Ep. 124 – IRAs – Required Minimum Distributions

Do you have any strategies surrounding your Required Minimum Distributions (RMD)?

Required Minimum Distributions (RMDs) references money in a tax-deferred vehicle like a 401k or the traditional IRAs. You need to think and plan for the Required Minimum Distributions as you will be required to start paying taxes when you get to age 72.

In this episode of the Secure Your Retirement podcast, we talk about the RMDs and strategies to keep in mind when planning for them. We explain how to calculate your RMDs using the IRS life expectancy formula and why you should start planning as early as possible.

In this episode, find out:

  • Understanding RMDs tax benefits and how they apply to your pretax type account like IRAs.
  • You can take your money out of the RMD on the year you turn 72 and before 12/31 of the same year.
  • The IRS life expectancy formula to calculate your annual RMD.
  • How you can defer your first-year income after you turn 72, and when it is advisable you do so.
  • How to withdraw your RMD income from different IRAs.
  • Avoid mistaking your RMD for the year to avoid the up to fifty percent penalty.
  • How you can convert your RMD into a Roth prior to age 72 and increase your growth and income.
  • Reinvest your money after taking it out of the IRA.
  • Qualified Charitable Distribution (QCD) – how to specifically not pay taxes while giving money to charity.
  • Have a plan as early as possible rather than delaying to the last minute.

Tweetable Quotes:

  • “You don’t want to mistake your RMD for the year because that can result in a hefty penalty of up to fifty percent.”– Murs Tariq
  • “You can take out your Required Minimum Distributions pay the tax, and then reinvest whatever is left over.”– Radon Stancil


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the Full Transcript:

Radon Stancil :Welcome everyone to our Retirement in Action version of the podcast. We’re certainly glad to have you with us today. And today, we’re going to tackle a topic that some of you who are listening maybe already know about, have to deal with. Some of you are planning for it to occur at some point in the future. We are going to be talking about required minimum distributions. In short, we call them RMDs and what is this? What does it apply to? Why do we need to know about it? We’re going to walk you through all of those different aspects, but when it comes to required minimum distributions, what we are referencing is we are referencing money that is in a tax deferred vehicle, like a 401(k), 403(b), 457. Any of those company plans that you put money in and you deferred the taxes on that to sometime in the future, we’re talking about IRAs, traditional, not Roth. And so we’re going to talk a little bit about that here in a few moments.  
 So anytime I’ve deferred taxes, think about this. What I did is I made a deal with the IRS and the deal was this. Hey, I don’t want to pay the taxes when I’m younger and making a lot of income. I want to defer this into the future. Well, the IRS says, hey, no problem. We’ll let you defer this into the future. But when you get into the future, we want our cut. And then they give us a definition of what that future is. And today, or now, it is age 72. So the way it works says is that when I turn 72, it used to be 70.5. I am open to this idea of needing to take required minimum distributions. Now that’s not a bad thing. It’s just a thing we need to plan for. So there’s a bunch of things we need to think about when it comes to this. So Murs, can you kind of take us through all these different things to think through you?  
Murs Tariq:Yeah. And I like what you said there, RMDs are not a bad thing. Like Radon said, we always have to remember. And we’ve been putting money in these accounts for 30, 40 years and getting the tax benefit from them. But at some point we’re going to have to pay the taxes on. And that is at age 72. Once again, just to say, it’s on your pre-tax type of account. So sometimes we’ll get the question of does a Roth have it, or does it apply to a brokerage account? And so the case is it’s just on your IRAs. So Radon said that we have to start them at age 72. Sometimes we get the question of, well, maybe I turn 72 in June of that year. And so do I have to wait until June of that year to start taking my required minimum distributions?  
 The answer is no. The IRS makes it very specific that it’s in the year that you turn 72 is when you’re required to take some money. This gives you the ability to strategize a little bit. You don’t have to wait until that June month. You can actually start in January while you’re still 71 and take it throughout the year, or you can wait all the way until December. The big thing to remember is in the year that you turn 72, that requirement has started. And we’ll talk about how that requirement is calculated towards the end of the episode. But that requirement is started at age 72 and now you have to start taking money out of there. A key thing to remember is that it has to be out by December 31st. So calendar year end, the money that you required, let’s say it’s $10,000, has to be out of the IRA status by calendar year end.  
 So a lot of times this gets confused with our tax filing. If you’re filing your taxes in April and you can typically kind of play with whether or not you want to do a contribution to an account for a tax benefit in April. This is not the case for RMDs. RMDs have to be taken by 12/31 to be counted for that year. The way that they, without getting too specific, but basically the IRS has come up with a formula that says, hey, at age 72, based on some numbers, based on actuarial tables, we have a good idea as to how much longer you’re going to live, your life expectancy. And so they’re going to put a factor to that and that ultimately gives us an idea as to how the calculation is done. So it’s a life expectancy number. You’re going to take it every single year. It’s not a fixed number. It’s going to rotate a little bit or ebb and flow a little bit every single year based off of the calculation.  
Radon Stancil :Hey Murs, I thought since we’re on that topic, why don’t we do a quick example?  
Murs Tariq:Yeah.  
Radon Stancil :And we’ll just walk somebody through the example. So at age 72, Murs just talked about this table, just to keep that in mind, this table is based on a life expectancy table that the IRS created. It’s not about your health or anything like that. It’s across the board, whether you’re a male or a female, and what they do is they give you that calculation and use that as a divider. So let me just kind of give you an example. Let’s say that a person had $500,000 combined in all of their different IRA accounts. So you could have an IRA at Vanguard, an IRA at Fidelity, an IRA at TD Ameritrade. It doesn’t matter. You just total all of those up. And what you do is you look and say, what is my balance on December 31st of the prior year?  
 So let’s just pretend that I somehow hit miraculously right on the nose, $500,000 on December 31st. I would then take that number and I would divide it by my factor. At age 72, the IRS says that my life expectancy at that point is 25.6 years to go. So I would divide 500,000 by 25.6 and that will equal my required minimum distribution, which is $19,531.25. So I can take more than that, but the IRS says I am required to take that out. In all essence, that’s going to be added to my income. There’s no flat rate on the tax, but there is going to be added to my income and then I’m going to be taxed on that income. So I just wanted to walk you through that example. And also Murs, if you don’t mind, going back to this thing about 72, can you explain what we just went through in that calculation and how a person has to think about the very first year? Because sometimes people understand that they can wait till April 1st of the next year. So can you walk through that scenario?  
Murs Tariq:Right. So in your first year, you turn 72, whatever year that is that you turn 72, there is 1 exception and that is on your very first RMD year. So previously I said that you want to take it by 12/31 every single year. On your first year, there is one exception and you can actually defer your first RMD until the following year, into April. So you may say, well, yeah, I want to defer it as much as possible and some people do that. Sometimes it does make sense to do that. But the thing you have to be aware of is you’re taking … So you’re deferring your first year, but you’re still going to be on the hook for your second year. So let’s go with that example of Radon just calculated roughly about $20,000 on that $500,000 total IRA value, 20,000 had to come out in the first year. Well, you’ve still got to do that calculation again for year two. And let’s just assume it’s 20,000 again.  
 Well, now you’ve got a calendar year where you’ve got 40,000 of income that you’re adding to your overall income for the year because you decided to defer the first one. Now once again, that can make sense, that’s something that we would strategize on. For the majority of people, it makes sense to go ahead and take it in the first year that you have it. A situation where it could make sense to defer is maybe you’re still working and you’re not going to be working in the next year. So it makes sense to defer that income for the first year. But once again, I want to clarify that’s only for the first year, then after that, 100%, you have to take it by 12/31.  
 Another thing I want to point out, Radon made a good comment about you can add up all of your IRAs. So sometimes we’ll get the question of, well, I’ve got an IRA in five different places. Do I have to take it from each one individually? And yes, you can take it from each one individually if you’d like. That means you’re just getting five checks into your bank, or you can take an aggregate amount and take it from one. The IRS doesn’t care, as long as they are getting their taxable revenue every single year. So if they add up all the accounts and they know that John Doe is supposed to be having an RMD of 20,000, they don’t care where it comes from. If it comes from all of them or only a couple of them or just one of them, as long as they get their tax revenue, they are happy.  
 Now, one thing we don’t ever want to miss is mistaking our RMD for the year, because that can result in a pretty hefty penalty of up to 50%. So you definitely don’t want to miss your RMD. It’s very important. The IRS, as we know, loves their tax revenue, they’re going to make sure that they’re going to get it. So that’s really some things to remember as we get closer here to the end of the year, whether you’re in an RMD year or not, or you’re starting to think about, hey, what is this going to be? That’s just the quick things to remember as we’re approaching the end of the year. But now we want to talk a little bit about some strategies around RMD and what we can be thinking about in the future if we haven’t approached that time just yet.  
Radon Stancil :All right. So we’re just going to hit three strategies. We’re not going to go into them in extreme detail, but just high level to keep in mind.  
 Strategy number one, Roth conversions. Now I want to be clear. You cannot take your required minimum distribution and convert that into a Roth. That is not allowed. So what is the strategy? Well, if I know that I am going to, at some point have to take this money out and take a required minimum distribution, I can do Roth conversions prior to age 72 and reduce the amount of my IRA that’s going to be required. Why would I do that? Well, if I convert today, let’s say … Give you an example. Let’s say I’m 62. And I want to come up with a strategy that for the next nine years, I’m going to convert as much traditional IRA as possible. I can convert it at what I know my tax bracket is today. And I can get that over into a tax free account because by the way, there is no required minimum distribution on a Roth.  
 So I get it converted. I get to 72. My money now is growing in that Roth for as long as I live and I can live it to the next generation. And there’s never going to be tax due on that account again. I don’t have to worry about the required minimum distributions. Think about what occurs. If I’m 62 and I got $500,000 in my account and I grow at just 7.2% on average, I’m going to double my money in 10 years. So now I’ve got a million dollars. In a million dollars, now is I’m going to be taking out $40,000 plus a year that’s required. And that can continue to go up if my account is growing. So I’m controlling it. I’m just coming up with a strategy to control it.  
 Now we are not saying that this makes sense in all cases, but one of the things that Murs and I do is we run examples or illustrations, or we simulate this idea of what if you did this conversion and you’re able to look at all of that scenario. And a lot of times it makes sense to do that. So that’s strategy number one, Roth IRA.  
 Strategy number two, just as one to keep in mind. The IRS says that you have to take the money out of the IRA. The reason why, they want you to pay the taxes. They do not say you have to spend the money. So you can take out your required minimum distribution, pay the tax, and then whatever’s leftover, reinvest it. And a lot of our illustrations, we show the unused required minimum distributions going into another account and actually continuing to grow that account so that you still have that money in the future. Sometimes people think I got to take the money out of the IRA, it’s gone. No, only the tax is gone and that’s good enough, but you are not required to spend the money. So number one, Roth convergence. Number two, reinvest the money after taxes. Now there’s a third one. I’m going to let Murs talk about this one.  
Murs Tariq:Yeah. And so the third one is, it’s called a qualified charitable distribution. It’s also referenced to as a QCD. We have clients do them all the time and they make a lot of sense if you are charitably inclined. And so the way it works, let’s go with that example of you’ve got 20,000 of RMD that you have to take out this year. So one option is you take out 20,000, you pay the taxes on that full 20,000 amount, and then you do whatever you want with the money. Or maybe you are charitably inclined and you say, okay, well, I’m going to take out the 20,000, but I don’t need all of this. So I’ll give some of it to charity. Well, in that situation, you still paid the taxes on the 20,000.  
 Now where the QCD or the a qualified charitable distribution comes into play is let’s say you have an amount in mind that you want to give to a charity, whatever it is, let’s just say it’s $5,000. And you want to do it through your IRA. And you’ve heard of this thing called a qualified charitable distribution. Essentially, what you’re going to be able to do is reduce, so that 20,000 is now going to be reduced, not perfectly, but pretty close by that 5,000 or whatever the charitable amount that you do give. And so it’s a tax reduction. So you won’t pay the taxes on the charitable amount that you do give. Now it’s not as easy as cutting a check. It needs to be done very properly, very specifically. So let’s go to the case. If you decide to give 5,000, and let’s say that account is at Charles Schwab.  
 So you’ll give very specific instructions to Charles Schwab to say, I would like to do a charitable distribution on my IRA as part of my RMD. And here is how to make the check-out to. You’re going to make it out to whatever the charity is. You’re going to include a letter of instruction that has their address as to who to mail it to, attention to who or what amount. And then also the tax ID that’s going to go to it. The whole thing is that here you want to be hands off with that $5,000. You want the custodian to do all of this for you, so that it never looks like that money actually entered your bank account and it never entered your pocket. So now you’ve got 15,000 of taxable income and you’ve got 5 that you’ve given away and you didn’t have to pay the taxes on.  
 Once again, it’s a powerful strategy, if you’re giving away money, you may as well do it in an efficient and advantageous manner. So if you haven’t heard of a QCD, if you’re already in the RMD window, I would definitely think about it if you like to give money away.  
Radon Stancil :All right, just to close, there are strategies that you need to think about when it comes to planning for required minimum distribution. So think ahead. Don’t just wait until you’re 72 and say, okay, I’ll deal with that in the future. Let’s strategize on what would be your best overall plan? Don’t wait till the last minute. You’re hearing this podcast here really in the first of, right at the November time mark, timeframe. If you’ve not already taken care of your required minimum distribution, get that taken care of as soon as possible. The delay on this and getting it into next year and have a potential of a tax penalty, you don’t put yourself through that stress. So if you’re listening to this and you don’t know if you took your required minimum distribution, check it out, make sure you get it done.  
 Murs has already talked about this whole idea of the QCD. QCDs need to be done in a timely manner so make sure you get that done. Go ahead and get that processed. These things do not necessarily happen overnight. So my biggest thing is plan. Make sure you do it early versus later. We hope this has been beneficial and understanding required minimum distributions. We know we went through some number and some different bullet points. Go to our website, pomwealth.net, go to the blog page, and you will find our latest blog on this exact article or this exact content of information that has all of it listed there, all the numbers and everything. We do appreciate very much you listening and we hope you have a great week.