When taking RMD, better when market "high" or "low"

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backroad
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When taking RMD, better when market "high" or "low"

Post by backroad »

Hello Bogleheads,

- Is there a rule of thumb to determine whether it is better to take the first RMD from a Rollover IRA in kind when the market is high (lesser number of shares get transferred to taxable brokerage) or when it is low (greater number of shares that could potentially bounce back in the after tax account)? How does one analyze this question?

- Also, if anyone is hitting 70.5 this year, are you waiting to take the first RMD as late as possible to see whether the new law delaying RMDs moves the age to 72?

Thanks.
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FiveK
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Re: When taking RMD, better when market "high" or "low"

Post by FiveK »

It would be great if the market spiked high, you took the RMD with minimal shares, then the market tanked so you could convert remaining shares to Roth at minimal cost, and then the market jumped and stayed high while you lived luxuriously on your obscenely high, tax-free, Roth withdrawals.

Lacking that, take your best guess and good luck!

See also RMD timing site:bogleheads.org - Google Search.
JPM
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Re: When taking RMD, better when market "high" or "low"

Post by JPM »

Buy low. Sell high. Simple. Not easy
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Re: When taking RMD, better when market "high" or "low"

Post by RadAudit »

Don't know. What I do is take the RMD from the bonds in the portfolio. Then, I rebalance when the stocks are up. Sometimes it takes a while for the stocks to be up enough so this approach takes a few years of RMDs to be in bonds.

The rule I'm using is not to sell stocks at a loss - well, as much as possible - in retirement.
Last edited by RadAudit on Sat Aug 03, 2019 9:02 pm, edited 1 time in total.
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Leif
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Re: When taking RMD, better when market "high" or "low"

Post by Leif »

I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
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backroad
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Re: When taking RMD, better when market "high" or "low"

Post by backroad »

Thanks Leif and FiveK. You both make convincing arguments. Note that your suggestions are the opposite of each other. :D
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FiveK
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Re: When taking RMD, better when market "high" or "low"

Post by FiveK »

backroad wrote: Sat Aug 03, 2019 11:05 pm Thanks Leif and FiveK. You both make convincing arguments. Note that your suggestions are the opposite of each other. :D
Hmm...they seem pretty much the same...?
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Leif
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Re: When taking RMD, better when market "high" or "low"

Post by Leif »

FiveK wrote: Sat Aug 03, 2019 11:13 pm
backroad wrote: Sat Aug 03, 2019 11:05 pm Thanks Leif and FiveK. You both make convincing arguments. Note that your suggestions are the opposite of each other. :D
Hmm...they seem pretty much the same...?
I agree with FiveK.
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Re: When taking RMD, better when market "high" or "low"

Post by MathIsMyWayr »

Leif wrote: Sat Aug 03, 2019 9:00 pm I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
A tax-deferred investment, e.g., 401(k) or IRA, is better than a taxable investment. If you plan to reinvest the RMD, it is better if it is high (higher than Dec. 31, last year). You can keep more shares in IRA.
John Z
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Re: When taking RMD, better when market "high" or "low"

Post by John Z »

Your second question first: From what I remember reading in the spring, it doesn't really matter that much in the long run whether you start RMDs at 70.5 or 72. If you are retired and need the money you will still withdraw. If you don't need the money you can reinvest it. Been retired since 2012 so it doesn't affect me.

For your first question, I did a lot of research right before retiring because I didn't want to make mistakes while withdrawing, both in the type of withdrawals (stocks or bonds) and the percentage per year. I wanted to maximize and efficiently make withdrawals.

My research led to McClung's Living Off Your Money which can be found here: http://livingoffyourmoney.com/ where you can scan the ToC and download the first 3 chapters with Chapter 3, "Surveying and Selecting an Income-Harvesting Strategy" containing the exact information I was seeking. You have to decide how to make withdrawals and then decide on what percentage and whether it will be fixed or variable.

Here is what Chapter 3 covers:

Income-Harvesting Strategies
Bonds-First Strategy
Age-Based Strategies: 100-Age, 120-Age, and Glidepath
The Guyton PMR Strategy
The Parker Strategy
The Weiss Strategy
The OmegaNot Strategy
The Three-Bucket Strategy
The Enhanced Two-Bucket Strategy
The Rational Strategy
The Prime Harvesting Strategy— A New Strategy
Other Strategies Investigated But Not Included

I never wanted to have to sell stocks at a loss so I chose "The Prime Harvesting Strategy". In summary:
Withdrawals are always funded by bonds, providing a buffer from stock volatility
Bonds are replenished from stock sells only when the total market is up (i.e., stocks are never sold at a loss
if possible). The author gives details on implementing every strategy.

I use 10%-15% increase in stock from my original value to convert stock to bonds. The author suggests a 20% increase.

Then you have to decide the percentage to withdraw which is covered in Chapter 4. I have the text and after reviewing the withdrawal percentages offered I went with a simple 4% fixed withdrawal. This method has been working very well for me and I sleep at night knowing what the plan is. His backtesting shows 100% success rate in a 30 year retirement with a 40/60 portfolio allocation.
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Leif
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Re: When taking RMD, better when market "high" or "low"

Post by Leif »

MathIsMyWayr wrote: Sun Aug 04, 2019 12:20 am
Leif wrote: Sat Aug 03, 2019 9:00 pm I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
A tax-deferred investment, e.g., 401(k) or IRA, is better than a taxable investment. If you plan to reinvest the RMD, it is better if it is high (higher than Dec. 31, last year). You can keep more shares in IRA.
When I say "reinvest the RMD" I mean to invest in taxable. My plan is if I have extra after an RMD distribution I will invest that in stock. A lower price gives me more shares. I plan to keep that invested for my lifetime. My beneficiaries will get a step up in cost basis. I cannot put the RMD in a tIRA. Already past that age. Also RMDs cannot go in a Roth IRA. But, even if it could I would want a low stock market to get more shares (buy low).
Last edited by Leif on Sun Aug 04, 2019 12:42 pm, edited 2 times in total.
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TomatoTomahto
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Re: When taking RMD, better when market "high" or "low"

Post by TomatoTomahto »

I don’t understand the question perhaps, so bear with me. Under what circumstances would you want to sell low? Obviously if doing Roth conversions, it would be nice if the market swung 99% during the conversion, but that’s lottery thinking.

OP, I think you are getting confused because of the “number of shares” consideration. Number of shares don’t matter; would you rather transfer a dime or two nickels from tax deferred to taxable?
Okay, I get it; I won't be political or controversial. The Earth is flat.
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Re: When taking RMD, better when market "high" or "low"

Post by rbaldini »

With regard to the first question: It doesn't matter because *you don't know if the market is high or low.*

Sure, it may be high or low relative to the recent past, or relative to when you purchased it. But that doesn't matter now, because you can't decide to take a distribution in the past. What matters is whether it is high or low *compared to the future*, which is the only alternative time to take distribution. Because you don't know the future, and probably can't even predict it better than chance, there's nothing actionable here.

This applies to any advice that derives from the adage "buy low, sell high".
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Leif
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Re: When taking RMD, better when market "high" or "low"

Post by Leif »

rbaldini wrote: Sun Aug 04, 2019 12:30 pmthere's nothing actionable here.
True. We get whatever market we get. But I think this is a useful discussion because it may help in understanding some of the dynamics around RMDs, taxes, and planning.
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Re: When taking RMD, better when market "high" or "low"

Post by MathIsMyWayr »

Leif wrote: Sun Aug 04, 2019 12:11 pm
MathIsMyWayr wrote: Sun Aug 04, 2019 12:20 am
Leif wrote: Sat Aug 03, 2019 9:00 pm I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
A tax-deferred investment, e.g., 401(k) or IRA, is better than a taxable investment. If you plan to reinvest the RMD, it is better if it is high (higher than Dec. 31, last year). You can keep more shares in IRA.
When I say "reinvest the RMD" I mean to invest in taxable. My plan is if I have extra after an RMD distribution I will invest that in stock. A lower price gives me more shares. I plan to keep that invested for my lifetime. My beneficiaries will get a step up in cost basis. I cannot put the RMD in a tIRA. Already past that age. Also RMDs cannot go in a Roth IRA. But, even if it could I would want a low stock market to get more shares (buy low).
According to a common understanding, tax-advantaged is better than taxable in most of the cases. You want to keep IRA as large as possible, but you have to take the RMD which was fixed as of Dec. 31 of last year, and spend or direct it to taxable. The dollar amount of RMD is fixed, but you want to take the smallest number of shares out of IRA, e.g., the smallest fraction of IRA. How? Hope the market is high.
Roth conversion is the only time when a low market is advantageous.
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Re: When taking RMD, better when market "high" or "low"

Post by Nowizard »

Since no one really knows when the market will go up or down, we just take ours early in the year. There are reasons some would not do this, but it makes it simple, a key trait to investing comfortably, particularly in retirement.

Tim
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Leif
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Re: When taking RMD, better when market "high" or "low"

Post by Leif »

MathIsMyWayr wrote: Sun Aug 04, 2019 1:17 pm The dollar amount of RMD is fixed, but you want to take the smallest number of shares out of IRA, e.g., the smallest fraction of IRA. How? Hope the market is high.
Roth conversion is the only time when a low market is advantageous.
I agree that the dollar amount of the RMD is fixed. However, let's look at what we call the "market". Normally that is equities. So if equities are low I would sell my bonds. My bonds are mostly TBM and TIPS. If equities are down there is a fair chance my bonds are the same or up. If my bonds are down likely not as much as equities. So, I would sell bonds in the tIRA for the RMD and buy equities in taxable with funds I don't need for living expenses. This provides some rebalance as well. I always want to sell what is high and buy what is low.

However, let's say my IRA was 100% equities. Let us also say I wanted to reinvest 100% in equities in taxable. The amount I need to withdraw is fixed. Would I prefer (no control of course) stocks to be high or low? I say low. This is because I will pull more shares out of my tIRA. You may say this is a wash since I'm selling low and buying low. However, I think pull out more shares, when low, will provide for lower RMDs in the future.

I think it is kind of funny. During my accumulation years I'm working like crazy to get money in my IRA. Having been successful in that, and now in retirement, I'm working like crazy to get money out of my IRA (particularly stocks), to reduce my future RMDs.
Last edited by Leif on Sun Aug 04, 2019 2:22 pm, edited 4 times in total.
Big Dog
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Re: When taking RMD, better when market "high" or "low"

Post by Big Dog »

Nowizard wrote: Sun Aug 04, 2019 1:43 pm Since no one really knows when the market will go up or down, we just take ours early in the year. There are reasons some would not do this, but it makes it simple, a key trait to investing comfortably, particularly in retirement.

Tim
I've been struggling with this very question and plan to take down the RMD's quarterly (a little more complex than Tim's but Vanguard can automate). (sort of dollar-cost average redemptions?)
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Re: When taking RMD, better when market "high" or "low"

Post by JW-Retired »

rbaldini wrote: Sun Aug 04, 2019 12:30 pm What matters is whether it is high or low *compared to the future*, which is the only alternative time to take distribution. Because you don't know the future, and probably can't even predict it better than chance, there's nothing actionable here.
I invariably take the 2 RMDs we have as soon as possible at the beginning of the year. Mainly this is just because I don't want to stew over it.

However, I do think this "action" means the market is unlikely to have changed very much from the Jan Dec 31 RMD value. I like that.
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Last edited by JW-Retired on Sun Aug 04, 2019 3:28 pm, edited 1 time in total.
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Re: When taking RMD, better when market "high" or "low"

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general).
backroad wrote: Sat Aug 03, 2019 8:23 pm - Also, if anyone is hitting 70.5 this year, are you waiting to take the first RMD as late as possible to see whether the new law delaying RMDs moves the age to 72?
Please note that the new law is still pending legislation. Conjecture on what "might" happen is off-topic. Here's why: Political comments and proposed tax plan remain off-topic
LadyGeek wrote: Sun Nov 20, 2016 12:01 pm Speculation about future legislation is prohibited by forum policy, see Unacceptable Topics:
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Re: When taking RMD, better when market "high" or "low"

Post by colodane »

Depending upon how you have your RMD structured, this could be a meaningless question.

In my case, my yearly RMD is set up to occur on 1 April each year, and it is simply a transfer from a MM fund in my Vanguard IRA account to a MM fund in my Vanguard taxable account. I always have enough in the IRA MM to accommodate the RMD amount come April

If needed, I keep the RMD $$ in mind during the year when I'm doing asset rebalancing in the IRA account.

So essentially a cash-to-cash transfer and no "market timing" or fund selections involved.

I
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Re: When taking RMD, better when market "high" or "low"

Post by MathIsMyWayr »

Leif wrote: Sun Aug 04, 2019 1:47 pm
MathIsMyWayr wrote: Sun Aug 04, 2019 1:17 pm The dollar amount of RMD is fixed, but you want to take the smallest number of shares out of IRA, e.g., the smallest fraction of IRA. How? Hope the market is high.
Roth conversion is the only time when a low market is advantageous.
I agree that the dollar amount of the RMD is fixed. However, let's look at what we call the "market". Normally that is equities. So if equities are low I would sell my bonds. My bonds are mostly TBM and TIPS. If equities are down there is a fair chance my bonds are the same or up. If my bonds are down likely not as much as equities. So, I would sell bonds in the tIRA for the RMD and buy equities in taxable with funds I don't need for living expenses. This provides some rebalance as well. I always want to sell what is high and buy what is low.

However, let's say my IRA was 100% equities. Let us also say I wanted to reinvest 100% in equities in taxable. The amount I need to withdraw is fixed. Would I prefer (no control of course) stocks to be high or low? I say low. This is because I will pull more shares out of my tIRA. You may say this is a wash since I'm selling low and buying low. However, I think pull out more shares, when low, will provide for lower RMDs in the future.

I think it is kind of funny. During my accumulation years I'm working like crazy to get money in my IRA. Having been successful in that, and now in retirement, I'm working like crazy to get money out of my IRA (particularly stocks), to reduce my future RMDs.
Which investment of IRA, stocks or bonds, to sell to meet RMD is meaningless at a given time since you can adjust the composition any way without cost. Theoretically you may convert the entire IRA to cash before taking RMD and re-allocate according to your desired AA. Re-investing RMD to taxable is just a mechanism of transferring a given amount from IRA to taxable (of course, there may be a tax on RMD). In the current hypothetical problem, you may feel lucky if the market (weighted according to the AA of IRA) is up when you take RMD since you preserve more of IRA after RMD. In other words, we only have to focus on the total value of IRA irregardless which, stocks or bonds, is up or down. Any other factors are irrelevant and only help cloud the picture.
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Re: When taking RMD, better when market "high" or "low"

Post by rossington »

MathIsMyWayr wrote: Sun Aug 04, 2019 4:21 pm
Leif wrote: Sun Aug 04, 2019 1:47 pm
MathIsMyWayr wrote: Sun Aug 04, 2019 1:17 pm The dollar amount of RMD is fixed, but you want to take the smallest number of shares out of IRA, e.g., the smallest fraction of IRA. How? Hope the market is high.
Roth conversion is the only time when a low market is advantageous.
I agree that the dollar amount of the RMD is fixed. However, let's look at what we call the "market". Normally that is equities. So if equities are low I would sell my bonds. My bonds are mostly TBM and TIPS. If equities are down there is a fair chance my bonds are the same or up. If my bonds are down likely not as much as equities. So, I would sell bonds in the tIRA for the RMD and buy equities in taxable with funds I don't need for living expenses. This provides some rebalance as well. I always want to sell what is high and buy what is low.

However, let's say my IRA was 100% equities. Let us also say I wanted to reinvest 100% in equities in taxable. The amount I need to withdraw is fixed. Would I prefer (no control of course) stocks to be high or low? I say low. This is because I will pull more shares out of my tIRA. You may say this is a wash since I'm selling low and buying low. However, I think pull out more shares, when low, will provide for lower RMDs in the future.

I think it is kind of funny. During my accumulation years I'm working like crazy to get money in my IRA. Having been successful in that, and now in retirement, I'm working like crazy to get money out of my IRA (particularly stocks), to reduce my future RMDs.
Which investment of IRA, stocks or bonds, to sell to meet RMD is meaningless at a given time since you can adjust the composition any way without cost. Theoretically you may convert the entire IRA to cash before taking RMD and re-allocate according to your desired AA. Re-investing RMD to taxable is just a mechanism of transferring a given amount from IRA to taxable (of course, there may be a tax on RMD). In the current hypothetical problem, you may feel lucky if the market (weighted according to the AA of IRA) is up when you take RMD since you preserve more of IRA after RMD. In other words, we only have to focus on the total value of IRA irregardless which, stocks or bonds, is up or down. Any other factors are irrelevant and only help cloud the picture.
It just depends on whether the goal is to preserve the IRA or deplete the IRA.
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Re: When taking RMD, better when market "high" or "low"

Post by MathIsMyWayr »

rossington wrote: Sun Aug 04, 2019 5:14 pm It just depends on whether the goal is to preserve the IRA or deplete the IRA.
Goal of depleting IRA? It may call for a very peculiar tax/IRMAA situation and/or certain benefits. Roth conversion is a way to preserve IRA by pre-paying tax for the benefit of future tax-free income and no RMD.
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Re: When taking RMD, better when market "high" or "low"

Post by Wakefield1 »

MathIsMyWayr wrote: Sun Aug 04, 2019 1:17 pm
Leif wrote: Sun Aug 04, 2019 12:11 pm
MathIsMyWayr wrote: Sun Aug 04, 2019 12:20 am
Leif wrote: Sat Aug 03, 2019 9:00 pm I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
A tax-deferred investment, e.g., 401(k) or IRA, is better than a taxable investment. If you plan to reinvest the RMD, it is better if it is high (higher than Dec. 31, last year). You can keep more shares in IRA.
When I say "reinvest the RMD" I mean to invest in taxable. My plan is if I have extra after an RMD distribution I will invest that in stock. A lower price gives me more shares. I plan to keep that invested for my lifetime. My beneficiaries will get a step up in cost basis. I cannot put the RMD in a tIRA. Already past that age. Also RMDs cannot go in a Roth IRA. But, even if it could I would want a low stock market to get more shares (buy low).
According to a common understanding, tax-advantaged is better than taxable in most of the cases.
At least with the taxable account,you get the lower Cap Gains Rate (if long term) and "Qualified Dividends" Rate for certain kinds of income. Whereas in the Tax Deferred 401 or IRA (not Roth) you probably will end up paying the full income Tax Rate on such increase when distributed.
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Re: When taking RMD, better when market "high" or "low"

Post by MathIsMyWayr »

Wakefield1 wrote: Sun Aug 04, 2019 8:36 pm
MathIsMyWayr wrote: Sun Aug 04, 2019 1:17 pm According to a common understanding, tax-advantaged is better than taxable in most of the cases.
At least with the taxable account,you get the lower Cap Gains Rate (if long term) and "Qualified Dividends" Rate for certain kinds of income. Whereas in the Tax Deferred 401 or IRA (not Roth) you probably will end up paying the full income Tax Rate on such increase when distributed.
This is a common misunderstanding. In the taxable account, you start with an after-tax amount (ordinary income tax rate, t1). However, in the case of 401k or IRA, you start with a full pre-tax amount, but the entire appreciated amount is subject to an ordinary tax rate at the time of withdrawal (tax rate of t2). What you have in your pocket after paying taxes when withdrawal:
  1. Taxable: (1-t1)*(1+G1*(1-tc))
  2. Tax-deferred: (1-t2)*(1+G2),
where tc is the capital gains tax rate, and G1 and G2 are appreciation for taxable and tax-deferred, respectively.
Because of a tax drag, G1<G2, and t1>t2 in general.
Even in the case of t1=t2 and G1=G2, tax-deferred will end up more than taxable because of tc.
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Re: When taking RMD, better when market "high" or "low"

Post by Ron »

colodane wrote: Sun Aug 04, 2019 3:37 pm Depending upon how you have your RMD structured, this could be a meaningless question.

In my case, my yearly RMD is set up to occur on 1 April each year, and it is simply a transfer from a MM fund in my Vanguard IRA account to a MM fund in my Vanguard taxable account. I always have enough in the IRA MM to accommodate the RMD amount come April <snip...>
We do the same,except we draw our RMD the first business day of the new year from our FIDO/VG MM accounts, which are funded primarily by distributions throughout the previous year - with the vast majority coming in the month of December.

We don't look to invest the remainder RMD in taxable after we have paid our taxes on the withdrawal, along with taxes due on all other income (SPIA, pensions, SS). The excess is used for retirement expenses with the rest going into short term savings for travel and "what if" situations that may occur along the way.

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Re: When taking RMD, better when market "high" or "low"

Post by GerryL »

Leif wrote: Sat Aug 03, 2019 9:00 pm I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
Yes. I was thinking the same thing. If the market is down and you end up having to take more shares out of your IRA, this can help reduce future RMDs a smidge, if that's what you're going for. As long as you don't need the money to meet expenses and can reinvest, seems to be a positive.
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Re: When taking RMD, better when market "high" or "low"

Post by kaneohe »

GerryL wrote: Sun Aug 04, 2019 10:47 pm
Leif wrote: Sat Aug 03, 2019 9:00 pm I think it depends on what you do with the RMD. If you are using it for spending then you want it high (sell high).

However, if you are doing a Roth conversion (maybe pre-RMD) or if you plan to just reinvest the RMD, then I think it is better if it is low. That gives you more shares.
Yes. I was thinking the same thing. If the market is down and you end up having to take more shares out of your IRA, this can help reduce future RMDs a smidge, if that's what you're going for. As long as you don't need the money to meet expenses and can reinvest, seems to be a positive.
I agree w/ RMD when market low if reinvesting. As an extreme example assume you have 100 in TIRA and RMD is 4. Market crashes to 4 and you take RMD leaving TIRA w/ 0 and 4 in taxable account. Eventually market recovers so you have 100 in taxable account If you took RMD when market was high , you have 96 in TIRA and 4 in taxable account. You have traded ordinary income tax rate on TIRA for CG rate on taxable account.
If you are in 12% ordinary/0% CG bracket . 100 in taxable account has 96 in CG but pay 0 in taxes so has after tax 100.
96 in TIRA pays 11-12 in taxes so ends up w/ 84 + 4 = 88 after tax.
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