Retirees: Unlock the Secrets of RMDs - 7 Strategies to Find Out Now!

Hey everyone, welcome to another edition of We're Talking Money. I'm Phil Clark, and today we're going to be talking about required minimum distributions, AKA RMDs. There's a lot of material out there on RMDs, but stick with me on this important topic. The rules have changed, and if you are approaching retirement age or know someone who is, you don't want to miss this episode.

Having the right knowledge about RMDs can help retirees make solid and strategic decisions. Stay tuned and I'll help you unlock the benefits of your RMDs.

First, let's talk about what these things are. What is an RMD, or a required minimum distribution? Well, simply put, they're stipulated by the IRS. They require individuals to begin withdrawing money from their retirement accounts upon reaching now age 73. That just changed. Under the old act it was 72. Under the SECURE Act that was passed in late 2022, it's 73, and that number will eventually reach age 75 by 2033.

Now, the purpose of RMDs, it's ensuring that retirees begin to use their qualified assets and avoid these funds sitting idle. As an aside, RMDs also mean that Uncle Sam gets their taxes out of your basket of money.

There are several factors that go into calculating your RMD. Now, that includes your age, the balance of your retirement account or accounts, and a government-issued life expectancy table. We'll talk about that more in a few minutes. Basically, you must withdraw a certain percentage of your account balance every year or face some pretty stiff penalties imposed by the IRS.

Next, let's talk about how you calculate your RMD. Your required minimum distribution is based on your age and the total value of your retirement accounts. To calculate your RMD, it's very simple: you divide the total value of your retirement accounts by the appropriate factor as issued by the IRS. For example, if you're age 73 in 2023 and you have a total of a hundred thousand dollars in your retirement savings, your RMD would be three thousand seven hundred seventy three dollars. That's a hundred thousand dollars divided by the factor of 26.5.

If you fail to take your RMD, the new SECURE Act 2022 fortunately reduces the penalty, which used to be 50 percent. It has now been reduced to 25 percent. Still a hefty penalty, and that is an amount that's taxed on what you should have withdrawn. Lower, but still a stiff penalty.

If you need help with your RMDs or anything else with your qualified retirement plans, please contact us. We're happy to help you work through some of these complicated things. Let's keep going.

So what are the tax implications of RMDs? This tends to be one of the most asked questions, at least at our firm. We hear this question more than any: what are the tax implications? For some people, they represent a large part of their income, so it's a key part of tax planning. These mandatory withdrawals, always, every year, coming from your retirement accounts are taxed not as capital gains but as ordinary income.

If you have multiple retirement accounts, you must aggregate them for purposes of your RMD calculation. A lot of people forget this one. Now, this can be tricky, because if you have multiple 401K plans, real estate IRAs, precious metal IRAs, the rules change. Now, if you're not sure, consult with a wealth advisor or tax professional and be sure that you're calculating your RMD correctly.

There is no penalty, by the way, I want to mention this, there's no penalty if you withdraw more than your RMD or your required minimum distribution. You can take as much as you'd like, but any excess amount, it will be taxed as ordinary income. Herein lies the problem: everything distributed from your IRA or other qualified plan is income taxable. That is why it's so important to know the strategies that can help you minimize and potentially eliminate these huge tax bites.

So what can you do to minimize taxes as it relates to your RMDs? The simplest strategy, and this is simple, is planning. Planning ahead and working with someone that has demonstrated expertise when it comes to this complex type planning. Make sure that you understand the rules for RMDs and when you are required to take them.

Now, if you're working with someone who doesn't seem to exude a high knowledge, or high level of knowledge, about RMDs, you might want to find someone else. Whoever that person is, be sure that they understand RMDs and they understand how to use them to your advantage.

So the first strategy: calculate the right amount. Your RMDs are based on the balance in your accounts as of December 31st of the previous year, divided by the life expectancy factor based on your age.

Strategy number two: know when you don't have to take an RMD, since they are not just for retirees. If you're still working, for example, and you're not expecting an RMD, it can make a huge difference when it comes to your tax return. So if you're still working, RMDs are not required from the 401K of your current employer. So if you have IRAs and you want to avoid required distributions while you're still working, let us know. We'll show you a couple of loopholes that allow you to take advantage of not taking RMDs while you're still employed.

Number three, strategy three: be sure you take RMDs from the right accounts. A lot of times we see people with multiple IRA accounts, multiple 401ks that they left behind at a former employer, and they miss calculating correctly. The rules about which account to tap for withdrawals are different from IRAs and 401ks.

Now, if you have several traditional IRAs, the sum of all accounts must be used to determine your total RMD. You can withdraw the money from only one of those accounts, or you could withdraw it from all of those accounts, but they all must be included in your calculation.

Now, you do not have to take RMDs from a Roth IRA. So if you're fortunate enough to have a Roth IRA, if you thought ahead and you were saving in a Roth, you don't have to worry about RMDs when it comes to a Roth.

Now, keep in mind, you cannot use this method in the case of several 401ks. What I just described doesn't work if you have several 401ks. Different set of rules. If you need help with that, reach out to your advisor, reach out to us. Glad to help you answer those questions so that you don't get it wrong.

Let's talk about strategy number four: give RMDs to charity. For all of you charitably inclined folks out there, this is a big benefit. You've heard us talk about this on other shows. If you're one of our subscribers, you've definitely heard us talk about these QCDs, or qualified charitable distributions. Big, big opportunity here. So for you charitably inclined, and by the way, if you're not a subscriber, we welcome you to subscribe so you never miss a show and you never miss great advice that we're trying to deliver every week. So we'd love for you to subscribe, and we appreciate that.

Giving to charity tax free, what a huge benefit. After you turn 70 and a half, you can give up to one hundred thousand dollars from your IRA to a charity tax free, and you can do this every year. Best of all, this counts towards your RMD, so your required minimum distribution is included in that gift. So you're going to satisfy two things: your charitable inclination and your RMD.

Best of all, this up to a hundred thousand dollars is not included in your adjusted gross income. That means it never hits your tax return. So if you don't need the money to live on, this is one way to get a huge tax break for your charitable giving.

And by the way, under the new SECURE Act 2.0, check out our show on SECURE Act 2.0, gives you a lot more information in addition to talking about charitable planning, but under the new SECURE Act 2.0, that one hundred thousand dollars is now going to be indexed, so it's going to go up every year. That means what you can give to charity gets larger every year. Huge benefit.

Number five: convert money from a traditional IRA to a Roth IRA. When you do this, you eliminate future RMDs. No more required minimum distributions. If you convert money from a traditional IRA to a Roth, don't forget this part, you will have to pay taxes on the conversion, of course minus any portion from non-deductible contributions, but be prepared for that. Roth conversions are awesome, but you need to be sure that a Roth conversion fits your situation.

Now, once you make the conversion, the money will grow tax-free, and it's never subject to future RMDs. And as a bonus, any Roth that's left behind to your beneficiaries, it's not subject to income tax, nor do you pay income tax when you withdraw money during your lifetime. This strategy is way underused, but it does require careful planning, so please don't jump into this one without good counsel. Be sure it fits.

And strategy number six: use RMDs to create transferable wealth. This is another underutilized strategy. Remember, your RMDs will be taxed as ordinary income, so we can't get around that, but this strategy focuses on using that after-tax money to maximize your IRA benefit to your family, or maybe your charity of choice, or maybe both.

The concept is quite simple, actually. So after the RMDs are made, these are after-tax dollars. Now you use that money to fund a life insurance trust, and depending on the type of insurance and of course your health, this strategy can create a huge tax-free windfall. Inheritances have never been better. Best of all, when this money is paid to your beneficiaries or your charity, it is completely tax-free and free from estate tax. So if that's a concern of yours, rest assured, this one gets you out of income tax for your inheritance or your beneficiaries or the charity, and it avoids estate tax. Huge benefits.

And finally, strategy number seven: you could consider, and I know this is going to sound a little unusual here, maybe even unorthodox, but you could consider withdrawing less than the required minimum distribution each year. And again, I know you're thinking about the penalty for not taking the minimum amount, but hang on for a second, just hear me out. Spreading your taxable income over multiple years could lower your overall tax bill.

Why? Well, since the penalty for failing to withdraw your RMD was reduced under the new SECURE Act from 50 percent all the way down to 25 percent, this concept all of a sudden might make sense. It requires specific calculations, and let me give the disclaimer, it is not right for everyone, but if you want to explore it, we're happy to help. Whoever helps you with it, it is imperative that you work with someone who understands this concept and knows how to test the concept to see if it fits you.

Those are seven strategies, much different than just making a simple RMD or required distribution. These are things that you can use in a much more strategic fashion as it relates to income, wealth management, taxes, estate planning. Great tools.

So as we conclude, a little planning can help ensure more enjoyment in your golden years. When it comes to taking required minimum distributions or RMDs, there is no one-size-fits-all, and please don't think there is. They are mandatory for anyone with an IRA, and anything that's mandatory, I believe it requires a second look and some planning. In fact, you just might lower your taxes, spend more, and leave a larger estate.

We hope this video has inspired you to look a little closer at maximizing your RMDs and minimizing your taxes. If you have questions or you need help with your RMD, the professionals here at OmniStar, they'd be happy to help you plan for a brighter future.

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