Required Minimum IRA Distributions: Timing is Everything to Maximizing Returns (Part 2)
Posted: Monday, May 10, 2010
by Jeffrey Diercks
InTrust Advisors
In part one of this article, we made the case that the proper timing of taking your required minimum distributions (RMD) could help you improve your investment results. We also showed how a 72 year retiree in a rising market would generally do better to wait before making his or her RMDs until the end of the calendar year due to the effect of compounding. Finally, we showed how to gauge the type of market (rising, falling or sideways) so you could make better decisions with regard to the timing of such RMD payments. In part two of this article, we want to get you some strategies that you can use to know what to do in each of the above market types.
Markets Likely To Decline
If you are early in the new tax year and you believe there is a significant chance of a market decline during the remainder of that year either because the current trend is down or because of negative market action, there is no time like the present to make that RMD distribution. This is because the distribution you make will hopefully be from a larger base of assets, unaffected by any possible market declines.
You can see in Table 1 that the RMD amount is unaffected by the market decline, but negative compounding on this balance results in a lower account value the longer you wait to make your RMD.
Assumes an 11% market decline in the year of the required minimum distribution.
Markets Likely to Rise
Conversely, if you believe there is a significant chance of a rising or Bull market in the current year or if you are in a upwardly trending market, it might be best to put off your RMD distribution until the end of the year. Since the size of your RMD will not be affected by market appreciation in the actual distribution year, this allows you to leverage the portion of the RMD that will represent tax withholding as long as possible.
Table 2 shows that waiting to make RMDs in a rising market or market that is likely to rise will usually result in a higher account value at the end of the year.
Assumes a 9% market increase in the year of the required minimum distribution.
Markets Rising but May Decline or Declining but May Rise
What if the market is rising, but you believe a significant decline may occur during the year? It may then be best to put off this distribution during the year until there is a confirmed market reversal (market trades below its 200 day moving average) and then make that distribution as soon as possible.
Alternatively, if the market is falling, but you believe it will reverse and head higher during the current year. It may be prudent to wait on your RMD and put off this distribution until the end of the calendar year. Hopefully you made the right call and end up with more net dollars.
In conclusion, an attempt to determine market direction and having a plan for your RMD should put you ahead in the long run. Even subtle improvements in portfolio performance compounds over time and can make a sizeable difference to you and/or your heirs.
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