June 13, 2022 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 13, 2022 

This Weeks Podcast -401k Versus IRA

Do you understand the difference and similarities between 401ks and IRAs? How can you make the two or one make sense for you as your retirement plan?

Both 401ks and IRAs are set up to encourage you to plan for your retirement, and you should have an analysis and a conversation on which one is good for you.


This Weeks Blog –401k Versus IRA

If you’re saving for retirement, you’ll need to know the difference between a 401k versus IRA. You may even have both types of accounts. While trying to secure your retirement, it’s crucial to know what each account type offers you.

June 6, 2022 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 6, 2022 

This Weeks Podcast -How Required Minimum Distributions and QCDs Work?

When it comes to taking your money out of your IRAs and 401ks after retirement age, you might need to understand the terms RMDs and QCDs.

At age 72, you’re required to start taking distributions out of your 401k and IRAs with a formula based on your life expectancy. The key here is to be tax-efficient or even go tax-free in any way you can without breaking the law.


This Weeks Blog –How Required Minimum Distributions and QCDs Work?

It’s important to understand how required minimum distributions and qualified charitable distributions work, even if you’re under 72. We’re going to discuss a strategy that is crucial to you, even before you can begin taking your RMDs.

How Do Required Minimum Distributions and QCDs Work?

Today we’re going to discuss two main, important aspects when trying to secure your retirement: RMDs and QCDs. But before we go any further, it’s important to define these acronyms for you:

  • RMDs: Required minimum distributions
  • QCDs: Qualified charitable distributions

It’s important to understand how required minimum distributions and qualified charitable distributions work, even if you’re under 72. We’re going to discuss a strategy that is crucial to you, even before you can begin taking your RMDs.

So, if you’re under 72 and don’t think this post is for you, trust us: it is.

Understanding Required Minimum Distributions

RMDs are attached to your 401(k), traditional IRA and other retirement accounts that are out there. If you have an account where you defer taxes until the future, the IRS requires you to take money out of these accounts and pay your taxes.

When you place money into these accounts, the deal is, “I don’t want to pay taxes now, but I will later.”

At age 72, you’re required to begin taking RMDs out of these retirement accounts, using a formula that is based on your life expectancy. These figures are generalized, and right now, at age 72, you have a life expectancy of 27.4 more years.

Using your balance from December 31 of the year prior to taking the distribution, you would do the following:

  • Balance / 27.4 = RMD

For example, let’s assume that your IRA had a balance of $500,000 on December 31, 2021. When you take the distribution in 2022, you’ll receive $500,000/27.4 = $18,248.18. However, you may not need to take your distribution at 72.

When you turn 72, you’re required to take a distribution for the year. So, for example, if your birthday is in November, you’ll still take the distribution in January of that year.

However, on your first RMD, you can decide to take the RMD in the next calendar year by April 1.

Delaying Your First RMD Until April 1

If you want to delay your first RMD, normally for tax reasons, there are some pros and cons that go along with it. For example, let’s assume that you must take an RMD in 2022, but because you turn 72 this year, you decide to take your first RMD by April 1, 2023.

In the 2023 calendar year, you’ll take two RMDs of:

  • approximately $18,248.18
  • approximately $18,248.18

After this period, all RMDs must be taken by December 31 of the calendar year.

You can also withhold taxes from your RMDs, so you won’t need to worry about:

  • Quarterly payments
  • Surprise tax bills

However, it’s up to you to decide whether you want to pay taxes quarterly or not. You can also opt to take a monthly distribution from your account. The main goal is to take out the full amount required by the end of the year.

Custodians of your account will take care of the calculations on your RMD amount, so we suggest following the amount they recommend for distributions.

If you’re 65 and retired, you can still take money out of your account for:

  • Living expenses
  • Placing funds into a Roth account
  • Lowering your future RMDs

When clients opt for this strategy, they can grow the money in their Roth accounts tax-free, which is very beneficial.

Sometimes, people have five different IRA accounts with $100,000. You can take the RMD from a single account. The IRS doesn’t care as long as you take the money out of the account. However, if you have a 401(K) and 4 IRAs, you need to take the portion out of the 401(K) and then the remaining from your IRA.

When retirement planning and trying to secure your retirement, you’ll find a lot of buzz around RMDs and QCDs.


Let’s find out.

Understanding Qualified Charitable Distribution

QCDs are another tool that you can use in retirement planning, and it’s one that the IRS allows you to begin using at 70 ½. If you want to give money to a charity that qualifies for a QCD, you can donate a portion or all of the RMD to the QCD.

Many people will take the RMD, pay taxes, and then give the money to charity.

However, with a QCD, you can:

  • Skip paying taxes
  • Setup a QCD directly to the charity

Since the check goes directly to the charity, you’re erasing the taxes on the distribution and helping a charity with the full amount of the RMD.

You can begin using the QCD strategy at the age of 70 ½ and above.

If you’re interested in QCDs and RMDs but have more questions, we’re more than happy to help. You can schedule a call with us.

We also have two great courses that you can sign up for today for free: 4 Steps to Secure Your Retirement and 3 Keys to Secure Your Retirement Master Class.

IRAs – Required Minimum Distributions

Many of our readers are planning to retire, and they want to know about required minimum distributions (RMDs). If you have a tax-deferred vehicle, RMDs are something that you should learn more about.

Tax-deferred vehicles are:

  • 401(k)
  • 403(b)
  • 457
  • IRAs (traditional)

When you’ve deferred taxes, you’re making an agreement with the IRS that you’re not going to pay taxes on this money now. But in the future, when you’re able to access the funds, the IRS will come knocking on your door because they want their cut of the money.

Under today’s requirements, you must start taking your required minimum distributions at age 72 – it was 70 and a half not too long ago.

RMDs are not a bad thing, and these are retirement accounts that you’ve been paying into for 30 or 40 years. However, since you’ll have to pay taxes on the distributions, some people get concerned.

Don’t be. This is money you saved and will be using for your retirement.

Understanding When You Must Take RMDs

RMDs are part of your retirement planning, and while you start taking them at age 72, this definition is a bit misleading. According to the IRS, you must begin taking distributions in the year you turn 72.

If you don’t turn 72 until December 31, guess what? You can take distributions from January 1st (you’re still 71) since it’s in the year that you turn 72, or you can wait until December. So, you can strategize to some degree on when is best for you to take your RMDs.

You must take the distribution by the calendar year end (with one exception listed below).

How RMDs are Calculated

The IRS will try and estimate your life expectancy, based on several factors, and then calculate your RMD. The required distribution can vary from year to year, so the RMD isn’t a fixed rate.

For example, let’s say that you have $500,000 in all of your IRA accounts.

If you have this much in your account on December 31st of the previous year, you would divide this amount by a factor that the IRS has created. The factor, at the time of writing this, is 25.6 for someone that is age 72.

The IRS figures that at age 72, you still have 25.6 years left to live. Your health isn’t personally calculated as these factors are across the board for everyone. So, you’ll be required to take the following RMD:

  • $19,531.25 ($500,000 / 25.6)

You can take a larger distribution if you want. However, you must take the minimum amount and it’s added to your income for the year.

In your first year, you can defer the distribution until April. You may want to defer the distribution to avoid taxes, but you’ll still need to take the distribution the second year.

In fact, if you defer the first distribution, you’ll be required to take the first and second distribution in the second year, adding significantly to your yearly income.

What to Do If You Have Multiple Tax-deferred Accounts

If you have 5 different tax-deferred accounts that require RMDs, you can take money from one or all of them. The IRS doesn’t care which accounts the distribution comes from. However, they do care that you’re taking the RMD (based on the combined value of all accounts) and paying tax on it.

What Happens If You Miss an RMD?

You’re penalized. You can be penalized by as much as 50% for missing your RMD.

3 RMD Strategies If You Need to Take RMDs in the Near Future

For anyone that is not retired yet but will be in the near future and has these tax-deferred accounts, there are a few strategies that can help you:

1. Roth Conversions

If you have an RMD, you cannot convert it into a Roth account. However, what you can do is a Roth conversion before you hit age 72. If you convert today, there are no RMDs, but you do pay taxes today.

You’re still paying taxes, but you know today’s taxes and not what your tax burden may be in 10 years.

When you use this strategy, you’re controlling your tax burden because you decide to convert the account at a time of your choosing and at a favorable tax bracket. For example, if your Roth account grows at 7.2% per year, you’ll double your money in 10 years and won’t have to pay taxes on your RMDs.

Of course, this doesn’t make sense for everyone.

We run simulations to see if this is a good strategy for our clients.

2. RMDs are Required, But You Don’t Have to Spend the Money

Many times, we’ll advise people to take money out of the IRA and then put it in another investment account. You don’t have to spend the money that you take out of your account, but you do need to pay your taxes on it.

3. Qualified Charitable Distribution

We have many people who don’t need the entirety of their RMD, so they’ll leverage what is known as a qualified charitable distribution, or QCD for short. A QCD allows those who want to donate to charity to do so with tax benefits.

Let’s assume that you have a $20,000 RMD and want to donate $5,000, you can.

When you do this, you’ll pay taxes on $15,000 instead of $20,000. You will need to go through your IRA to make this distribution, but you need to ensure that the distribution is in the charity’s name, address, and Tax ID.

You want the custodian to do the transfer for you so that the money never enters your account.

If you’re planning on giving to charity any way, the option of making a qualified charitable distribution makes a lot of sense for anyone that has an RMD that they must take.

The earlier you plan to reduce your RMD tax burden, the better. But, even if you plan on using our last strategy to lower your taxes, you want to start as early as possible to make sure it gets done in time for tax season.

Click here to join our course: 4 Steps to Secure Your Retirement.