to model TIPS ladders in PRC? (I did search through the manual and forum posts.)
Thanks in advance.
@malik182 If the TIPS are actually held within the tax-deferred account, my suggestion would be to make TIPS an asset class to which some portion of your tax-deferred account is allocated.
Stuart
@smatthews51 Stuart, appreciate the quick reply. The TIPS ladder is in a separate IRA account.
I decided to calculate what RMDs would be for this IRA account and it looks like the RMDs are very close in magnitude to the income generated by the ladder. So if the ladder income is withdrawn each year (or at least moved into a taxable account), then modeling the ladder as a (taxable) annuity doesn't seem to have any drawbacks other than a small error in RMD calculations. Does that sound right?
I do what Stuart suggested above. Under Asset Allocation for the Tax Deferred, I have a TIPS asset class and whatever percentage of the IRA TIPS is, I use that percentage. I set my ROR to 2% because that is what my ladder is. For Roth Conversions of other funds in the IRA, I play around with the tax bracket to limit the amount converted since I don't want to convert any of TIPS that have not matured yet.
@malik182 As long as that annuity income is taxed as ordinary income then, yes, that sounds right to me.
Stuart
@kiwibobs Thanks for the detailed information, Robert. I find the annuity approach easier to work with and wrap my head around. And it works out in my case b/c the income generated by the TIPS ladder is pretty close to estimated RMDs for the IRA account in which the ladder is housed.
I tried to take the approach where I created a TIPS asset class and assigned a percentage of my TD accounts to it (100% in my case). To model the fixed income from the ladder, I created an entry in the Scheduled Withdrawals Table with a fixed amount each year for 30 years. I also created historical data for my TIPS asset class. Finally, I set my withdrawal order with my TD account listed last to avoid withdrawals beyond the fixed, scheduled withdrawals.
So far so good. The problem I'm seeing is that at age 74 Pralana is adding an RMD in addition to the scheduled withdrawal, even though the scheduled withdrawal is already more than enough to cover the RMD. The result is that my TD account runs out of money before my "ladder" can fully pay out.
Is there something that I can do differently to model the desired behavior?
There was an earlier thread about this, see
My imperfect fix was to only have scheduled withdrawals for the years before RMDs kicked in. After that point, the RMD withdrawals effectively include the income generated by the TIPS ladder since, in my case, the annual RMDs exceed the income generated by the TIPS ladder.
Hoping that, as indicated by Stuart in the thread linked above, the online version of PRC will treat scheduled withdrawals during RMD years as counting towards RMDs. That would allow for better modeling of TIPS ladders in PRC.
Thanks for the response. Modeling as an annuity for now as you suggested above.
I didn't see any more recent thread on this topic.
I have a 12 year ladder to social security (ages 58 to 70) held in a traditional IRA. I originally modeled it as "additional income" of $XXX per year for 12 years, where $xxx is the value of each rung in today's dollars (including accumulated interest distributed with the return of principal) and setting that income growth to with 0% Real growth
The problem is that it's effectively telling the system I am actually withdrawing that money, with the tax consequences, when I don't really have to withdraw, it can stay in the IRA, and even be reallocated to other assets as each rung mature. How do I tell the system my tIRA will get an injection of $XXX each year, instead of having it be considered income?
Also depending how much of hte tIRA I use before RMD age it might miscalculate the RMDs
In Boldin and ProjectionLab, I found a way to instruct the tool that money would appear in the tIRA at regular interval for some years.
EDIT: I found another thread that suggests modeling it as its own asset type in my tIRA. I need to think how that would work, the idea of a TIPS ladder is that you don't want to touch each rung unless it matures.
I can model TIPS as their own asset class, either figure our the average nominal return of the entire ladder (not each bond) which would be around 2% real, or I think I'd be happy to figure out the total value of the ladder in today's dollars and enter that as the account initial value and set the growth to 0%. For example if I had a ladder that pays $50K a year for 10 years, I could call it $500K initial balance with a 0% growth.
The whole idea of a ladder is to not touch each rung until it matures, and that's the part I can't figure it out. How do I tell it that this $500k generates $50K a year for 10 years starting in 6 years?
In other programs I exclude the TIPS ladder from my accounts (it messes up my net worth but I don't care), I then set up a transfer from an external account into my tIRA for $50K for 10- years starting in 6 years (just an example). The reason I transfer into tIRA is that my ladder is also in a tIRA today. In my case the ladder will have fully matured before RMD ages, so "hiding" the tIRA that holds it from the system doesn't impact RMDs.
What I'm doing in Pralana today is that I added an income stream of $50K a year (0% growth) for 10 years starting in 6 years, taxed as ordinary income. The problem is that it only works if I actually spend the rung the year it matures, which I may or may not do. If I don't or not all of it, then RMD calculations will be thrown off, so would any recommendations on Roth conversions, which is really what I'm trying to explore.
Pralana allows withdrawals from another account but not deposits from another account. I would really like to see this ability.
Now I'm looking at whether I could model each rung as an inherited tIRA, that would allow me to control the timing, that would allow to put it in tIRA I think, but I'm worried there are weird rules that will affect how it's treated
Ooops Pralana supports only one inherited IRA per person, so that won't work.
Any suggestions?
Quick reminder that there is a potential new feature for fixed income listed in the Pralana online > Resources> Feature Voting:
Add Fixed Income Assets feature -- Add a new feature to support holdings of Fixed Income Assets. These assets would be held outside the current account structure and, like a Personal Loan, would include a cash outlay to purchase the asset followed by an annual income stream and possible future return of capital.
Consider voting for this. It would help with TIPs ladder and other bond and CD ladders too. However, if it's built "outside the current account structure"—similar to how personal loans are managed now—I'm unsure whether it would be included in the Roth conversion optimizer.
