Ep. 310 – Required Minimum Distributions – RMDs
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In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss a crucial yet often confusing topic for retirees: Required Minimum Distributions (RMDs). Joined by their colleague Taylor Wolverton, a Certified Financial Planner and Enrolled Agent, they break down the rules surrounding what are RMDs, how they’re calculated, and the updates brought by the Secure Act RMD changes. If you’re unsure about RMD rules 2025, or when and how much to take from your retirement accounts, this episode is for you.
Listen in to learn about the mechanics of how do RMDs work, from when to take RMDs to how they’re taxed and the penalties for missing one. The episode also explores RMD for retirement accounts like IRAs and 401(k)s, RMD tax rules, and even strategies like RMD and charitable giving. Whether you’re planning ahead or facing your first required withdrawal, understanding your obligations is key to effective retirement tax planning and preserving your wealth.
In this episode, find out:
· What qualifies as a required minimum distribution and who it applies to.
· Updated RMD start ages under the Secure Act RMD changes.
· How RMDs are calculated using the IRS Uniform Lifetime Table.
· The tax implications of RMDs and how to manage them effectively.
· Smart options for reinvesting or donating your RMD.
Tweetable Quotes:
“You can’t put RMDs back into an IRA or convert them to Roth—but you can reinvest them into a brokerage or give to charity tax-free.” – Radon Stancil
“Even if you don’t need the money, RMDs are required—it’s about paying back the taxes you’ve deferred for years.” – Murs Tariq
Resources:
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:
Required minimum distributions. If you have an IRA, a 401K, any of those deferred
plans, you need to listen to this episode all the way through. – We hope you’ve
been enjoying all the episodes from Secure Your Retirement. If you’d like to keep
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receive alerts when they come out. We’ve helped thousands of listeners get on the
path to securing their retirement. Now it’s your turn, Let’s dive in.
Welcome to secure your retirement podcast. Uh, today is an exciting day.
It’s always exciting when we can talk about taxes or something fun, like required
minimum distributions. And it’s so fun. We always have our own, very own in -house
enrolled agent, financial planning guru Taylor Wolverton. So Taylor, thank you so much
for coming on and talking with us and our listeners today. You’re welcome. So today
we are going to talk about what are called required minimum distributions. We call
them RMDs. And so there’s lots of rules around these.
And so we thought it would be a good episode to have Taylor come on and talk us
through all of these rules and how it works. So let’s just start off really simple
here, Taylor. Could you kind of just let people know what is this thing, RMD? Like
what is it, define it for us. – Yeah, so if you are the owner of an account that
is tax deferred, so that would include traditional IRAs, SEP IRAs,
simple IRAs, employer plans, like your 401 (k case or some depending on your employer
might be named a 403b or 457, any of those accounts once you reach a certain age
require you to take distributions each year from that account and pay the tax on
the distributions. And the point is really for the government to get the revenue
from those accounts since you have been deferring the tax for so long as you’ve
been contributing to it and had it, that once you reach a certain age, you’re
forced to start paying the tax on it so the government can collect on that revenue.
Yeah, that’s right. So we made a deal with the government to get some tax benefit
up front by putting into the 401(k)s or the IRAs. You get a tax benefit in that
calendar year, but then it comes back later on. And you mentioned at a certain age
that these RMDs are required minimum start. So Help us understand those ages because
there’s been some changes along the years here, right? Yes, the laws have changed
fairly recently so Prior to the end of 2019 the start age for RMDs was 70 and a
half then at the end of 2019 we got the first secure act which changed the RMD
age to 72 and then we got Secure 2.0 in 2023 that split the star age into
kind of different categories. So depending on your birth year now, that determines
your RMD star age. So for those born between the years 1951 and 1959,
the start year or your start age is now going to be three years old,
and if you were born in 1960 or later, then your RMD start ages 75.
So if you have family members who are talking to your neighbors about RMDs and they
said, “I started when I was 70 and a half or I started when I was 72,” and
you’re wondering what your start age is, that’s why. The laws changed, so it does
now depend on your birth year. So quick clarification, and this is the question we
get all the time in meetings is I turned 73 in May of this year.
So do I have to wait until May to start taking my requirement on distribution? It
does just depend on the year only. So if your birthday is in May, then you can
take your RMD on January 1st of this year. So what I wanted to make sure is that
it’s the year in which you turn that age is the big thing Knowing when to start.
Okay, great. Yeah. Okay. So let’s talk about this because I think, you know, if my
mind goes to a required minimum distribution and then I say, okay,
now you’ve just given me these, these years and dates and all that kind of stuff.
How much am I going to have to take? And how does that math work out? Yes, so it
is calculated every single year based on the prior year account balance and your
age. So if you’re returning 73 in 2025, let’s say use that as an example.
Let’s just say you have a million-dollar IRA balance. We need to take the IRA
balance on December 31st of the prior year. So in this example that’s going to be
December 31st of 2024. So let’s say that date your IRA balance. Total across all of
your IRA accounts was a million dollars. Then we’re going to need to refer to what
is called the Uniform Lifetime Table. This is a table published by the IRS,
and you can just find it like on the IRS website, or I know a lot of custodians
also publish their own version of it, but it’s always the same numbers. So we’ll
refer to the IRS Uniform Lifetime table, which gives us a lifetime factor based on
your age that’s also used in the calculation. So for age 73,
the factor from that table is 26 and a half. Actually, I have the table up.
If you want me to share my screen, I could show it for those that are watching
the video version, but we’re going to take that factor, so the 26 and a half and
use that in our calculation. So starting with the million-dollar IRA account balance,
we’re going to divide that by 26 and a half. And that will give us the RMD4 2025.
So this is what the uniform lifetime table looks like. For those watching the video,
you can see the age. And then you’ll see what’s labeled as distribution period or
sometimes referred to as a lifetime factor. So on this table age 73, you can see
the lifetime factor is 26 and a half. And that’s why I say we recalculate it every
single year because the lifetime factor changes each year. So for age 74,
the lifetime factor is 25 and a half. For age 75, it’s 24 .6 and it keeps going
down each year as your age increases.
– Very good. So again, nothing never is that simple.
– So when we’re talking about getting the number from,
and this is probably just off of your own experience, getting the calculation done,
what would your advice be to someone that’s turning 73 and they know they have to
take an RMD? Should they go calculate it themselves? – There aren’t, usually the
custodian, like if you have your accounts at Schwab, which is where we have all of
our clients’ accounts, then Schwab will automatically calculate the RMD for you. So
you don’t really need to go like look at the table and calculate it all out, find
the account balance and stuff like that. You can usually just refer to the
custodian’s website and you can usually find it there. All right, fantastic.
So let’s talk another more common question that we get is, well, okay, I know that
I’m of the age of RMD, I know how much I need to take. So let’s talk about now
deadlines and how to take it from the perspective of frequency. So what are the
options there and what are the deadlines we need to think about and think through?
Yeah, like we said, the year is really what matters the most. So if you want to
take your entire RMD as a one -time lump sum distribution on January 1st, then
that’s possible, you can do that. If you would prefer to spread it out throughout
the year and take it as a monthly distribution, divide the year total amount by 12,
then you can do that. It’s really more your personal preference comes into play more
here than the rule is the entire amount just needs to be out of the account by
December 31st of that year. So whatever your preferences as far as cash flow, if
it’s helpful for you to have a monthly distribution or to it all at once up front
or if you want to delay it a little bit towards the end of the year then whatever
works for you is how we’ll set it up for you. So let’s go into this idea
that we kind of hit on a little bit earlier about that first year. Can you walk
through that first year of I just hit whether it be 73 or 75 whatever it is might
say my birthday is you know I turn 73 no matter when I turn 73 I’m turning 73 in
the year 2025, what are my rules on that first year? – Yeah,
the first year is unique because technically the deadline is April 1st of the year
following when you turn 73. So if you turn 73 in 2025, technically that first year
deadline is April 1st, 2026. So if for some reason you miss it,
It just gives you a few more months to adjust to that new requirement. If you do
delay until April 1st, you have to pay the tax on that year’s RMD plus the tax on
the, in this example, the 2026 RMD. So in a way, you’re almost doubling your RMD
for that second year. So I’ve never made that recommendation to someone to
intentionally delay. I don’t think we’ve ever had a client situation like that.
million dollars and they’ve got a, let’s call it just for round numbers, a $40 ,000
distribution that they have to take and then they don’t take it. So then that first
years, and now next year you got $80 ,000 you’ve got to take because you’re taking,
you’re still your 2025 distribution; you just are delaying it until 2026. So now you
got $80 ,000 of taxable money in 2026. So that could be a very different taxable
scenario for you. And so that’s and so that’s why I don’t ever remember telling
anybody to defer either to April 1st. So that’s a good thing to make sure we got
in our minds. – Yeah, I think you’d have to have a pretty unique type of income
scenario to say, let me delay and take a double hit in the following year. So
while we’re talking about hits and tax things like that, let’s talk about how RMDs
are taxed and what people want to think about as they’re setting up their
distributions. Right, so because our RMBs are coming out of our tax -deferred
accounts, our IRAs, our 401Ks, those dollars have not been, the tax has not been
paid on those dollars yet. So now that we are taking the distributions, every dollar
is taxable in the year that the distribution comes out. It’s taxed as ordinary
income for both state and federal tax. So it is important to think about now that
we have that income included in what way are we going to arrange the tax to be
paid whether that could be by putting in place estimated tax payments that you’re
making throughout the year or it could be by withholding tax from the distribution
which is set up as a percentage at the time the distribution comes out of the
account so that when you receive the income the taxes automatically paid for you.
That’s associated with that. So it’s important to think about how you want to go
about that, because what you don’t want to do is take the distributions, not think
about the taxes, and then be surprised at the time that you file your tax return
now that you have that potentially new source of income, and you don’t want to
surprise new tax bill at the same time. Yeah. So some of the things we get,
you know, with clients is they complain. They don’t need the money. And And they
go, “You know what sets me? It’s got this money sent here and I’ve got to take
it.” And so now basically I just got to take it out of the account, pay the taxes
and they’ll go put it in another account. But if a person is charitable inclined,
what can they do with a portion of that distribution? – Yeah,
so if you do charitable donations throughout the year, what you can do is donate a
portion of your RMD to charity. So let’s say you have that $40 ,000 RMD this year
and you want to donate $10 ,000 to a charity, then that $10 ,000 will go directly
to the charity tax -free. You don’t pay any federal or state tax on that amount.
That’d be a $10 ,000 distribution at 0 % tax. And then the remaining $30 ,000 is
what you will need to take as a distribution. So the charitable donation part counts
towards your total RMD for the year. And on that point too, just with if you’re
taking the RMDs and you don’t need the income, some people ask, I’ve gotten this
question a couple times, you cannot put it back into your IRA. There is no
reinvesting in the IRA. You also cannot put it into a Roth IRA. I like the idea,
but that’s against the rules. You can put it into a brokerage account If you want
to reinvest it and still have, you know, investment growth associated with that, if
you don’t want to just keep it in like a checking or savings account. So don’t put
it into back into your IRA or your Roth IRA, but you can keep elsewhere. Yeah, I
like to make it super simple and say, when I get the question of, well, I’ve got
my RMD, what am I supposed to do with this? I make it simple and say, well, you
take it out, you pay the tax on it and you spend it, or you take it out, you
pay the tax on it, and then you reinvest it back into a brokerage account or just
build up your cash bucket, but you can’t put it back in to your IRA or convert it
to Roth. And then the final option is you take it out, don’t pay any tax on it,
and give it away as a QCD. So not directly taking it out yourself,
but directly giving it to charity is going to avoid the tax on it. Those are
really the three options when you boil it down. So what do we want to make sure we
take our RMD, right, Taylor? Because there are penalties imposed if we don’t. Help us
understand those because they have changed as well here over the years. – Right, yeah,
so the penalty if you miss your RMD is 25 % of the missed amount.
And if you make up that distribution within at least two years. So if you miss an
amount and then two years later, you realize it and you take that amount out, then
you can fill out a form and you can ask the IRS to waive the penalty and it will
drop to, or not completely waive the penalty, but reduce the penalty, it will drop
from 25 % to 10%. So there are ways to get it reduced.
If you have a good reason or an explanation that the IRS will accept for why it
was missed in the first place. But yeah, the penalties also have been reduced as a
result of the Secure Act. It used to be 50%. So even 25 % in comparison to 50 %
is seems generous now. So yeah, definitely don’t miss it though. Don’t pay the
penalties. It’s not worth it. Just stay on top of it each year. Hey, one quick
question we get to is, you know, they want to know how much they’ve got to take
out of their Roth what’s the requirement of distribution on a Roth IRA? Yeah, one
of the advantages to a Roth IRA is that RMDs are not required.
I guess that’s kind of repetitive, but there are no RMDs on Roth IRAs.
So you don’t ever have to take distributions from your Roth IRA if you don’t want
- So yeah, Roth IRAs are a little more flexible in that aspect. You can Choose
more when you want to take those distributions and be more intentional about that
part of the planning Yeah, we are that’s one of the things I love about those and
why people want you know Should be looking at doing if they can and it makes sense
to do conversions into the Roth Because now I can reduce my requirement of
distribution later in years as well as I don’t have those distributions Well, thank
you very much anything else first. Did you have nope? I was just gonna tease an
upcoming episode that we’re going to do today. We’re talking about required minimum
distributions We’re definitely going to be bringing
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