Transcript:
Easan Arulanantham:
You know, is there any time like a best time of the year to take your arm DS?
Tom Vaughan:
Yeah, this is this a question that came in, actually, earlier this week. And we were looking at this and a majority of our clients take their RMDs at the end of the year. And the reason for that is because the average year is positive in the stock market. So I think it’s we looked this up today was 73% of the time going back 94 years, 73% of the time, the stock market is up for the year. So let’s say for example, you have to take out 10,000. And that 10,000, if you left it till the end of the year, like December beginning, December, is now worth 11,000, you only have to take out the 10, you take out the 10, the other 1000 gets to stay in the account and continue to grow tax deferred. Investing and and planning and what have you is all about probability. So there’s a higher probability that the account is up at the end of the year, well, there is 27% of time where they were, you know, if you look at that, for the market is down, and you’d been better off taking it at the maybe the beginning of the year. But again, it’s a probability scenario, you’re going to be right more often by waiting for the end, you’re in that situation. There are some other scenarios though, that kind of play into this one is somebody who wants to do a Roth conversion that year, and maybe every year, but they got a we got a program in place, we got a lot of clients we’re doing this with.
And so when you do a Roth conversion, you have to take your Required Minimum Distribution first from that account, before you do the Roth conversion, to kind of changes the dynamic, because ideally, you want to do the Roth conversion at a low point in the market. So if I’m going to convert $100,000, if the markets down 10%, if I do it at that point in time, and I move it over to my Roth, and then the market jumps up another 10%, I just made that tax free growth in my Roth, instead of having that 100,000 grow back in my tax deferred account, I made money on it, it’s great, got it back. But I just made that tax deferred and said tax free around have a tax free. So our ideal scenario, and this is difficult to accomplish. But an ideal scenario might be to look at Roth conversions now. Because it’s down. But if you’re taking your RMD, now, you’re also taking your RMD when it’s low, which isn’t ideal either, because, you know, the requirement of distribution calculation is based on the end of the year value for last year. And so let’s just say I suppose, take out 5%, based on this calculation, if the value of your account drops, you might be taking out 6%, just because it’s slower. So if you’re going to do an RMD, I mean, Roth conversion, you might be better off taking it kind of early, like in January, kind of the beginning of the year, just so that you can, you know, make sure that you don’t have some drop. However, you could also make an argument to wait till the end of the year, just because again, on average, the market is up. So you could take your RMD right before you take your Roth conversion in early December. You know, so it’s, it’s, it’s a little hard because there’s no crystal ball, you could make an argument for taking in January if you’re going to do a Roth conversion. But again, a majority of our clients are actually taking it in December for the fact that they can get more growth out of it before it goes. Anyway, that’s, that’s the scenario is very fascinating. It’s, it’s all kinds of different pieces that fit into that, that’s for sure.
Easan Arulanantham:
Yeah, there’s no perfect time. Like, if we have, you know, hindsight is 2020. So like, say like, for this year, it was great if you were able to take your RMD January 1, for example, because of the market is down on the year so far. Yeah, but we don’t know where the year is gonna end. You know, if that year ends 10% up, then it’s like totally worth it. So if you kept that RMD till like the very end.
Tom Vaughan:
Yeah. This reminds me of one of my favorite sayings. So the Super Bowl was happening. It was in New Orleans actually, at the time the power went out. It was the 40 Niners in the Baltimore Ravens 40 Niners driven down the field, they’re really I think they’re inside the 10 yard line, Colin Kaepernick throws three passes to Michael Crabtree in the end zone. If they catch it they probably when there wasn’t much time left over but they didn’t catch it. And so the announcers were talking to the coach Jim Harbaugh at the time, you know, if you you know, if you look back now but you’ve thrown it to somebody else or or run the ball or you know, done something besides three passes to the same guy, and he said coulda woulda shoulda is undefeated and ever since I heard that I’ve been saying that to myself, because that’s true and investing right? It’s coulda woulda shit is under vesting on on undefeated and That’s true with all of these different types of things. I do think they’re you play probabilities, so that you kind of do as much as you can. But sometimes those probabilities don’t work. And you just have to be careful of kind of beating yourself up mentally, too hard about these different things, kind of pick a path that has a higher probability, and hope for the best. Because we don’t control what the market does.
You know, I’m having to make some adjustments to my overall analysis for the year because of Ukraine’s invasion, you know, I didn’t have that in as a certainty when I was looking at things at the beginning of the year. And it’s just it, you make adjustments to the new inputs, and you just kind of keep going. And one of the things the Federal Reserve talked about just recently is how much they’re going to be looking at things differently now, because Ukraine, and the market responded very positively this week to the testimony, because I think they’re concerned with that, too, that, you know, what does this situation Ukraine mean? Yeah. And so how do we adjust to that, so this fit factors into when you take your RMD, there’s kind of it’s hard to tell, I probably play the probabilities and just kind of go with that. And you might be trying to split hairs here a little bit by getting too refined, and, you know, too perfect. I think sometimes we all do that, you know, that that can sometimes come back to bite us, it just it certainly creates a lot more work and consternation versus something sort of automated, you just at the end of the year, you take your RMD and you do your do your your conversion. And you figure out that mountain conversion at the end of the year, because maybe you know, more of your tax situation at that point, too. So there’s other things you could do to maximize that. But that’s pretty easy. You know, as a strategy, it’s kind of hard for us because we get so many things happening right at the end of the year that we’re having to deal with. But otherwise, it’s I think there’s, it’s, there’s some simplicity for the clients there.
Easan Arulanantham:
Yeah, yeah. And when you’re like maximizing something, you know, gain that extra one or 2%. You know, it’ll add up over time. But is it worth the extra stress and effort to get that? Yeah, those things and so, you know, sometimes it’s better to be a little bit more laid back about it.
Tom Vaughan:
Yeah, yeah. And you might not get that extra one or 2%, which is a problem. Because you don’t know, you know, you sell it out, you think you’re gonna convert it this low point, and then there’s a lower point, you know, or whatever it is, or the market skyrockets when you weren’t expecting it to you know, so it’s it’s, there’s that’s, that’s, I mean, that’s what makes it interesting. This is not a boring scenario for us looking at what’s happening, you know, between the tax law changes, the different things that are happening in retirement, the number of variables that are coming into the stock market, I mean, it’s definitely an exciting thing to look at it. It never ceases to be interesting as far as that goes.