How to Align Your RMD with Your Income Strategy

“Hey Mike, what are these “RMDs” I am hearing about, and how do they fit into my retirement income strategy?” Discover the potential tax inefficiencies caused by Required Minimum Distributions and various strategies you can implement to help take action now. 

Text your questions to 913-363-1234.

Request Your Wealth Analysis by going to www.yourwealthanalysis.com

What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.

Mike: 00:05

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.

Mike: 00:21

With me is my esteemed colleague, mister David Franson. David, thanks for being here.

David: 00:25

Yep. Glad to be here.

Mike: 00:26

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 [phone]. That number one more time. [phone]. Let's dive in.

David: 00:40

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

Mike: 00:47

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.

Mike: 01:10

Mhmm. You know, the government needs money. They need revenue. So at 73, they'll force you to take out a little bit, and then 74, a little bit more, 75, a little bit more, and it's just a greater percentage, basically.

David: 01:23

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

Mike: 01:26

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.

Mike: 01:39

They they all have calculators. Okay? So the RMD is basically it's just the government's trying to get paid on it.

David: 01:46

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

Mike: 01:48

Of your pretax.

David: 01:50

Okay.

Mike: 01:50

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.

Mike: 02:04

I mean, really any IRA except for Roth. Okay. Roths are not subject to required minimum distributions.

David: 02:09

Yeah. And tell us why that is.

Mike: 02:11

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.

Mike: 02:18

So I think it's like the government said, well, we don't care about this, so whatever.

David: 02:21

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

Mike: 02:26

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

David: 02:32

Okay.

Mike: 02:32

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.

David: 02:44

Okay.

Mike: 02:45

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.

Mike: 02:59

It doesn't pay a dividend, so it doesn't really bug you anymore. It just grows, or maybe you buy some indexes you believe in, and you might pay some taxes on the dividend. Fine. But once you pass, there's a step up in basis, which is such a weird term. Yeah.

Mike: 03:14

But it's yeah.

David: 03:14

It doesn't make any sense at all.

Mike: 03:16

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.

David: 03:28

K.

Mike: 03:29

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.

David: 03:43

Right.

Mike: 03:43

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

David: 03:48

Yeah. Floor has moved up.

Mike: 03:50

Yeah. It went from a hundred dollar basis per share

David: 03:53

Uh-huh.

Mike: 03:53

To now $200 basis per share.

David: 03:55

So

Mike: 03:56

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.

David: 04:04

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

Mike: 04:09

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.

David: 04:19

Okay.

Mike: 04:19

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.

Mike: 04:44

Yeah. So RMD planning in my mind really starts at 60 years old, because that's when you can really aggressively do IRA to Roth conversions, and you can line things up so by the time you're 73 years old or so, that the income of the RMD is kind of baked into the income you already want.

David: 04:59

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.

Mike: 05:08

I mean, the simple answer is yeah.

David: 05:10

Okay.

Mike: 05:11

There are exceptions to rules, but Sure.

David: 05:13

In general, Yes.

Mike: 05:14

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

David: 05:18

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.

Mike: 05:26

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.

David: 05:39

That's nice.

Mike: 05:40

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

David: 05:43

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

Mike: 05:47

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

Mike: 05:53

In retirement, you skate towards the income that you need and the tax ramifications of whatever's gonna happen to your assets. Now we don't know the future, but there's a good chance you're gonna have to pay taxes out of your IRA assets. So what does that look like in the future, and are you optimizing in a way that creates long term efficiencies? That's the idea here. That's all the time we've got for the show today.

Mike: 06:19

If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis.

Mike: 06:45

Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to ww.yourwealthanalysis.com today to learn more and get started.