An Advanced Guide To Minimizing Future RMDs

Now , a lot of you know my bad joke by now , but I'm all about being patriotic , not to the point you pay more in taxes than you need to . So today I'm going to go over these RMDs , which stands for required minimum distributions , and how you can effectively plan for them .

This was an episode that was prompted by a listener question and it's a little bit of a funny one , but it came from someone who says Ari , I just heard about RMDs from a previous episode of yours . I am not happy with you . I have to take out funds .

I just found out Now , unfortunately , you are the bearer of bad news here , but I looked it up and it turns out it is true . Rmds are going to begin and I have a healthy 401k balance of $3.4 million . How should I effectively plan for my RMDs that are going to occur , which I now know , whether I want to or not .

So , in light of hearing this , the reality is you are going to have RMDs . And if you're wondering , oh my gosh , when do these RMDs begin ? For me , here's when . If you were born 1950 or earlier , age 72 . Now this includes people who were born earlier and you were subject to the old RMDs , which began at 70 and a half .

If you were born from 1951 to 1959 , you are going to have to take those at age 73 . And if you were born after 1960 , you are not going to have to take RMDs until age 75 . So for a lot of you , it's not until 75 that you really have to worry about this , and so it's really easy to go . Let me just put this off . I don't have to worry .

I'm 45 today , I'm 50 today , I'm 60 today . I've saved and invested well , I have my 401k . Why should I have to worry about this RMD thing ? It's not going to happen for so long , and it's not that I want you worrying about it , but what I want you doing is being really intentional , because here's what a lot of people do they retire early .

So you've saved and invested really well . Maybe you have 3 million bucks , and now you're going to retire early . So let's call it age 62 in this example . You're going . All right , I'm not going to take Social Security yet . I know I can . All right , I know I need healthcare until 65 with Medicare .

But these RMDs , how do I plan for those with an early retirement ? Well , here's how . Like I said , a lot of people they've saved and invested . Well , they've got 3 million bucks or 2 million bucks or whatever it is , and now you're 62 .

And you're going , ari , I love this , and the reason I love this age is because I have paid so much in taxes up until this point . Now , here I am , finally , I don't have to pay a lot in taxes . This is what I'm talking about . This is the life you're the best advisor ever . That's why I tell my clients I don't wanna be the best advisor ever today .

Let me be the best over the next 20 , 30 plus years of your life . And the way you do that is you take advantage of what's called your tax planning window . That's the time before RMDs begin , before Social Security begins , maybe before other income sources begin , so you can optimize your timing . And so what a lot of clients will do is they'll go .

Okay , ari , I get it . Age 62 , here's where I am today . Income is low because I'm living off of maybe it's a brokerage account , or maybe some a little bit from an IRA account , or whatever it is . So now , here you are going . What can I do to minimize my future RMDs ? But , ari , I don't even know how much my RMD is projected to be .

So let me give you an example so you can understand what this is talking about , because this RMD is a big problem for a lot of people . Now , it's a good problem . The problem is is if , hypothetically , let's assume , you need 100,000 to live the life you wanna live , but your RMD is projected , at age 75 , to be 150,000 . Okay , you just pull more , right ?

Well , not only do you have to pull the 150 , you're going . Ari , did you not hear me ? I don't need 150,000 a year to do the life I wanna live , I go . I heard you . You said you only needed 100,000 , but that extra 50,000 , that gets taxed to what we call the not so fun rate , and so what we wanna do is prevent that for you .

And so here's an example . Let's pretend you were born January 1st 1950 . And so you're 73 years old and your life expectancy . Using certain IRS tables it would be 26 and a half years .

Don't worry about the nuance of it , but what you do is you divide your account balance as of December 31st of the previous year by this life expectancy , using the IRS table of 26 and a half . So let's assume that you have a million dollars . Super simple , it would mean that you would have to take out 3.8% of your balance that year .

So your first year RMD in this example would be $37,736 . You can take out more , but you cannot take out less without a penalty . Now what if you had that same IRA but your birthday was , let's say , january 1st 1940 . So not 1950 , but 40 . Well , in this case you'd be 83 years old .

Your IRS life expectancy is 17.7 , so all we do we divide the IRA balance by that . So now your withdrawal , or your required minimum distribution would be 5.65% , which would be about 56,500 .

So now , as you can imagine , pretend it's not a million dollars , but right now you are saving and investing well and you're at age 75 , looking at compound growth , projected to have 2 million or 3 million or 4 or 5 or 10 million dollars .

And if that's you , the reality is , you might be projected to have to take out $200,000 or $300,000 in addition to social security , in addition to a pension , in addition to rental income or other income sources . You might be in the highest tax bracket once you're retired even more so , maybe , than where you are working today .

Maybe there's deferred comp that you're gonna have to factor into this as well . And so how do you make sure you plan for this ? Well , well , first understand what accounts do you have to take these RMDs on ? The accounts you have to take them on are 401ks , iras , 403bs Now , if you're still working after your RMD age , which is really rare .

But if that's you , you don't have to take the RMD from your workplace , except if you own more than 5% of the company , but very rare . So you can't just go start a side hustle . This is why I'm bringing this up . I know a lot of you are sneaky , creative people , which I like but at the same time , I need to make sure you're aware of this .

You can't just go start a side hustle , put all your pre-tax money in a 401k just to avoid this RMD . But good thought , I got a few emails from you guys on that . If you have some money in an IRA and some in your company 401k Then you have to take an RMD based on the IRA balance but not on the 401k balance .

Just to be clear there now , hsas these are pre-tax accounts technically no RMDs , don't worry about it . Roth IRAs no RMDs , don't worry about it . Now , if you've inherited a Roth IRA which we're gonna talk about at a later time you do , but as of right now , don't worry about it for this conversation .

So , when you're looking at RMDs , how do I plan for these ? What should I think through ? I give a basic example that I get made fun of a lot here at the firm for and a lot of you have already heard it , but it's my cauliflower example .

And so the whole idea here is think about RMDs like a vegetable , and I have people sending me selfies of them in the grocery store , you know , with a cauliflower in the frozen aisle or vegetable ion . It's just hilarious at this point .

But what is literally happening is I'm asking you hey , you're projected to have to take out a whole lot more than you're even Gonna want to have to take out in the future . So what I want you to do is eat a little bit of cauliflower , almost like can you eat a little bit of your vegetables today ?

Because if you don't , what's gonna happen is in the future You're gonna have to eat a ton of cauliflower Even when you're full , and the last thing I imagine you want is to go oh my gosh , I've got this whole plate and it's mainly cauliflower , even though I don't want cauliflower it's .

If I could have eaten a little bit along the way or pay a little bit in taxes along the way , I'll be in a much better spot , you know , down the road , and so for a lot of my clients , it's not unrealistic to add 1.5 , 3 million more dollars tax-free over the course of your lifetime by doing quality Roth conversions .

We say I'm intentionally gonna pay taxes on maybe a hundred thousand dollar conversion . Maybe I'm gonna pay it at at 15 percent . That way in the future , that same hundred thousand doesn't get taxed at 35 or 40 percent . Now this is really important for a lot of you that have saved and invested well . But I mentioned this in earlier episodes .

Part of my job is not to say , hey , just think about this . But here's what I don't want you to worry about . And if you say you know what , ari , I'm looking at my different investment accounts , I'm not projected to have a whole lot left over to the point where RMDs are gonna be a massive issue . Well then , guess what ?

You don't really need to worry about Roth conversions that much . The reality is this is , for people that have Saved and invested really well , they're gonna have to take out a whole lot more than they're gonna know what to do with . Now .

Of course you could spend it , but you're gonna get taxed on a on a very high amount for a lot of you if you don't do good planning , and the time to do this is before so security begins and before the RMDs begin . So for most people you retire at 60 . You want to do really effective planning from 60 to 65 , then maybe 65 to 70 .

We're doing a little bit less of conversions , maybe , so security starting , maybe there's other income sources and then , as we're getting up to that 73 age or 75 age when RMDs begin , we're good . We've done a lot of conversions up until that point and you don't have to worry .

So what I don't want you to do is is two common mistakes where people will actually Overconvert . They'll move too much money from an IRA to a Roth IRA to avoid RMDs entirely , and they'll actually pay more taxes along the way by doing that . So you don't want to do that . There's a fine balance there .

Now I want to break down a few common things regarding inherited IRAs so both spouse and non spouse and here are your options . Your option is , if your spouse passes away , you can roll that account into your own IRA , or you could keep it as an inherited IRA Just where it is , and it will be subject to RMD rules as they are , which I'm going to explain .

Almost always not all the time , but almost always it makes sense to roll that old IRA account from your spouse that is now deceased into your own IRA .

If you are younger , because you're going to be able to push back the RMD timing and do more tax planning , let's make it simple for you there's no RMDs until your required date of either 73 or 75 for most of you .

Now , potentially , this is going to change when RMDs will begin if the following occurs let's pretend you're 60 years old , now your spouse they're 72 , so they're 12 years older . I'm just going to give you an extreme example to understand this . Your 60 , your spouse is 72 . They have a million bucks in their IRA they pass away .

Now here's what's going to happen . That million dollars , once again , your spouse that passed away . They're 72 . So you're going all right . When do the RMDs begin ? You said 73 or 75 . Let's say it's 73 .

Well , that million dollars in your spouse's IRA your spouse that just passed away , unfortunately , which is another conversation , of course , but just financially looking at it for a moment , that million dollars would be subject to RMDs starting next year . But here's what you're going to do .

You've heard the early retirement podcast and maybe other podcasts , and so that million dollars you're going to roll into your own IRA . So , based on your age , that RMD doesn't begin until 75 . Now , once again , you're 60 . So you don't have to wait at all .

You can say I have 14 years until I have to take my RMD , otherwise it would have started next year and then , once it starts , it doesn't stop . So that can protect you big time if there's a big gap between spouses . Another thing you could do is you could take the account as an inherited IRA and it will be subject to RMDs .

And here's an example of why you would even do this . Let's pretend that your husband passes away or your wife , your spouse passes . In this example . All of their assets were in an IRA , but they were only 50 years old . If that spouse rolled the IRA into their own IRA , they wouldn't have been able to access it penalty free until 59 and a half .

Once again , this applies to a lot of you that want to retire early . Your 50 spouse passes away , they once again . If you didn't roll it over , you wouldn't be able to access until 59 and a half . So what you want to do in this case is say why don't we take this as an inherited IRA , subject it to RMDs ? And this is why we would do this .

The nice thing is that RMDs aren't subject to the 10% early withdrawal penalty , even if you aren't 59 and a half . I'm going to say that again . The nice thing about good planning here if you're under this age , if you're 50 years old and your spouse passed away , what you can do is you can say we're going to actually turn on those RMDs .

You're not subject to the 10% early withdrawal penalty , even if you're not 59 and a half . So the extra benefit here is you can later move your spouse's inherited IRA your spouse that passed away into your own IRA , stopping RMDs . So this is just a it can seem a lot of details , which there are , but my goal is to simplify it .

Now , that's assuming that it's a spouse . Let's look at what if it's not a spouse . So here's the question to ask yourself didn't you inherit it before 2020 ? Did you inherit it after 2020 ? If you inherited an account from non-spouse so from a parent , for example well , if you inherited that before January 1st of 2020 , so think back .

Okay , when did this person pass away ? Was it before 2020 ? It was not . My spouse Got it . You have required distributions . You have to take over the course of your lifetime . It's known as a stretch IRA . So , if you inherit an IRA at 40 and then you take it over your lifetime , the tax-deferred benefits are what's known as stretched .

Now you could reference the IRS life expectancy table and you could see exactly what that distribution has to be every year . Or what I would recommend is don't do that . Go use an online IRA RMD calculator and it will tell you . Now , if this person passed after January 1st of 2020 , you do not have required distributions .

Instead , you have a little bit of a tougher situation . You have to fully distribute the account over the next 10 years . Technically , accounts must be fully distributed by December 31st of the 10th year following the death of that IRA owner .

So , as an example , if you inherited an IRA on February 1st of , let's just say , 2023 of this year , then by December 31st of 2033 , 10 years later , this would have to be fully distributed . Now there's some exceptions , because there always are , and the first is if it's your spouse .

So if your spouse don't worry about this I just went over that a few minutes ago If it's a minor child , once that child reaches the age of majority , they will become subject to the 10 year rule . So let's say you inherit the account at age 12 , the kid can keep it as is until they turn 18 , then that 10 year rule begins .

So it would have to be fully distributed by age 28 . Now another exception if an individual who is not more than 10 years younger than the IRA owner .

So example here you inherit , let's say , your sibling's IRA Okay , not your spouse , but you inherit your sibling's IRA and let's say they were five years older than you , you can use that IRS life expectancy table . Now a quick side note not all beneficiaries , of course .

It works this way , but I had a client case where the following occurred , it was a grown child . They were subject to the 10 year rule over 18 years old , but more than 10 years younger than the original account holder . So because they were more than 10 years younger than the original account holder , they had to distribute it over 10 years .

Now , that is rare , but it depends . All of this depends on your circumstances . So make sure , of course , speak with a planner to make sure you don't execute this incorrectly . Now , if you're disabled or chronically ill other instances where you don't have to worry about it . So why did I bring up all those examples ?

Well , I get asked those questions often and I just wanna go through those details to make sure you're aware of it .

But really and this is not in a specific order is regarding RMDs if you are saving and investing , well , the reality is , if you have a million bucks today and you look at that rule of 72 , which is a common way people will look at compound interest , which is what if you take your average growth rate and divide it by 72 .

So you take eight divided by 72 , it's gonna take an average of nine years for your money to double . So if you're 50 today and you have two million bucks , you might have four million bucks , and then you might have eight million bucks , they might have 16 million bucks , and if you have $8 million by the time you're 75 , you might have to take out .

And I'm just doing a calculator right now on my phone while I do this . If you have $8 million , the reality is you might have to take out an RMD of $304,000 . And so , if that's the case , you're going once again . Ari , I don't know if you heard me , I don't need 300,000 plus , I'm going . Oh , I heard you . You're not gonna get taxed .

A very happy rate here . So what we wanna do is say can we use our years where our income is low to implement effective tax strategy to bring down those future RMDs ? Now what do you do ?

Once again , if you're looking at overall planning , don't simply start on the tax side , meaning some people will start Roth conversions without asking themselves how much do I really wanna spend ? Because you could , of course , spend a whole lot more . But I don't want you to do the following , which is you go , I'm gonna have these big RMDs in the future .

Why don't I just spend a ton today , even needlessly , so that I protect myself from these RMDs where the government takes a hit in the future . It's yes , I want you to protect yourself , but I don't want you to spend excuse me just unnecessarily . So the big planning points here how much will RMDs impact your plan ?

It's a big planning point for a lot of people to manage their tax liability . One of the biggest challenges , I can tell you , for most people is managing that impact that RMDs are gonna have on their tax bill . There are other episodes where I go through a comprehensive list of options to understand how you can reduce your RMD through tax .

You know planning such as Roth conversions or donor-advised funds or charitable giving through qualified charitable distributions . All of these different strategies exist out there and that's what it helped clients to do . Now an additional layer to this not to put too much detail for you , but you wanted the advanced guide , you got it .

I'm gonna go through legacy planning and a lot of people say are there , I don't have kids , I don't have a legacy plan . I go , yes , you do , because if you don't have kids , you're gonna have to spend a whole lot more than you even want to once that RMD begins , because it's not gonna get passed down . So for a lot of my clients .

It's my job to show them how much I need them to spend in certain years and how much I need them to understand the trade-off if they don't spend it . Here's what your RMD is gonna look like If we don't do this tax strategy . Here's what this looks like .

So a lot of people wanna also make sure that when they're planning for RMDs , they also have their kids in mind . So if you have a significant IRA balance and your children might inherit that in their peak earning years , then their tax bill could be huge , and so I wanna protect against that . Now it might be a net positive to them .

But let's assume your child is a doctor and you're a client of mine and you're a doctor and the doctor passes away , who's making very healthy income and has a very healthy IRA balance , and now your child inherits this and they're a doctor and they have a healthy income . Well , they're gonna be taxed at their tax rate . And so now , all of a sudden , it's .

You've worked really , really hard . I don't want you being taxed , necessarily . You know a huge amount on that . So the question is , what would it look like if something happened to you for your children , and what rate would they be taxed on what you work so hard to accumulate .

If there's a million dollar inheritance and it has to get distributed over 10 years assume it grows at let's just say seven or 8% , let's say 7% your child would have to take out over $142,000 a year . So if they're already in a high tax bracket and guess what , a big chunk of that is gonna be taxed , and so we wanna protect against that .

A few last things here . Charitable giving there's something known as qualified charitable distributions . This is where you gift to a charity directly from your IRA . Whatever you gift , that counts against your RMD for the year . So if you're already doing giving , let's assume you're leaving half of your money to charity and half to a child .

Well , assume you have half your money in an IRA and half in a brokerage account . Don't just split it 50-50 . Put 100% of it that you wanna leave to charity in the IRA . Let your child receive 100% of it from your brokerage account .

You need to manage it every year , but the most effective way is not to go okay , 50% of IRA to charity , 50% of IRA to child . It's not wise from a tax perspective . You can do a whole lot better , and the way you do .

That is you say let's put 100% of what I'm gonna be giving in the IRA and let's put 100% of what I'm gonna be giving to my child not a charity in the brokerage account . Just minimize taxes Doesn't mean you're shifting the investments , but are we owning the right things ? That goes back to asset location . So here are the action items to think through .

To summarize , number one will RMDs be a big impact and , if so , to what extent ? Number two is how will the decisions impact your heirs ?

Or , if you don't have heirs , from a legacy planning perspective , if you don't spend a tremendous amount , what amount are you projected to have to take out , and then call it bonus tip , if you will how do you incorporate charitable giving into thinking through this ? Now , I do wanna always recognize , because one client said this to me and was really helpful .

They said Ari , all of this sounds great , but this is a really good problem we're talking about All of this RMD is because I'm projected to have to take out more than I know to do it . So remind your clients to be grateful that they're in a position where , yes , they need to be smart tax wise .

Yes , do these things , but it's because they're in a wonderful spot . It's not as if it's . You know there's a lot of people who would love to have an RMD issue , safe to say , so hope that was helpful for today's episode on RMDs . A little bit on inherited IRAs helps you think through this a little bit more . That's all for today's episode .

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Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice . Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .