In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, breaks down the complexities of Required Minimum Distributions (RMDs). RMDs can be an intimidating topic, but Darryl simplifies the details with practical guidance, actionable strategies, and insights to help you navigate this critical aspect of retirement planning.
In this episode, Darryl explores the fundamentals of RMDs, explaining their impact on your tax strategy, legacy planning, and overall financial health. Whether you’re nearing the RMD age, have questions about Roth conversions, or want to reduce your lifetime tax burden, this episode provides valuable insights to optimize your retirement plan.
Key highlights of the episode include:
- Understanding the rules, including recent changes to RMD ages, and how they affect your tax obligations.
- Exploring Roth IRAs, qualified charitable distributions (QCDs), and how to balance traditional and Roth accounts for long-term tax efficiency.
- Insights on the 10-year rule for non-spouse beneficiaries, trust considerations, and how to avoid unintended tax consequences for your heirs.
- Breaking down calculations, life expectancy tables, and why your December 31 balance plays a critical role.
- Common pitfalls like missed RMDs, understanding IRS codes, and how to ensure proper reporting.
For more resources and to connect with a financial advisor who can help you plan your retirement with confidence, visit http://www.PAXFinancialGroup.com. If you found this episode helpful, share it with someone preparing for retirement!
Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. Also visit PAX Financial Group. You can hit the Connect with Us button. You’ll connect with a financial advisor for 15 minutes.
They have hearts of a teacher and that 15-minute consult can be over the phone just to see if it’s a good fit. I don’t know if generally we can help you. We may not be a good fit and you don’t know as well if you even like us. So that 15-minute consults, just a really easy, no obligation way to connect and just see if it’s a good fit.
So, I want to encourage you to do that. I want to talk. I’ve got multiple requests for this one. Required minimum distributions. And hang with me because this one might be a little nerdy, I don’t know if you’ve noticed, but I generally stay away from numbers on the podcast. And one of my favorite compliments is, hey, you dumb it down for me, Darryl.
Thank you so much. You know, and it’s not my intent to, show disrespect by communicating in a way that, you know, layman’s terms. In fact, oftentimes I get, I listen to my peers and in their production of different content, and they’re so sophisticated and intellectual and I feel like I fall short on that many times in this podcast.
But I do that intentionally because I just I think there’s just a lot of us out there that need to hear the basics in kind of digestible pieces and, and it’s not overwhelming. And so that’s why there’s not a lot of math and it’s 15 to 20 minutes. And that’s why my books are short. And so I just really try to meet you where you’re at.
My videos are 30 seconds. But this one, I’m going to go a little bit deeper. I say all that because I’m going to go a little bit deeper. I’m going to have to use some numbers for this one. And this one is just a byproduct of multiple requests. So, hang with me on this one. I’ll try not to make it too dry, but it’s an important one.
It’s called it’s really based on required minimum distributions. And so, a lot of us have IRAs. And I bet you don’t know what IRA stands for.
It stands for Individual Retirement Arrangement, probably thought account. It’s actually arrangement for whatever reason. So, the individual retirement arrangement IRA is just a powerful tool. I’ve run modeling before and said, okay, if somebody invests on their own versus using an IRA, which one grows more? And, you know, as you would imagine, the IRA grows more and you say, why?
Well, because the earnings on that IRA are not subject to taxes. So, there’s not somebody coming along with the shovel and taking money out of the ditch, so to speak. So that really helps, right? You know, every year your growth is not subject to taxes. Now, an interesting point. You typically don’t pay those taxes from the account.
You usually pay it from your personal income, but altogether it still hurts. So, if you were to model it out and run spreadsheets, you’ll find that IRA’s outgrow assuming the same types of investments outgrow non IRAs. They just do it because they don’t have some money coming along, taken away. And that somebody being the IRS of their earnings each year.
And if you’re really thoughtful about it when you’re doing your planning and a good advisor can help you with this. If you’ve got multiple types of investments, maybe you’ve got some investments in non-IRAs and you’ve got IRAs. You put your investments that have taxes a little bit more taxes each year in your IRAs. And how do you find those investments.
Which investments have more taxes? And those are funds that have more turnover or strategies that have more turnover whenever things are turned over, like stocks are being traded, those create taxes. And if you put it in an IRA, you can trade all you want. And it really doesn’t matter. Because it’s tax deferred. So I love mathematics.
I just love it. By the sheer math IRAs grow better all investments equal than non IRAs. Then you’ve got the Roth IRA, which was invented in 1994 by the senator from Delaware, Roth, Senator Roth, that allows you to put money into an account. And the money comes out completely tax free. And that’s really where we’re going with this conversation, because there’s no required minimum distributions, generally speaking, on Roths.
And by the way, all this conversation, there’s always exceptions. So, I’m going to kind of keep it high level. But you know get with your advisor. I’ll put a link to the IRS publications in the show notes. But there’s exceptions to all these things. So just keep that in mind. But the Roth IRA generally doesn’t have any required minimum distribution, which is awesome.
And your money comes out completely tax free. Awesome. Like what? Like if you see your account balance is 100,000 and it’s in a Roth, that’s all your 100,000. If you see your hundred thousand in a traditional IRA or your 401K and its pretax money, that 100,000 that’s on your statement is only about 80,000 of that is yours.
So love love love Roth IRAs. The challenge is most people money have money in traditional IRAs. And for one case, because Roths haven’t been around as long. So traditional IRAs have this thing that you just got to be aware of, and it’s called a required minimum distribution. This is the minimum amount of money that you got to take out a certain point in your life, because the IRS needs to get paid.
Like when the when they sit around and, up in DC around a room and they say, how do we get money to pay for all these bills? They look at every senior in America and they say, man, there’s this big bucket of, retired minimum distribution money coming out of these accounts. I can’t wait.
And they’re like licking their chops because it’s a huge amount of money that you if you own a traditional IRA and you’re 73, that’s the new number. Except if you reach 72, before 2022. If that makes sense. But let me say it this way. If you reach 72 after 2022, then your, required minimum distribution age is 73.
They’ve changed that a lot over the years. Last several years, you used to be 70 and a half. Now just know, it’s about 73. Some exceptions in there. Check with your advisor. So if you’re 73 you’ve got to take out money. And the IRS is licking their chops because they’re going to get paid. And so you take out money.
And the way that works is that and advisors help you with this. Although I will say this, the IRS says it’s the responsibility of you as the owner of the account to do this right. And so now we feel very responsible for helping you do it. But it really comes down to you as the owner of the account doing this right.
Again, most institutions really help you make this work, but you’ve got to take it out. You got to take it out at age 73. Not all of it, but some of it. I’ll tell you how that calculates in just a second. But very important, because if you don’t take it out, there actually used to be a pretty hefty penalty.
And they’ve watered that down a little bit. But if you didn’t take it out, they used to charge you 50% penalty, which is absolutely insane. And they’ve changed that under the Secure Act 2.0. Now it’s 25% penalty which is still stupid. But if you correct it, it might only be 10%. So still painful. And you don’t want to deal with it.
So, you’ve got to make sure that you take your required minimum distribution out at the right time. Typically 73 now. So, let’s say you turn 73 in the year, you turn 73. You don’t have to take one out. You have to take it out the following year. But then now you’ve got to coming out and same year.
So that could bump your taxable income up. So you got to be careful work with your advisor. But basically at 73 you’ve got to take money out. Again, not all of it. It’s a calculation. So, the calculations on the IRS website again I’ll put a link in here. But let me give you an example. Let’s say again it’s like married filing joint.
They have different, they have different, calculations. But it’s basically life expectancy tables. So, they basically want you to withdraw the whole thing by the time you die. And so, if you’re married filing joint, that’s one calculation. If you’re single, that’s another calculation. If you’re married, filing joint with a spouse that’s ten years younger than you, that’s actually a different calculation.
So, here’s an example. Let’s say, this is actually 72. So, it’s a little older but it still works. Let’s say you had 100,000 and you looked at the tables. The life expectancy of a 72-year-old is 27 years, 27.4 years. So, you take 100,000 divided by 27 and you’ve got to take out $3,649. So that would be the amount of money you’ve got to take out.
And so, you also want to know that they look at the balance at the very end, December 31st of the previous year. So, if the market crashes like right at the end of the year, that’s actually good for you because then you have to take out less money the following year. But check this out.
So, at age 90, this every year, this required minimum distribution gets more and more. So, in that example somebody 72 takes out $3,649, but somebody who’s age 90, that formula is different. They have to take out $8,000. So, the money, the RMDs go up. As you get older, if you have multiple accounts, you can take your RMD from one account.
You don’t have to take it from every single account. The challenge with that is, to me, it just kind of brings in some red flags to that. Hey, you know, somebody is going to probably bug you. You never take your RMD from this account and then you’ve got to do some explaining, which is fine, but just keep good records.
So, nobody comes along and says, oh, this account never took RMDs. And you’re like, I calculated it based on all of the accounts. So, in other words, you can take the RMD from one account. You don’t have to take it from an individual as long as it’s the total, that you’re supposed to take out. Now you can kind of workaround this required minimum distribution a little bit Roth IRAs, which I love, don’t have this required minimum distribution.
While you’re working, you probably know about this, but you can rollover your 401K IRA. That’s tax free. You don’t have to worry about that. If you made along the year, some people make nondeductible contributions to the IRA. Now typically when you make a deduction, a contribution to A 401K or traditional IRA, typically that money that you put in there reduces your taxable income.
It’s a deduction of sorts. But some people because their incomes too high, they don’t get to deduct their traditional IRA. So, they have a nondeductible. If that’s you, you know what I’m talking about. If you have nondeductible contributions to your IRA, those, that hang with me, those nondeductible portions are not subject to RMDs.
So, but make sure you keep good records of that. A really cool thing to know is a qualified charitable distribution. So, this is one of my favorite things to do is instead of taking your RMD, you just send that money to a charity. And I love this. You can do this up to 100,000 per person, 200,000, married filing joint.
And so you say I don’t want my RMD. And that example before I said like $3,000, I don’t want it. Just send it to a charity. That’s perfect because most people aren’t getting it. Charitable deduction, especially if you’re senior because the standard deduction went up so much. The charitable deductions are not really applied for many, many people.
So, if you’re not doing a charitable, distribution, here’s what’s happening to you. You’re taking money out from your retirement account, your IRA, you’re paying taxes on it, let’s say $600, and then you’re donating it and you’re not getting a deduction. So basically, by sending it directly to charity in some cases, you’re avoiding a $600 IRS payment.
And we’re called to I mean, we need to pay the IRS, but nobody’s required to leave a tip. So, if we can do a, charitable contribution, qualify charitable contribution or I’m sorry, qualified charitable distribution, I think, you know, need to look at that and work with your advisor on that. The one thing to note, too, I think is often lost on us, is, you know, what happens to my account when I die.
And generally speaking, your beneficiary has to take the money out. This is a different RMD rule. Over ten years. That rule was more confusing in prior years, but it’s generally your beneficiary. Let me say this clearly your non spouse beneficiary. If it’s your spouse, your spouse can take your IRA roll it into theirs. So that’s generally the rules.
But if it’s a non-spouse, if it’s a child and they have to take the money out over ten years. And so, keep that in mind because some kids could be in a high tax bracket. And you might want to think about like, should I pay for some of that now? So that’s something to consider. I think the, the really good planning that is done in a lot of this is thinking about not only like how to minimize my, but here’s also how I think about it.
I want to minimize my lifetime taxable tax payments. And so, a lot of us over the last several years have really been thinking about not only while we’re living, but our beneficiaries and converting our traditional IRAs to the Roths. So that way we’re not subject to the same RMDs. And then those monies that come out down the road are completely tax free, which is really cool.
So, I really want you to encourage working with your advisor to try to reduce your RMDs down the road. And I think it’s really important, too, because we know the federal government is going to have to find this money somewhere. Like I said, they’re licking their chops. And so, if you can reduce your future RMDs, I really think that’s going to put you in a good position down the road for both you and your beneficiaries.
Oftentimes we don’t think about the beneficiaries, but I think it makes sense. Again, we don’t want to leave the IRS a tip. If you leave a trust as your beneficiary, that’s a different rule. That’s a five-year rule. So, a little bit more aggressive. RMDs there. Again, you can’t I mentioned this maybe in the previous podcast you can’t borrow against your IRA.
You can borrow against other investments, but not your IRAs. And then I also want to make sure that if, if you missed out on this a little bit, if you look at your IRS forms, make sure the forms have the right letters on them. Like for example, and you can check with your advisors, but sometimes we just don’t even look at our tax returns.
But the codes on a make sense. So like a code B would mean a Roth distribution not subject to tax, but a code J would mean an early distribution from a Roth which could be subject to a tax, so maybe even a penalty. So those codes on your IRS forms just I always just encourage you just to look at those.
Just make sure they’re right and check with your advisor again if there’s a problem. It used to be a 50% tax. Now if you get it corrected in a timely manner it could be 10% I think. I don’t know, I’ve never experienced it. I think it can even be zero. If you could substantiate that. It was an administrative error.
But I don’t want to mislead you there. But RMDs are definitely something that you want to plan out and think about and do the calculations. Again. I’ll put a link. There’s calculators in there. Your advisor can help you with that. We got all kinds of tools. I really think it’s funny because when you go through the IRS website and look at this stuff, they put in random things that they’re trying to support, like they put in this little paragraph, kind of in the midst of all of the nerdy stuff they put in here.
Photographs of missing children. The IRS is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the center may appear in this publication, or pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling. I think that’s nice. I think it was just kind of I just see kind of these in this IRS publication is just kind of this random, random request.
So try my best to blow through that in such a way that it’s not overwhelming. It gave it a little extra energy this morning and hope it makes sense to you. My final take would be do some thinking through your RMDs as you plan out what that looks like and try. Here’s your goal. Try to reduce your lifetime taxable income.
We’re all required to render under Caesar’s, what is Caesar’s? But none of us are required to leave a tip. Remember, you think different when you think long term. Have a great day.
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References:
2023 Publication 590-B
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