What are RMDs? Raisin Mutation Diseases or Required Minimum Distributions? Find out on this week’s episode of The Invested Dads Podcast! Josh and Austin discuss all things RMD, including tax strategies, exceptions, beneficiaries, and answer the big question, “Do You Need To Take One?”. They also share a dad joke and Austin tells a story about his motorcycle trip. Listen now!
Main Talking Points
[1:51] – What is an RMD?
[9:03] – Tax Strategies for RMDs
[13:53] – Exceptions For RMDs
[19:05] – Eligible Beneficiary, What Is That?
[21:30] – Dad Joke of the Week
[23:16] – When To Take An RMD
[26:24] – Just To Be Sure, Any More Exceptions?
[30:28] – How We Recommend Handling RMDs
Links & Resources
IRS – Required Minimum Distribution Worksheets
Last Week’s Episode: Understanding Different Account Types
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. Today, we are going to be talking about RMDs, or what I like to think of as raisin mutation diseases. Well, I mean, not really, it’s actually required minimum distribution, but I tried to come up with something that was way more entertaining than that. So-
Josh Robb:
I consider a raisin already a mutation for a grape, so it’s already something-
Austin Wilson:
It’s like a super, it’s a super sad grape.
Josh Robb:
Yeah.
Austin Wilson:
But this is really a follow-up to our other recent episode where we talked about account types, and we actually kind of left the conversation off without going into too much detail about required minimum distributions. So, we’ll link that episode below. If you haven’t listened to that, check it out first because they will kind of be a predecessor to this episode.
Josh Robb:
Yeah. Because there’s a lot to talk about when it comes to required distributions, as well as account types, and it was hard to fit it all into one. So, yeah, please listen to that first to know what accounts have to take required distributions and then today, we’re going to talk about what that means.
Austin Wilson:
So, Josh, I hear this is one of your favorite topics in the world.
Josh Robb:
Oh, I love it because there’s so many rules and exceptions and there’s one thing I like, it’s exceptions to rules, because that’s the most frustrating thing in the world.
Austin Wilson:
That is, to the English language?
Josh Robb:
I before E.
Austin Wilson:
In America.
Josh Robb:
That’s the one that bugs me the most.
Austin Wilson:
Yeah?
Josh Robb:
Like it’s I before E, except for almost all the time.
[1:51] – What is an RMD?
Austin Wilson:
The English language and American law, there are lots of loopholes in both. So, let’s talk about what an RMD is. An RMD is the amount that a person is required to take out of a retirement account to avoid tax penalties. So, RMDs are required for accounts that have a tax advantage. An example that most people could probably relate with is a 401k account. When you add money to a traditional pretax 401k, you do not pay taxes on that money. It’s going in before you’ve paid taxes on. So, it’s literally the X percent that you said, or whatever of your salary, taken off the top before you even are taxed by it. If you earn 50,000 a year and add $10,000 into your 401k pretax, you only pay taxes on that 40,000. And that $10,000 that you put into your 401k account, it’s going to grow what we call tax-deferred until you take it out. Then the IRS wants to collect their taxes at that point, right?
Josh Robb:
Yeah. Yes. So, tax-deferred, meaning you’re deferring, you’re putting it off. It doesn’t mean you get out of tax.
Austin Wilson:
There’s no free lunch.
Josh Robb:
No. But you’re just saying, “I’ll pay you later.”
Austin Wilson:
It’s an IOU.
Josh Robb:
And the IRS says that’s fine, because every dollar that it grows to, you’re also going to pay taxes on it.
Austin Wilson:
And taxes are probably going to be higher in the future.
Josh Robb:
That’s what they’re thinking. But that’s the idea is, and this is the end result of that is the IRS says, “You can only defer taxes for so long. And so at some point, we want to collect that tax money.” Because that’s what keeps everything going in government. And so, they put restrictions on that. So, the RMD, which is just exactly as it sounds, required minimum distribution. They’re saying, “Here’s the very little, the least amount you have to take out of your account each year. It’s required.”
Austin Wilson:
So, how did the IRS decide how much each person has to withdraw? And does everyone owe the same amount? Or how does that work?
Josh Robb:
Yeah. So, to make it fair, the IRS says, okay, they’re going to force a minimum withdrawal, starting at a certain age, and then from then, for the rest of your life, and they’re going to do that as a percentage. Because everybody has different account values. If they said everybody owes $10,000, for one person, that may not matter. For another person, that might be their whole account and then they’re done. So, they said, “Okay, we’re going to do it as a percentage.” And up until last year, so 2019, they passed a SECURE Act, which changed some stuff. But prior to that, 70 and a half, because-
Austin Wilson:
Stinking half-year.
Josh Robb:
This makes things as confusing as possible. We’re going to do, the favorite half-year shows up, your first required distribution is in the year you turn 70 and a half.
Austin Wilson:
So, everyone in their calendar had their 70 and a half birthday marked.
Josh Robb:
I mean, who doesn’t celebrate their half birthday every year?
Austin Wilson:
That’s another excuse for ice cream.
Josh Robb:
I guess.
Austin Wilson:
Now, you don’t really eat ice cream, but if you did, that would be-
Josh Robb:
If I did, it would be on the half-year. Yeah.
Austin Wilson:
You could have sorbet.
Josh Robb:
Yeah. That’d be true. Or Dole Whip.
Austin Wilson:
Sorbet keeps you from having a sore tummy.
Josh Robb:
Yes, that’s true.
Austin Wilson:
Okay. That’s good. Josh has a lactose issue, so.
Josh Robb:
Yeah. I don’t eat ice cream.
Austin Wilson:
For listeners. So, yeah, the famous half birthday the government loves to use. Totally ridiculous. So, starting in 2020, they have a new age for that.
Josh Robb:
Yeah. So now, it’s 72.
Austin Wilson:
Oh, that feels so much better.
Josh Robb:
The thought process was, people are living longer. Life expectancy has been growing, that we’re going to start it at 72, an easy number. Everybody knows when they turn 72. They don’t have to run some weird calculation.
Austin Wilson:
You’re already thinking about the rule of 72.
Josh Robb:
Yes.
Austin Wilson:
72. Man. Okay. I love it. 72 is the new year, easy to figure out. So, you mentioned a table.
Josh Robb:
Yes.
Austin Wilson:
So, does that table tell you the amount that you have to withdraw?
Josh Robb:
Yeah. So, the IRS puts out this table and they say, okay, based on life expectancy, they give you a number, and this is the factor you use to figure out how much you need to take out.
Austin Wilson:
Ooh, I like factors.
Josh Robb:
Factors, and this factors into the calculation.
Austin Wilson:
Ah haha.
Josh Robb:
Yeah, you got it. Yeah. So, they say, okay, if you are 72 years old, you take the ending value of the end of the prior year. So, if I turned 72 in 2021, I would take whatever my value is at the end of this year, 2020 on 12/31. That’s my value. So, let’s say it’s $50,000 at the end of the year. All right? And then I turned, we’re going to say, 76. Because I actually looked all these things up. Right? So, if I turned 76 in the next year, my factor is 22.
Austin Wilson:
Ooh. I don’t know what that means, but it sounds good.
Josh Robb:
It’s this sliding scale. The number starts high and gets smaller because you’re dividing. So, the smaller the number, the bigger your outcome will be.
Austin Wilson:
So, yeah, you have less years. The older you get, you have less years you’re dividing things out by.
Josh Robb:
Yes. And so, 22 is the number you’re going to be dividing by. So when you divide 50,000 by the factor of 22, you come up with $2272 and 73 cents. Now, if you know or have ever done a tax form, there’s not places for pennies, so you’re rounding, but anyway.
Austin Wilson:
To the dollar.
Josh Robb:
Rounding up to the next dollar. So, $2,273 is your required distribution for that year you turn 76. And so, you have from January 1 to 12/31 of that year to take the money out. All right? Now, let’s say you have that $50,000 and you’re 86 year old. Your factor is now 14.1. So, like I said, it slowly starts working downward.
Austin Wilson:
Yep.
Josh Robb:
All right? That would mean you’d have to take out $3,546. So, you could see, the IRS says, the older you get, the more they’re going to force you to take out.
Austin Wilson:
So, based on rough estimates of those two numbers, the IRS is using an actuary table that assumes between 98 and 100 years life expectancy.
Josh Robb:
Actually, the table goes to 115.
Austin Wilson:
Whoa.
Josh Robb:
Which is crazy. And after 115, 1.9 is your factor. So, you’re taking out over half of your portfolio every year after 115. So, if you make the 115 years old-
Austin Wilson:
It’s going to go quickly.
Josh Robb:
Your required distribution is half over half of your portfolio every year. But again by then, the concept is, you’ve had a lot of years to have tax-deferred growth, they want their money.
Austin Wilson:
Exactly. Yeah.
Josh Robb:
And so, the older you are, the more it is required to take out. The idea there too is you just have to take it out of that tax advantage account. They don’t care what you do with it once it’s out. They get their tax, what’s left over is yours. You could turn around and reinvest it back into the market if you don’t need it. You just can’t have it in a tax-deferred growth anymore. That’s the only thing they care about.
Austin Wilson:
So, that is how you calculate what your distribution has to be. Now, does everyone use the same table? It’s the same table published by the IRS?
Josh Robb:
Yes. Yeah. In the irs.gov, their website, you can see it. They have it right there.
Austin Wilson:
We’ll throw that in the show notes.
Josh Robb:
Yes, we’ll have that in the show notes. That’s really the best website to go to get the legal answers for RMDs. Because they’re the ones that make the rules.
Austin Wilson:
It sounds like fun reading.
Josh Robb:
Oh, it’s so great. But to answer your question, no. So, there’s different tables, depending on your situation. And so, for instance, if you are a spouse who is within a certain years of your husband or wife, whoever passed away and you inherited an IRA, you have a certain table. If you’re past, I think it’s 10 years, you have a different table. Depending on your age, when you receive the account, and how you receive the account, whether it’s your money or inherited money, there are different tables. So, you want to make sure you use the right table when factoring in your RMD.
[9:03] – Tax Strategies for RMDs
Austin Wilson:
So, we’ve talked a lot about taxes because the government isn’t going to give you free lunch. You’re going to pay taxes on your money now, or you’re going to pay taxes, as we’re talking about here, down the road, when you’re required to take those distributions. What are some tax strategies that someone can use around RMDs?
Josh Robb:
Yeah. So, let’s first talk about who needs to take that out. I mean, because then you can talk about kind of-
Austin Wilson:
Hoo, hoo.
Josh Robb:
Yeah. The idea here is, people are required to take out an RMD when they turn 72, for the accounts that they’ve been adding money into.
Austin Wilson:
Correct.
Josh Robb:
Right? Okay? If you have an account that you inherit, that has totally different rules that we’re going to get to in a minute. All right? So now, we’re just talking about money that you’ve accumulated.
Austin Wilson:
I’m getting an exception vibe.
Josh Robb:
Yes. And so, that’s why we had to do a totally separate ish episode?
Austin Wilson:
Episode. Yeah, we’re doing episodes.
Josh Robb:
Let’s do an episode of this. A totally different episode is that there’s so many rules, situations. Because really, there’s a rule because some situation popped up and someone asked the question and they had to come up with a-
Austin Wilson:
I know the first person who ran into that situation probably skated through tax-free or whatever. And then the government’s like, “I got you. We’re not letting that happen.”
Josh Robb:
Probably why it’s 59 and a half is they had a friend who was connected in the government and said, “Hey, you know what? If I could push this off a little bit farther, let’s do 59 and a half.”
Austin Wilson:
I need six months. I just need six months.
Josh Robb:
Oh, it’s so ridiculous. But from a tax strategy around RMDs, people who have their own, that at 72 and a half, you can do things to lessen the burden by first reducing the amount of money in those type of accounts. So, a lot of 401ks nowadays have the option for a Roth IRA, a Roth 401k. And so, you could add money in and that’s after-tax money. Since the money’s already been taxed, the IRS does not require distribution out of that account. So, one way to do it is to put more money in tax-free accounts, like a Roth IRA or Roth 401k.
Austin Wilson:
Post-tax.
Josh Robb:
Post-tax, yeah. It grows tax-free. Or you can convert later on, meaning move money from a tax-deferred account like an IRA 401k, into a Roth IRA and you would pay tax at that point, but then no future RMDs are required.
Austin Wilson:
And I’m sure that a financial advisor would have a pretty good way to calculate the optimum point and amount to be able to do stuff like that.
Josh Robb:
Yes. Because then you get into, okay, what tax-
Austin Wilson:
Rates.
Josh Robb:
Rate am I paying now?
Austin Wilson:
Yeah, exactly.
Josh Robb:
Or I’m paying in the future. Is my required distribution going to be a burden for me? Maybe I’m already planning on spending that amount of money every year, so I will be taking it out anyways. So, there’s a lot to consider, but that is a way to reduce that required distribution.
The other way is, when you do have required distributions at 72, instead of taking the money out and paying tax, if you give it directly to a charity, you can count that towards your required distribution. So, an example is called a qualified charitable distribution, QCD.
Austin Wilson:
Ooh, another acronym.
Josh Robb:
Yes. And this qualified charitable distribution states that if it goes directly to that charity, and I don’t take possession of the money, since the charity is a nonprofit, and it has to actually be a registered nonprofit, they then get to keep the tax, in a sense.
Josh Robb:
So, an example would be, let’s say I have a $10,000 required distribution for a year, and I was already going to be giving $2,000 to a charity. If I would have taken the $10,000 out, paid my tax of 20% and then tried to pay the charity…
Austin Wilson:
Right.
Josh Robb:
I have less money. If I have a 10,000 RMD and I already know I’m going to give $2,000 to charity, if I give it directly from there, they’ll get the full $2,000. I owe no tax on that $2,000. And the $8,000 that’s left is the only thing I’ll pay tax on. So, I save taxes that way.
Austin Wilson:
So, this is probably a lot more beneficial now with the standard deduction being so high.
Josh Robb:
Right.
Austin Wilson:
Because most retirees, they could have, if they were say giving, if they were doing a QCD and giving it to a church or whatever, then they could have itemized that, and it would have been fine. But now, everyone almost is going to take the standard deduction anyway, not everyone, but a lot of people. So, to do this, QCDs, you’re taking it off the top part instead of down in the middle-
Josh Robb:
Oh, yeah. Yes.
Austin Wilson:
Of your tax return.
Josh Robb:
Yep. And there’s limitations to the amount and stuff, but for most people, this is the most efficient way, from a tax standpoint, to give to charity.
Austin Wilson:
Can you give your entire RMD, if it fits within those limits, to charity and you get those?
Josh Robb:
Yes. Not only that, you can give more than your required distribution to charity and still take the qualified charitable deduction. So, you can give less than, equal to, or more than, as long as you fit the parameters of the QCD. That’s another tax strategy within RMD. So, you can reduce it ahead of time. Or if you have the required distributions, you can give portions of it to charity, and that would reduce the taxes owed.
[13:53] – Exceptions For RMDs
Austin Wilson:
So, I want to go back to loopholes.
Josh Robb:
Yes.
Austin Wilson:
I think loopholes are a very sticky topic.
Josh Robb:
Oh, yes.
Austin Wilson:
Especially when it comes to RMDs, but you talked a little bit ago about original owner, as the term. So, someone who originally maybe had the account or whatever, what do you mean by that? And how does that impact RMDs and passing them, or IRAs, and passing them along or whatever?
Josh Robb:
Yeah. So, a 401k’s retirement plan, it’s only for the person working at that company. Right? I don’t have a 401k for my wife at my job. She can have her 401k at her job, but each 401k’s tied to one person.
Austin Wilson:
On Friends, Phoebe called that a 40 wonk.
Josh Robb:
40 wonk?
Austin Wilson:
Yeah.
Josh Robb:
The same is true with an IRA. That’s short for individual retirement account, IRA.
Austin Wilson:
Individual, one person.
Josh Robb:
One person. And so, because it’s always tied to one person-
Austin Wilson:
Tied to a social security number, right?
Josh Robb:
Tied to, yes. One person is-
Austin Wilson:
You have one.
Josh Robb:
Yes. So, you can have multiple IRA accounts, but only one person can own it. And so, at that point, that owner is the one that’s contributing into that account, whether it’s a 401k or an IRA. Money’s being added into it, and it’s being added into it for your benefit. So, that’s where all these original or normal rules for the RMD are for you, 72 years, all that stuff, are for you.
Now, if you pass away prior to fully depleting that account, you can name beneficiaries on that account, and that account then goes to and becomes owned by whoever your listed beneficiary is. If it’s your spouse, there are rules that allow them to just absorb it into their IRAs. They can make it theirs.
Austin Wilson:
Right.
Josh Robb:
All right? So, a spouse has the ability to take that and there’s no limits or anything like that. The spouse can say, “Okay, that 401k or that IRA is now mine.” And so, the rules then are now my rules. So, when I turn 72, all that. If I’m not the spouse and I’m a kid or a sibling or just a friend who got listed as a beneficiary, it becomes an inherited IRA account, because I inherited it from somebody else. It was not originally mine. An inherited IRA has some fun rules. Yeah. 72 does not apply to inherited IRA. In fact, the new rules…
Austin Wilson:
Oh, yeah, they just changed them with the CARES Act.
Josh Robb:
New rules. Brand new. Yes.
Austin Wilson:
CARES Act, we talked about it.
Josh Robb:
Yes. And so, the CARES Act is one thing, but the SECURE Act is where a lot of these changed.
Austin Wilson:
That’s what I meant.
Josh Robb:
Yes. The CARES Act did have something to do with it though, because they canceled all RMDs for this year, including inherited IRAs.
Austin Wilson:
Oh, yes.
Josh Robb:
So, the CARES Act said, for 2020, because everything going on with COVID-19 and everything, nobody has to take anything out if they don’t want to.
Austin Wilson:
But SECURE Act of 2019.
Josh Robb:
Yes.
Austin Wilson:
2018, late 2018, 2019.
Josh Robb:
The end of 2019.
Austin Wilson:
Yes.
Josh Robb:
The SECURE Act of 2019 said that any new inherited IRA, so from January 1st, 2020 on, if you inherit an IRA, whether it’s a Roth IRA or a traditional IRA, because anybody who inherits it does have required distribution, even if it’s tax-free growth money, because they don’t want tax-free growth forever. Get that out of there.
Austin Wilson:
No free lunch.
Josh Robb:
They say you have 10 years to get all that money out.
Austin Wilson:
And pay taxes on it.
Josh Robb:
When on the-
Austin Wilson:
Over those 10 years.
Josh Robb:
Yeah. If it’s a traditional IRA.
Austin Wilson:
Yes.
Josh Robb:
So, for 2020…
Austin Wilson:
2020.
Josh Robb:
You have to take all the money out in 10 years.
Austin Wilson:
Okay.
Josh Robb:
And the rule is very open. You have 10 years to get the money out.
Austin Wilson:
You can take that out-
Josh Robb:
They don’t say you could do-
Austin Wilson:
The first year.
Josh Robb:
One-tenth every 10 years.
Austin Wilson:
The last year, or in between.
Josh Robb:
You could say, I want 1% this year, 7% one year, 47% another, it doesn’t matter. As long as by the 10th year, it’s zero.
Austin Wilson:
So, planning this out with your advisor, you’d probably look at what your income and tax rates are now, versus what… You don’t really know for sure, some people do, but versus what you anticipate them being in the future, and you would plan the most tax advantageous way of getting it out.
Josh Robb:
Yes. Yep. And if it’s a small account, let’s say you get $100 IRA, for whatever reason. You may just say, “I’m just going to take it out. The taxes is going to be minimal. It doesn’t really matter.” So, depending on what it is. But if you get a $2 million IRA, man, you really want to plan that out because that’s going to, that could have a big tax impact. And so, this 10-year rule gives a lot of flexibility, but it causes a lot of problems.
For instance, if a trust was going to be receiving this IRA, with a trust beneficiary taking the required distributions only, the wording of that trust could actually force them to wait till the 10th year and then have to take it all out, because it won’t let you touch it prior to that. So, it did cause a lot of problems. I say all that. If you already have an inherited IRA, you are still on the old rules, which is, you have your life expectancy and required distribution every year. So, you can actually stretch out that IRA for a long time.
Austin Wilson:
Stretch IRA.
Josh Robb:
That’s what they call them, yep. Because you’re stretching that tax-deferred growth, even though you’re not the original owner.
Austin Wilson:
Yeah, this is actually, generally pretty unfavorable rule for individuals.
Josh Robb:
Yes. So, what it did is it shortened the timeframe it takes the IRS to get that tax money.
Austin Wilson:
It also shortened the amount of time your money has to grow.
Josh Robb:
Yes. And the reason they did that is it offset some of the other SECURE Act provisions. It enabled them to show income coming in, where they were giving benefits to other places.
Austin Wilson:
Right.
[19:05] – Eligible Beneficiary, What Is That?
Josh Robb:
Now, I say all that, that applies for people who are not eligible beneficiaries.
Austin Wilson:
Whoa. So, this sounds like another term I think we’re probably going to want to define.
Josh Robb:
Yes.
Austin Wilson:
Eligible beneficiary, what is that?
Josh Robb:
Yeah. So, just to make it even more confusing, if you inherit an IRA and you are an eligible beneficiary, that would be a surviving spouse, which I talked about, a minor child, someone who’s chronically ill or a disabled person, or someone who is within 10 years in age of the person who is deceased, those are considered eligible beneficiaries.
Austin Wilson:
Gotcha.
Josh Robb:
These people can then do the RMD rule of the past.
Austin Wilson:
A minor child as opposed to a major child?
Josh Robb:
Yes. And so, they haven’t quite broken through yet. Maybe their fastball isn’t very good. So, minor being under the age of majority, and each state has a different age for that. But for instance, we’ll take them as in, because they have some extra rules on top of everything else. So, let’s say a four-year-old kid inherits a million dollars. All right?
Austin Wilson:
Wow.
Josh Robb:
Yeah. That four-year-old has no clue. He’s going to go out and buy a bunch of dinosaurs or something and spend all his million dollars. Right? If it’s my kids, it’s whole bunch of, I don’t know, what are those things called? They spin and they hit each other. I don’t even know. It’s a whole fun game. We’ll just say Pokemon.
Austin Wilson:
Okay, there you go.
Josh Robb:
I just know what that is. So, a four-year-old gets it. They obviously have no way of managing this million dollars.
Austin Wilson:
Maybe you didn’t when you were four.
Josh Robb:
I’d buy a lot of bubblegum, I guess. But the rule says, okay, from four, we’re in Ohio here where we’re recording, so 18 is our age.
Austin Wilson:
Yep.
Josh Robb:
From 4 to 18, you have required distribution and it’s all for your life expectancy. So, it’s really small because your life expectancy from 4 till 115 or whatever, it’s a very small withdrawal. So, they take these required distributions. When they hit 18, that ten-year rule starts. Because at that point, they say, “Hopefully, you’ve had some counseling. Hopefully, you have some people lined up to help you. But at 18, you have 10 years from 18 to 28, the rest of the money has to come out.”
Austin Wilson:
Gotcha.
Josh Robb:
The RMDs stop. You just have to get those out for 10 years. And so, that’s kind of their rule. Everybody else has just the ten-year. So, if you’re a disabled person, chronically ill, a surviving spouse, like I mentioned, your spouse then falls under their own rules, or someone within 10 years. So, let’s say it’s two siblings, and we’re three years apart. If I inherit it, I just have my RMDs and I’ll take it for my life expectancy because you’re within the same range as that other person.
Austin Wilson:
Right.
[21:30] – Dad Joke of the Week!
Josh Robb:
And so… Yeah. So, we talked through the 10-year rule. We talked through who is eligible for all those things. I think we need a break.
Austin Wilson:
Oh, good. My head is spinning. Josh, this is why I talk to you about my questions about this stuff, because I’m very, very high level. So, because I’m so high level and the weeds of this stuff confuses me and I talk to experts like you, I’m going to do what I do best and make Josh laugh.
Josh Robb:
All right.
Austin Wilson:
So.
Josh Robb:
I’m ready.
Austin Wilson:
Dad joke of the week. Got in my hand a book here. What is the best part about Switzerland?
Josh Robb:
Switzerland. Well, I would… I don’t know. I don’t think I’ve ever been there.
Austin Wilson:
Well, the flag’s a big plus.
Josh Robb:
A big plus, because it is a giant plus.
Austin Wilson:
It’s a big plus. So, side note. We went on a motorcycle trip last week, my uncle and my cousin and my dad and I. Went down to North Carolina and there’s this little place in the mountains, really twisty, beautiful roads for motorcycles. It was a great time. Everyone was safe. We all made it back. But there’s this little place, it’s like a chalet in the mountains called Little Switzerland. And we went and had lunch there and yeah, gets your little Switzerland vibe. It’s not like the Alps, but it’s pretty darn close for America anyway. It’s decent mountains for the east coast, and it was beautiful. Good lunch. I had a smoked trout caught around there. Club sandwich. Oh, so good.
Josh Robb:
Smoked trout. I love trout. It’s a good fish.
Austin Wilson:
We don’t have it around here much.
Josh Robb:
There’s a… I used to go actually trout fishing with my grandpa up near the Sandusky area, which was so much fun. Fly fishing, which is a whole different way of fishing.
Austin Wilson:
I’ve never done that.
Josh Robb:
It’s so fun. Challenging.
Austin Wilson:
That sounds like RMDs, it sounds hard.
Josh Robb:
Yeah. It is. It is challenging, but it was a lot of fun. So, I have really fond memories of that, and then eating the rainbow trout that we would catch up there.
[23:16] – When To Take An RMD
Austin Wilson:
So, now we know who needs to take an RMD, but when do you take it?
Josh Robb:
Okay. So, like I said, the current rule is, kind of the default is 72, if you are already taking an RMD. So, let’s say you were 70 and a half last year. Guess what? Unfortunately…
Austin Wilson:
That year and a half, you have to take it.
Josh Robb:
You got to take it, yep. They don’t retroact anything. They don’t care. So, you got to take it out. The IRS doesn’t put a timeframe. They just said by 12/31. So, you don’t have to do it on your birthday or on any certain day. You have the whole time. So, most people either say, “You know what? I’m just going to treat it like a monthly income and just take a portion out every month.” Others say, “You know what? Since it’s tax-deferred growth, I’m going to wait till the end of the year to get as much tax-deferred growth as possible.” It doesn’t matter. As long as it’s done by the end of the year, you’re done.
Austin Wilson:
So, if your money is in a traditional, I’m thinking, kind of traditionally equity looking account and would there would probably be potential optimum or not optimum times in a market cycle to do that, right?
Josh Robb:
Yeah. A good example is that actually, last couple of years. So, the end of 2018, if you remember back a couple of years, we saw a 19% drop at the end of the year.
Austin Wilson:
Correct.
Josh Robb:
So, what that did is it brought everybody’s account values down when they evaluate your required distribution. So, on 12/31, account values were down. And then, at the beginning of the next year, the values caught back up. The market caught back up to where it was.
Austin Wilson:
Yes, quickly.
Josh Robb:
And continued on to new highs. In 2019, the market was up 37% or whatever.
Austin Wilson:
Yep.
Josh Robb:
And so, that was a plus for anybody taking required distribution, because you got a low valuation.
Austin Wilson:
Your base was low, right.
Josh Robb:
Your calculation was low. Then all of a sudden, your account value grew very quickly. And if you waited till the end of the year, your percentage of withdrawal actually was lower than what the calculation originally was because you’re going off a higher value.
Josh Robb:
Reverse that. End of 2019, you had a high ending value, and then a 35% drop in the stock market. So, if you were planning on taking it in March…
Austin Wilson:
Probably wait.
Josh Robb:
Your percent withdrawal would be a lot higher than the calculation because of your value. So, if you look historically, three out of every four years are positive in the stock market. That’s part of why people wait till the end of the year to take it is, three out of every four years, it paid off. Now, you’re talking, and most years probably just small little difference between the percentage calculation on the two. But in general, we always tell our clients, if you need the money, that’s the best time to take it. Because you have to take it out by the end of the year, trying to time it in and out and frustrating yourself on that, it’s just a waste of time.
Austin Wilson:
If you have the flexibility and it’s a substantial swing, that might be an opportunity, but generally speaking.
Josh Robb:
Yeah. A rule of thumb is, plan on taking it at the end of the year. And if an opportunity arises earlier, then go for it. If you hit an all-time high in July, you may say, “You know what? I don’t know what the rest of the year is, but I at least know where I’m at right now, and it’s better than the beginning of the year. I’ll take it now.” So, yeah, there’s really not a bad time to take it, because you have to do it. The bad time to take it is on 1/1 of the following year because you missed it. And we’re going to talk about the tax consequences of missing in a minute.
[26:24] – Just To Be Sure, Any More Exceptions?
Austin Wilson:
Oh. So, we’ve already talked a lot about loopholes, about exceptions, about areas that just are there to confuse you. Are there any more or can you just rehash a couple of those just to be sure we understand as we go forward?
Josh Robb:
One of the ones we didn’t talk about is, for instance, let’s say I have multiple IRAs. So, let’s say I have a traditional IRA. I added some pretax money into it on my own. Then I have a rollover IRA because I had a 401k and I pulled it out. And then let’s say I started a new job and I have a new 401k. So, I have three tax-deferred accounts that all have required distributions. What do I… Do I have to take a little bit out of each of them? How’s that work? The IRS says, because they love making things exciting and very straightforward, if you have IRAs, you have to calculate each one, so you know how much comes out. But you can take it out of any of them, all of them, however you want to do it. They don’t care. IRAs, they look at them all as a big bucket of stuff. 401ks, though, each 401k, the required distribution has to come out of that 401k.
Austin Wilson:
Okay.
Josh Robb:
That’s one of the rules they have. So, if I have a 401k and I have a $5,000 RMD and I have an IRA and a 5,000 RMD, I can’t take 10 out of one of those. The 401k has to have five, and then all the IRAs together have to have five out.
Austin Wilson:
So, would this be an opportunity that if you had a handful of different IRAs, you worked a bunch of different jobs, whatever, they’re just kind of sitting there, you could strategize how each account was invested so that you take, you calculate your RMDs based on totals, just like you should, but you can determine which one at which point to take your RMD out of?
Josh Robb:
Yes, definitely.
Austin Wilson:
If they’re all the same.
Josh Robb:
Yeah. So, let’s say one’s an equity that has a high growth. In a good year, like 2019, I’m pulling my RMD out of there, because that’s where my growth came from.
Austin Wilson:
But in a down year, you take it out of a cash or fixed-income IRA. Yep.
Josh Robb:
Yes, definitely. And the other thing with that too, and this is another exception, age 72 is when you have to start RMDs. If you’re still working, your 401k at the company you’re working at is suspended until you end your work there. And so, if I’m working at 75, my 401k account does not have required distribution unless, because there’s exceptions to the exception, if I’m a 5% owner or more in the business, I have an RMD, no matter what.
Austin Wilson:
Now, are there work requirements? So, does it matter if you’re full-time or part-time?
Josh Robb:
No. As long as you’re employed.
Austin Wilson:
Employed. Really?
Josh Robb:
For that 401k company, yes.
Austin Wilson:
So, it might be advantageous if you could stay on as a consultant. I’m using air quotes on a podcast.
Josh Robb:
Consultant, as long as you’re still eligible for the 401k plan. Because if I leave employment and I am no longer eligible, but I’m working as a consultant, if I’m not within what’s considered an employee there, then I wouldn’t count for that. But you’re right. If I’m part-time there, just working a day a week, as long as you’re working.
Austin Wilson:
As long as you’re qualified for the plan.
Josh Robb:
Yes. And there’s probably some IRS rulings that I’m not familiar with, I’m sure they’ve hashed out exactly. People probably try to game the system working one day a year or something.
Austin Wilson:
Yeah.
Josh Robb:
But in general, if you’re legitimate employed, whatever that is, you can postpone your required distributions. Now, it’s until the year you retire. So, that’s the other thing. Some people say I want to retire at the end of the year on 12/31. Well, guess what? If you retire in that year, your required distributions do.
Austin Wilson:
That’s crazy.
Josh Robb:
So, 1/1 is a better time to retire, when looking at that thing. And so, another planning opportunity is, if I know I am going to work for a little while after 72, maybe actually rolling some of my IRAs into the 401k, if your company plan allows that, would reduce or eliminate their RMDs as well. Because even if I’m employed, the 401k’s the only one that allows that exception.
Austin Wilson:
So, if you’re planning on working past 72, but you’re not there yet.
Josh Robb:
And I have an older rollover.
Austin Wilson:
And you have an old rollover, see if you can roll it into your new plan so that when you continue to work, you don’t have to take those RMDs.
Josh Robb:
Yeah. It’s just a way of postponing a little while.
Austin Wilson:
That’s a really good plan.
Josh Robb:
Strategies. Now, the downside is, 401ks do not allow QCD. So, at some point, if you’re wanting to do charity, you’ll have to get it back into an IRA, a rollover IRA.
Austin Wilson:
And then you’d have to take RMDs.
[30:28] – How We Recommend Handling RMDs
Josh Robb:
Yep. So, there’s a lot, like I said, there’s a lot there. That’s, again, why we say financial advisors are very helpful, especially going through some of these complicated processes of retirement.
Austin Wilson:
So, yeah, how would you recommend someone keeping track of all of this? I mean, just from the outside looking in, I work in the industry and this is still a lot to comprehend and stuff. So, how would you recommend most people handle this?
Josh Robb:
The first thing I say is, don’t wait till the last minute. start planning ahead. And so, what I say, a good financial advisor will be running some of these scenarios prior to 72 and saying, “Okay, let’s look at some tax planning options before that.” So, we’ve talked about doing a conversion, moving money from your rollover or traditional IRA into a Roth IRA. You don’t want to do that when required distributions are already there. You want to do it prior to that. Planning ahead is key, so thinking through those things before they get there, and then obviously, just having a plan, having a reason for what you’re doing.
Because if I know what each account is set up for and why it’s there, you’re going to have to pay a tax. And when the taxes are owed at some point, just minimizing to what is the minimum amount of taxes I have to owe. So, I may have to pay taxes. I may have to take an RMD. That’s okay. If it fits in my plan, especially if I’m going to be living off some money anyways, so if the RMD fits into that whole calculation, that’s fine because I’m going to need that money to live off of anyway. So, just having a plan and sticking to it.
Austin Wilson:
We talked a lot about it, but this is an area where it’s probably worth its weight in gold to work with someone who knows the rules, who knows how to plan ahead for this kind of stuff. So, Josh and I, we want to let you know that we’re here for you. We’re here to help. If you have any questions, don’t hesitate to reach out. But also, just generally, working with a financial advisor is a huge asset in this kind of area of planning. So, if you are curious to know more about what Josh and I do at Hixon Zuercher Capital Management, check out the Invest With Us tab on our website. We’ll link that below. We work with a team of credentialed, experienced colleagues that have worked alongside our clients for nearly two decades to help them achieve their financial goals, including planning required minimum distributions and tax planning, all of this stuff. And we can help you too.
Josh Robb:
So, I think, before we end, just to recap everything would be great. And so, there’s a lot we went through. Hopefully, we were clear. If you have any questions, please email us. We’d love to help you out. We can’t give you financial advice on specific situations, but if you just want clarification on these rules and stuff, more than happy to answer.
Austin Wilson:
What’s that email?
Josh Robb:
The email is hello@theinvesteddads.com, but review. 72 is when most required distributions start. If you inherit an IRA, you have 10 years and I’m going to say, if you inherit, meaning you’re doing it now, going forward, you have 10 years to get that money out, and you can strategically plan when to get that money out. So, those are the two big things, I think, for required distributions everybody needs to know, is that’s the start point at 72. And if you inherit an IRA, you have 10 years to get that money out, and you can pick and choose how that works.
Austin Wilson:
So, as always, check out our free gift to you on our website, a brief list of 8 Principles of Timeless Investing. These are overarching investment themes to keep you on track, to meet your long term goals. Check it out. It’s free. Josh, how can people help us grow this podcast and continue to help people?
Josh Robb:
Yeah. Make sure you subscribe. On Apple Podcasts, leave us a review. Email us at hello@theinvesteddads, not just questions, but any topic. So, if this triggered something you’d like to know about, shoot us an email with the topic. We’d love to cover that in a future episode. And then share if you think of somebody in your family or friend that is getting close to that age and you thought, “Well, let’s make sure they know everything that they need to about RMDs.” Share this with them. We’d love to help. As always, it was great. Hopefully, you enjoyed this awesome topic.
Austin Wilson:
It was exciting.
Josh Robb:
I know my wife, when I told her this was the topic a couple of days ago, she said, she kind of rolled her eyes and said, “I know nothing about that and I don’t want to.” So, hopefully, she enjoyed that as well.
Austin Wilson:
Yeah. Hey, thanks. Have a good week.
Josh Robb:
All right, bye.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
