October 16, 2023 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 October 16, 2023

This Week’s Podcast – Required Minimum Distributions in Retirement – Monthly, Quarterly, or Annually?

Listen in to learn the advantages and disadvantages of taking required minimum distributions monthly, quarterly, or annually. You will also learn how the three-bucket strategy income safety and growth buckets can work together to your advantage.


This Week’s Blog – Required Minimum Distributions – Monthly, Quarterly, or Annually?

US tax law requires you to take a certain amount out of your traditional retirement accounts or employer-sponsored retirement plans each year, called a required minimum distribution. If you transferred money into these qualified plans and didn’t pay taxes on it, guess what? The IRS will eventually want you to pay your taxes, which is where RMDs come into the equation…

Required Minimum Distributions – Monthly, Quarterly or Annually?

Required minimum distributions (RMDs) become a very important point of discussion before the end of the year, and there is a lot that you need to consider. You can take your RMDs monthly, quarterly, and annually. 

However, which one is the right choice for you? That’s what we’re going to cover in this post. If you would rather listen to this post, we do have a podcast on this very topic.


What are RMDs?

US tax law requires you to take a certain amount out of your traditional retirement accounts or employer-sponsored retirement plans each year, called a required minimum distribution.

A traditional account is a tax-deferred account, such as your:

  • IRA
  • 401(k)
  • 403(b)
  • 457

If you transferred money into these qualified plans and didn’t pay taxes on it, guess what? The IRS will eventually want you to pay your taxes, which is where RMDs come into the equation.

Basically, you need to take out “roughly” 3.5% of your money each year, but there is a more complex calculation involved that we won’t go into with this post. The most important thing is that you’re required to take these distributions even if you don’t need the money.

Whether you’re in your 50s or 65, it’s important to educate yourself on RMDs and what you are required to do. Developing a plan for your RMD is important because you can incorporate a few strategies to lower your distribution requirements, too.

If you reach a certain age, you must take distributions.

In 2020, once you had reached age 70.5, in the calendar year, you would have needed to take distributions. After the Secure Act, this age has changed to age 73 – 75, depending on your birth year. The year you were born dictates this age:

  • Born in 1951 – 1959, your RMD age is 73
  • Born 1960 and later, your RMD age is 75

In the first year, you can defer your distribution to the next year and take it by April 1st. However, if you do this deferral, you will need to take two distributions, which is uncommon because it will push your tax bracket up.

On a Roth IRA, you have a tax-free bucket that you can use with no RMD requirement during the life of the original owner. Roth accounts are something that we often recommend as a strategy for eliminating or reducing RMDs, but this is something we’ll dive into more shortly.

Quick Note: Inherited IRA accounts work a bit differently. You used to be able to take distributions over a lifetime. Now, the new rule requires you to deplete the entire account over 10 years. There are a few caveats to this rule, but you’ll want to sit down with a financial advisor to discuss these in greater detail. Exceptions do exist for disabled individuals, minor or chronically ill beneficiaries and those who are less than 10 years younger than the original account owner.

Penalty for Not Taking an RMD

We do want to mention that when researching RMDs, you’ll learn that there is a penalty for not taking your distribution once required. The penalty can be 50% of the distribution, which is a lot, but we have never actually seen this applied.

Often, the government will give you a reprieve, but they do want you to take your RMD.

Is It Better to Take Your Required Minimum Distributions Monthly, Quarterly or Annually?

You know what RMDs are and that you can be penalized for not taking them, but one question still remains: at what frequency should you take your RMDs? We’re going to walk you through each of these distribution options.

Everyone has their own line of thinking when it comes to taking their RMDs, and it’s ultimately up to you. Each option has its advantages and disadvantages.

Monthly RMDs: Advantages and Disadvantages

Monthly distributions offer consistent cash flow – just like a paycheck. For example, if you need to take $12,000 per year in distributions, you can rely on $1,000 a month coming into your account.

You also benefit from market volatility.

For example, you are withdrawing the $1,000 when the account is up or down for the month, which can be an advantage or disadvantage. If you have a consistently down market when you’re withdrawing, that can become an issue.

The main advantages are:

  • Monthly cash
  • Less concern about the market
  • Easier to maintain a budget

However, the disadvantages are almost the exact opposite of the advantages. You’re taking money out of the account and missing growth opportunities.

Note on RMD Calculations and Growth Buckets

The IRS calculates your required minimum distribution on the balance of the account at the end of December 31st. If the IRS states that you need to withdraw $12,000 per year, it doesn’t matter if the markets are up or down 100% that year – you still need to take the full distribution.

When offering retirement planning, we often use a bucket strategy

In this article, we’ll discuss the:

  1. Income/Safety bucket
  2. Growth bucket

Why? They offer advantages in a down or up market, helping you mitigate some of the risks your accounts have in retirement.

The income safety bucket often isn’t correlated with the market so:

  • It provides income
  • Protects against stock market volatility

The growth bucket is, in all essence, money in the stock market. Last year, the market was down 20% or more.

When both buckets work together, it helps safeguard against the market. Money comes from the income bucket and the growth bucket is allowed to grow long-term and mitigate retirement accounts being down.

Income buckets buy us time so that we don’t remove money when an account is down.

During a year like 2022, the growth bucket was allowed to recuperate while still having a steady income from the income bucket. If you have all your money in a growth bucket, it leaves you very little room to mitigate losses.

Note on RMDs and Multiple Accounts

For the sake of simplicity, let’s assume that you have 3 IRA accounts and the government states that you need to take a $12,000 RMD annually. Your distribution can come out of one account, a combination of accounts or all your accounts.

You may have $1 million in an IRA and decide to put 50% in an income bucket and 50% in the growth bucket. You can take all the distribution from the income bucket and let the growth bucket grow.

However, if your money is in a 401(k), there are stricter rules. Money in the 401(k) must come out first if multiple other non-401(k) accounts exist.

You can also put money from a 401(k) into an IRA with different strategies, which may be a better option for you.

Quarterly RMDs: Advantages and Disadvantages

Quarterly distributions are middle-of-the-road. You’re between the monthly and annual distributions, and the advantages and disadvantages are very similar to monthly.

For our clients, it’s always a monthly or annual distribution because many people don’t prefer the quarterly option.

Annual RMDs: Advantages and Disadvantages

Annual distributions are ideal for clients who want to keep their money in the market and let it grow as much as possible. Since the account balance may be higher, you’ll benefit from higher returns.

You can also have a down year where you’ve lost money and now need to take it out of the account when you’re in the negative for the year.

  • During up years, you benefit from greater returns
  • During down years, you lose some money

What’s best for you? Consider your personal preference and needs. If you need a monthly paycheck, then the monthly RMD is best. However, if you plan to reinvest your RMDs because you don’t need the extra cash flow, it may be better to go with the annual RMDs.

A retirement-focused financial plan is what we recommend to our clients. The rules of RMDs are general, but your case is always going to be unique. Analyzing financial plans in retirement allows us to optimize income and RMD planning.

We can walk you through how this looks, even if you’re not currently a client of ours. You can schedule a 15-minute complimentary call with us that will allow you to discuss your options with us to have a more personal discussion about your RMDs and retirement plan.

Click here to schedule a 15-minute call with us to discuss your retirement plan and required minimum distributions.

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.