How to Align Your RMD with Your Income Strategy

Welcome to How to Retire On Time, a show that answers your questions about all things retirement. My name is Mike Decker. I'm a licensed financial adviser who can even file your taxes. Now that said, please remember this is just to show I'm not giving you financial advice. Everything you hear should be considered, well, informational. With me is my esteemed colleague, mister David Franson. David, thanks for being here.

Yep. Glad to be here.

David's gonna read your questions, and I'm gonna do my best to answer them. You can text your questions in right now to (913) 363-1234. That number one more time. (913) 363-1234. Let's dive in.

Hey, Mike. What are these RMDs I'm hearing about, and how do they fit into my retirement income strategy?

RMDs are required minimum distributions, and you are required to pull money out of your accounts that you've deferred taxes on. So in other words, we've had this great benefit of putting money into an IRA and deferring taxes. There's no capital gains. It's a huge benefit to grow your wealth. Once though you hit 73 years old, the government's saying, well, we need you to start paying taxes on this.

They have some kind of calculation, like, on the IRS website.

And it changes every year, it updates, but it's it's easy to calculate. Any financial professional should be able run the calculation. You can go on websites and get a calculation too. I mean, many companies have those calculators. Schwab, Fidelity, Vanguard, you name it. They they all have calculators. Okay? So the RMD is basically it's just the government's trying to get paid on it.

Yeah. That's it. They're forcing you to take some income.

Of your pretax.

Okay.

Yes. So think of IRA. It may be relevant to your four zero one k. There's some nuance there if you're still working or not, but just assume that you're gonna be taking money out of it. You've got SEP IRAs, simple IRAs. I mean, really any IRA except for Roth. Okay. Roths are not subject to required minimum distributions.

Yeah. And tell us why that is.

I don't know. Just how the rules are written. I mean, you've already paid the tax itself. Yeah. So it grows tax free, pays out tax free. So I think it's like the government said, well, we don't care about this, so whatever.

Yeah. Yeah. I I think that's where my assumption was is you've already paid taxes on it.

Yeah. The difficulty with RMDs is the double taxation trap.

Okay.

So if you don't need the income, you can take an RMD out, but where are you gonna put it? If you don't need to spend it, you can invest it again. Then if you invest it again and then you need it again, then you're gonna pay taxes on the capital gains.

Okay.

That's a problem. That's an inefficiency. Now if your intention is to grow your assets, give it all to the kids, who really cares if you take the RMD out, pay the taxes, whatever, put it into the stock market. I don't know. You buy in Berkshire Hathaway.

It doesn't make any sense at all.

Step up in basis, don't you Basically, a capital gain is if you buy something at a hundred dollars Uh-huh. And it's now worth $200, you're gonna pay taxes on that hundred dollars worth of growth.

K.

Per share in this situation, that's called a capital gain. Let's define things clearly. K? So when you pass, your stocks receive a step up in basis as in all that growth. Now there's a new base, a new starting point.

Right.

So you're not getting taxed anymore on the growth. It starts over.

Yeah. Floor has moved up.

Yeah. It went from a hundred dollar basis per share

Uh-huh.

To now $200 basis per share.

So

now you can sell it without really paying much in taxes. Sure. That's the idea behind it. So if you're taking your RMDs and just buying it for legacy purposes, fine.

Yeah. Because the people who are going to inherit it, that basis, that new floor will have stepped up.

Yeah. And they're gonna receive it, and there's no way restrictions on the ten year rule if they have to pull funds out of the the inherited IRA. Uh-huh. They can just spend this money.

Okay.

So it's not necessarily good or bad. I think people are often scared into, oh, RMDs are coming. I gotta be prepared. What do you want your money to do for you? If the idea is I want maximum income, then okay, you might want to get ahead of this, and do some IRA to Roth conversions because Roths aren't subject to RMDs, and then you have your income that would be then able to kind of line up with the income you already want, so it becomes a thing you already want, you already expect.

And what if you're still working at 73, you haven't fully retired? Do they still make you pull out a distribution? Oh, okay. They want their money.

I mean, the simple answer is yeah.

Okay.

There are exceptions to rules, but Sure.

In general, Yes.

General, yeah, you're you're soft pull funds out. Alright. So what do you do with it?

Because maybe if you already have income from a job and some other places, I don't need this income, but I was forced to take it. What do I do with it? Yeah. Be able to answer that question.

Now if you don't need the RMD and you don't have legacy intentions or legacy is already taken care of, you could do a qualified charitable distribution. Uh-huh. So you'd take your RMD, and you'd give all of it to a charity so you don't pay taxes on it. That's another option as well.

That's nice.

But it's you know Wayne Gretzky? Remember that guy? Yeah.

I think he's Canadian, but he played in the HL. Anyway, you're Yeah. Famous

Wayne Gretzky. Legend. So he has this expression. You don't skate to the puck. You skate to where the puck is going.