Danny (00:05.454)
Welcome to the Limitless Retirement Podcast. My name is Danny Goodorf, the owner of Goodorf Financial Group. Whether retirement is on your horizon or you've already made the leap, this podcast tackles your most important questions in retirement. Every episode, I'm here to share valuable tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show.
Required minimum distributions, otherwise known as RMDs, can be a confusing topic for many retirees. As a financial advisor, I've seen numerous individuals make mistakes when it comes to managing their RMDs. Today, I'm going to break down the top 10 most common RMD mistakes. I'll give you the info you need to navigate this complex part.
of your retirement plan. The first mistake I see is a simple one, but it's surprisingly common. That is not starting your RMD on time. The rules for RMDs starting ages have changed. This has led to some confusion amongst retirees. In the past, the starting age for RMDs was 70 and a half. However,
and now stands at 73. And it's set to change again at age 75 in the future. To make this easier to understand, let's take a look at an example. If you were born in 1951, you'll turn 73 this year in 2024, which means it's time for you to start taking your RMD. The starting age,
of 73 applies to anyone born between 1951 and 1953. If you were born in 1960 or later, your RMD starting age is currently set to 75 years old. However, it's important to note that this could change again before it's actually implemented. For now though, the RMD starting age is 73 until
Danny (02:34.51)
the year 2033, when it's scheduled to increase to that age 75. Now, it's crucial to start your RMD on time to avoid potential penalties. The IRS imposes hefty fines for failing to take your RMD as required. We'll be discussing some of the consequences of missing RMDs in more detail later.
So the second mistake I often see is combining RMDs with a spouse. Many people assume because they file their taxes jointly, they can also combine their RMDs. However, this is not the case. RMDs are an individual responsibility, not a joint one. Each person's RMD is calculated based upon their age and the value
of their retirement accounts. Even if you are a married couple, your spouse must satisfy their RMD requirements separately. You cannot take the entire RMD amount from one spouse's account and consider it fulfilled for both of you. This is an important point to understand that each individual is responsible for their own RMD.
regardless of how you file your taxes. So keep that in mind. The third mistake is misunderstanding the potential cost of not starting your RMD on time. As I mentioned earlier, you must take your first RMD by age 73. However, there is a loophole that allows you to delay your first RMD until April 1st of the following year.
While this may seem like an attractive option, it comes with some significant drawbacks. If you choose to delay your RMD until the calendar year after you turn 73, then you're still required to take your second RMD in that same year at age 74. This is essentially doubling up on your required minimum distributions.
Danny (05:03.47)
for that first year. Doubling your RMDs means potential doubling the income tax that you'll owe on those distributions. In some cases, it can even push you higher into a new higher tax bracket, resulting in an even greater tax burden. Now, normally when you have a rare situation where you expect your income to be much lower next year,
you should take that first RMD at age 73. This will allow you to avoid that higher tax in the year where your income is higher. All right, let's move on to mistake number four, confusing RMDs with Roth conversions. If you're a regular viewer of our channel, you know that I'm a big fan of Roth conversions.
as a tax planning strategy. However, it's important to understand that RMDs cannot be directly converted into a Roth account.
A lot of clients come in and they ask us about that, taking Roth conversions while they have to start taking their RMDs. But whenever you take your RMD, the money must be separated from your account and taxed as ordinary income. You cannot take your RMD and then convert that specific amount of money into a Roth IRA. Now,
That being said, you can still do Roth conversions while receiving your RMDs, but you first must satisfy your RMD first. After taking your RMD and paying the tax, you can then choose to convert more money from your traditional retirement accounts into a Roth account. And this does make sense for certain clients. To do...
Danny (07:13.23)
your RMDs and then do additional Roth conversions. It just depends upon your overall tax plan. Mistake number five, misunderstanding the RMD aggregation for IRAs. If you have multiple IRA accounts that are subject to RMDs, you have some flexibility in how you choose to take your distributions.
you're not required to take a separate RMD from each individual IRA account. Instead, you can calculate your total RMD balance from the sum of all of your IRAs. Then you can choose to take the whole distribution from one or more of those different accounts you can choose to withdraw out of each one. But as long as you withdraw,
the total RMD amount, then you have satisfied the requirement for your RMD. This creates a great planning opportunity. You can be strategic about which accounts you use for your RMDs. For example, if the market is down, you may not want to sell your growth investments from a certain IRA. They're essentially on sale. In this case,
you would choose to take your RMD from a more conservative account. Now, this is going to allow your growth investments to recover over time. Alternatively, if you had a sector that had a big increase, you might want to decide to take your RMD from that account to rebalance and reduce your risk. The key point is though, that for your IRAs,
you can choose which accounts you take your RMDs from. But the total must meet your total required amount. A lot of our clients we recommend when they come into our office is that if you do have one, two, three, four IRAs is to combine them into one IRA. This is going to make your overall RMD calculation and distribution that much more simple. Mistake number six that I see,
Danny (09:41.55)
is misunderstanding the RMD aggregation for 401ks and 403Bs. These are going to be your workplace plans. If you have multiple 401ks or 403B accounts subject to RMDs, the aggregation rules are different. Unlike with IRAs, you cannot aggregate your 401k or 403 balances to calculate your RMD.
Each 401k account or 403b account that is subject to RMDs must have its own separate distribution. You are required to calculate that RMD for each individual account and take the appropriate distribution from each one. This is important to keep in mind if you have multiple employer sponsored retirement plans.
as many of our clients do. From job to job, they may have entered into different workplace plans. All right, mistake number seven is not understanding the still working exception for 401ks. If you are still working and employed by the company that's sponsoring your 401k plan, then you may be able to delay taking
RMDs from that specific account. However, there are a few important caveats for this rule. First, you must not be more than a 5 % owner of the company. This exception is designed for employees and not company owners. Second, on your 401k plan, must allow for this provision. Not all plans are required to
to offer this option. So it's important to check with your plan administrator to see if it is available to you. If both of these are true and you still work for the company, you can delay taking your RMDs from that 401k account. Even if you're reached your RMD age. It's important to note that this exception only applies
Danny (12:08.014)
to your 401k at your current employer. It does not apply to your IRAs or your 401ks from your previous employers. So please keep that in mind if you're still working past RMB age. All right, mistake number eight is not understanding the new Roth 401k RMD rules. Starting in 2024, Roth 401ks are no longer subject to
to required minimum distribution. This is a significant change from the previous rules. Prior to 2024, if you had a Roth 401k, you were still required to take an RMD from that account, even though those distributions were generally tax -free. The Secure Act 2 .0, which was passed in late 2022, eliminated this requirement.
Now, for Roth 401Ks, they are treated similarly to Roth IRAs in terms of your required minimum distributions. As you know, Roth IRAs have never been subject to RMDs for the original account owner. However, it's important to note that different rules apply if you inherit a Roth IRA from someone else.
If you do have an inherited Roth IRA, you may still be subject to RMDs depending on your specific circumstances. That's a topic for another video though, but it's worth mentioning here to think about the difference between inherited Roths and the Roths that you've contributed yourself. Mistake number nine, forgetting to take your RMDs altogether.
While this may seem like an obvious error, it's one that can have significant impact and consequences. The IRS imposes penalties for failing to take your required minimum distributions as required. In the past, the penalty for missing your RMD was a staggering 50 % of the amount that you were supposed to withdraw. For example,
Danny (14:32.686)
If your RMD in the year was $10 ,000 and you failed to take it, you would owe a penalty of $5 ,000. You would also owe income taxes on that distribution as well. But fortunately, the penalty has been reduced in recent years and the current penalty for missing an RMD is 25 % of the amount you should have withdrawn. So that's helpful.
And that's a good benefit that the IRS has passed. While this is still of substantial penalty, it's not as severe as it used to be. The IRS also states that if you correct the mistake and take the missed RMD before they discover the error, you may be able to reduce that penalty to 10%. But regardless of the specific penalty amount, it's clear.
that missing an RMD can be very costly. So you want to avoid this mistake and consider setting up automatic RMD withdrawals from your retirement accounts. Most financial custodians or institutions offer this service, making it easy to ensure you never miss an RMD. All right, we're coming to the end here for mistake number 10.
which is sometimes the most important mistake. This is not exploring RMD planning opportunities. Even if you've reached RMD age, there are still strategies used to lower your potential RMDs and the taxes that you're expected to pay on them. One such strategy is using a qualified annuity contract, otherwise known as a QLAC.
A QLAC is a special type of annuity that allows you to defer a portion of your RMD to a later age. Effectively, what this does is it reduces the amount of your RMDs in the meantime. Now, there are several rules and restrictions that apply to QLACs. So it's important to work with a financial professional to see if this is the right strategy for you.
Danny (17:00.686)
Okay, so let's get into another planning opportunity. This involves charitable giving. If you want to give to charity, you may be able to lower the tax impact of your RMD by making a charitable distribution, otherwise known as a QCD. With a QCD, you can direct some or all of your RMD to a qualified charity.
satisfying your RMD requirement while also potentially reducing your taxable income. I have another video on QCDs in more detail, so you can see about that. But basically a QCD allows you the money you give to charity does not get reported as taxable income. So be sure to subscribe to the channel if you're interested in learning more. In conclusion,
RMDs can be a complex and intricate situation in retirement, but knowing these common mistakes can help you navigate this important part of your retirement plan. Remember to start your RMDs on time, keep your spouse's RMDs separate from your own, and be mindful of the taxes of delaying your first RMD. Also understand the difference between RMDs and Roth conversions.
and learn the RMD aggregation rules for IRAs and 401ks. Keep up to date on the latest Roth 401k RMD rules. Most importantly, take your RMDs each year to avoid those costly penalties. And also make sure you're looking for planning opportunities to reduce the impact of your taxes. If you found this video
and this information to be helpful, be sure to like and subscribe to the channel for more retirement planning insights. You can also check the links in the description for additional resources to help you make the most of your retirement years. Thank you for watching and I'll see you in the next video. Thank you for listening to another episode of the Limitless Retirement Podcast.
Danny (19:23.758)
If you want to see how Goodorf Financial Group can help you get the most out of your money, go to GoodorfFinancial .com forward slash get started. This is where you can schedule a 20 minute call to see how our firm can help prepare a free retirement assessment. Please remember, nothing we discuss on this podcast is intended to serve as advice.
You should always consult a financial, legal, or tax professional that is familiar with your unique circumstances before making any financial decisions.