To cut tax bill, should you time your RMD based on the stock market?

Q:  Would it be wise to consider market timing when taking your required minimum distributions? I am assuming that the tax due on your RMD withdrawal would be calculated based on the market value of your combined funds at the time of withdrawal, and,  therefore, it would be better to do the withdrawal when the market seems to be at a low point for the year vs. a high point? — Carol Allen, Duluth, Minn.

A: You’ve posed an interesting question, says Jeffrey Levine, an IRA technical consultant with Ed Slott and Co. in Rockville Centre, N.Y. Is there a market timing element when it comes to taking an RMD?

“I suppose that to a very minor degree, the answer could be yes, but if anything, it would probably bode well for taking the RMD at a point after the account value has swelled, rather than when it dropped,” says Levine. “This way, you’d maximize the tax-deferral aspect of the account — the pre-RMD growth would have occurred inside the tax-deferred wrapper of the IRA.”

Of course, since no one can really time the market, Levine says waiting until late in the year to take an RMD does, over time, generally help maximize tax deferral.

That said, your question shows a misunderstanding of two issues, according to Levine. One, the tax due on an RMD withdrawal is determined based on a person’s overall income and deductions, not the market value of the combined funds.

And two, the actual amount of the RMD — not the tax on it — is calculated based on the prior year-end balance. “Thus, gains or losses that occur during the year do not impact that amount,” says Levine. “The RMD remains the same.”

Levine gave this example: If you have a $100,000 account balance on Dec. 31, 2014, and your RMD is $4,000 but on July 1, 2015, your account is worth $125,000, the RMD is still $4,000. Similarly, if the account value dropped to $75,000, the RMD would still be $4,000.

“Ultimately, when to take your RMD may be influenced by a number of issues,” says Levine.

For more on the subject, read The Case For and Against Taking Your RMD Early in the Year and Retirement Plan and IRA Required Minimum Distributions FAQs.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch. Got questions about money? Email  rpowell@allthingsretirement.com .