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Dentists, Puns, and Money is a podcast focused on two things: The financial topics relevant to dentists leaving clinical practice and the stories and lessons of dentists who have already done so.
1. The stories of dentists who have transitioned from full-time clinical dentistry.
2. The financial topics that are relevant for dentists making that transition.
If you’re a dentist thinking about your exit from clinical, and you’d like to learn from the experiences of other dentists who have made that transition, be sure to subscribe to your favorite podcast app.
Host Shawn Terrell also dives deep into the many financial components of exiting dentistry, including tax reduction strategies and how to live off your assets.
And, we try to keep it light by mixing in a bad joke… or two.
Please note: Dentists, Puns, and Money was previously known as The Practice Growth Podcast until March 2022.
Welcome to Dentists, Puns, & Money! I’m your host Shawn Terrell.
We are back with more acronyms… In this episode, we will discuss FAQ’s about RMD’s.
In other words, frequently asked questions about required minimum distributions.
This episode is the part one of two dedicated to discussing RMD’s. In a separate episode next month, we’ll dive deeper into building a strategy around required minimum distributions so as to potentially lower the amount of taxes due over a dentist’s lifetime.
But before doing that, I think some background knowledge about RMD’s would be really helpful to begin with. So today we’ll discuss the eight most frequently asked questions about RMD’s.
Just like with treatment planning as a clinician, you must first provide the patient some baseline education before you can talk about potential actions or strategy. I’m gonna try to take the same approach.
So education today, and then next month, a couple episodes from now, we’ll get deeper how to approach RMD’s and a few potential actions to take.
So quick reminder, our company Dentist Exit Planning helps dentists leaving clinical with the financial piece of that transition… with things like RMD strategy, and with other ways to reduce that massive lifetime tax bill, and with how to optimize living off your assets.
If you’re interested in guidance on your taxes and income as you exit clinical, schedule an initial consultation with us on our website, which is dentistexit.com.
And with that introduction, let’s address frequently asked questions related to required minimum distributions.
A little story to start I am a big baseball fan… i went to my first cubs game at Wrigley field when i was seven years old, i have watched thousands and thousands of baseball games in my lifetime.
I mentioned that because as I record this in early April of 2023 it's the opening week of Major League Baseball season. And there's been some pretty fundamental rule changes in the big leagues this season. In fact I would go so far as to call them radical changes relative to the long history of the game. The very early returns seemed to be positive and that these changes are for the better, but I mentioned all this because If you had a DeLorean and brought a baseball fan from 10 years ago to a game today, they would have no idea about some of the things now going on during a game.
And that's really relative when talking about required minimum distributions. Like baseball, For a long period of time the rules around RMD's had stayed pretty much the same up until about three years ago. So I would wager to guess that the average person is not up to speed on some of the specific changes that have occurred as a result of the both the original secure act and secure act 2.0… both past in the last three years or so of this recording. And You throw in some of the temporary rule changes associated with the pandemic, and you have a recipe for a lot of confusion.
All of this is to say when working on your RMD's, it’s critical you’re working off of accurate up-to-date information. Much of the information on the Internet today is incorrect. In fact the IRS is still playing catch up on its website related to the recent laws passed by Congress. So definitely work with your financial advisor and your accountant and making sure that you have your RMD ducks in a row relative to all the recent changes.
So frequently asked question number one…. Let’s start really basic... What is a required minimum distribution?
Answer: The IRS tax code allows the opportunity for most people, dentist included, to defer some of the income they earn in the current year to some yet to be determined year in the future. As an easy example, if you earn $200,000 from practicing dentistry in 2023 and your practice has a 401K plan you could choose to defer roughly $20,000 of that $200,000 into your 401K plan. So in that scenario, that 20K goes into the your 401K account and your taxable income for 2023 is $180,000 instead of $200,000. And now you have $20,000 and whatever it grows to that will be taxed at some point in the future whenever you take it out of your 401k account.
The catch is, the IRS will not let you defer paying tax on that money forever. Once you hit a certain age, they will require you to take a minimum amount of that money back out of that account which then becomes taxable income to you in the year that distribution occurs so again it's a required by the IRS and there’s a minimum amount you have to take back out once you hit a certain age… we’ll get into how the actual amount gets calculated here in a little bit.
So that brings us to FAQ #2... What type of accounts do RMD's apply to? And this is probably a good time for me to throw out a disclaimer... I'm trying to hit the big pieces of RMD's in this podcast without getting too deep into the weeds, so i'm not going to get into every nook and cranny of the rules.
With that being said in general RMD's apply to any account where income tax has been deferred or in which tax has not been assessed to it. So Any part of a 401K or other qualified plan through an employer like a 403B for profit sharing plan that includes tax deferred or pre tax money will eventually have a required minimum distribution associated with it. same goes for most Traditional IRA’s Sep IRA, SIMPLE IRA that were contributed to on a pretax basis.
Just make sure to double check your account statements as most of those aforementioned accounts can also be contributed to on a post-tax basis.
FAQ #3... At what age are minimum distributions required? This one is the cause of a lot of confusion because of all the recent rule changes I mentioned a bit ago. The age for RMD's has changed multiple times very recently. To make it as simple as possible, if you were born in 1950 or before, you should be currently taking required minimum distributions on any pretax accounts you have. If you were born Between 1951 and 1959, the first year you are required to take a minimum distribution is the tax year that you turned 73 years old. If you were born in 1960 or later, the first year you are required to take a minimum distribution is the tax year in which you turned 75 years old.
Frequently asked question #4... How do I calculate my RMD? So before diving into that, the custodian of your investment account or the financial advisor associated with any investment account requiring a minimum distribution should be helping you with that calculation And delivering that number to you. If that's not happening or you just want to double check the math, it's somewhat easy to do that as well.
So the first thing to understand about calculating your RMD is that it is based on your account balance on the final day of the previous year. So as an example if you were required to take a minimum distribution for 2022, the exact amount of that required distribution would be based on your total account balance on December 31st 2021.
The second factor in determining your RMD is your age. And the third factor is something called the Uniform Lifetime Table, which is published by the IRS. And like anything with the IRS, nothing is simple, so there is more than one table, depending on whether or not you’re married, depending on the age of your spouse, and depending on who is listed as the beneficiary of the account in question. So just make sure when calculating, you have the correct IRS table for your situation.
Assuming so, you take your age, your account value and plug it into the correct table to do the math on your exact RMD for a given year. Just or some context if you're 73 and taking your first RMD, it's currently going to be just under 4% of whatever your account value is. But the table requires that you take a higher percentage withdrawal each year you age. So if your account value happened to stay flat year to year your withdrawal amount would increase in subsequent years all things being equal. And if your account continues to grow in spite of the oh going distributions, the required distributions each year would increase even further. As one more example for context your withdrawal percentage will be over 6% of the account value by the time someone reaches the age of 85 based on the most commonly used table inforce today.
FAQ #5 about RMD's... can I combine my accounts when calculating and taking RMD's? You ready for this... it depends. Some accounts that require minimum distributions can be combined in your calculations and distributions while others cannot. Without getting into all the different scenarios, let me just hit on the most common example of this.
Let's say you're a dentist that has 4 total accounts requiring a minimum distribution. Two of the accounts are traditional iras, and two of the accounts are still in a 401K plan of some sort. For simplicity, let's assume that each account has exactly $100,000 in it, and that your required minimum distribution percentage for your current age is exactly 4%.
With IRA's you can combine the calculation and the minimum distribution required. With 401K accounts, you cannot do the same. So in this scenario, a dentists rmd for the two IRA's would be $8000 for the year... so $200,000 times 4% equals $8000 total. That required distribution for the IRA can't be taken out of either IRA in any combination as long as the total equals $8000. So you could take the AK all out of one IRA or you could split up that total amount with distributions from both iras in any combination you want as long as you get to the correct total.
With the 401K's, each RMD must be calculated separately for each account and they cannot be combined to reach the total correct distribution. So in our scenario $4000 would have to be distributed from each 401K account for said year.
Yeah just to drive the point home you cannot take your 401K RMD's from the IRA. So if the total RMD from all accounts for the year was 16,000 dollars dash again $400,000 total times 4%, that $16,000 could not all be taken out of iras, because there are 401K counts accounts involved. So if it's not obvious already, you can see how this could get confusing for the uninitiated, Especially considering on average some people's cognitive abilities will not be the same when they're in their 80s or 90s.
Frequently asked question #6 are the RMD rules different if I inherit the account in question from someone else? Short answer…yes. For our purposes here, I'm not going to get into the flow charts of all the various scenarios, just know that if you inherit an account that requires an RMD, how you handle that will be different than if it's your own account. In short, those rules are determined by your relationship to the original account holder, how old they were when they died, and the type of account in question. Example, there are no RMD's associated with your own Roth IRA accounts. However, if you inherit a Roth IRA from a parent or sibling, there would be required minimum distributions for you associated with that account.
Question #7... What happens if I fail to take my required minimum distribution for a given year? If you forget to take an RMD or make an error in your calculation, the penalty is pretty steep. The penalty is 25% of whatever the shortfall is from the required amount. Now there are ways to get that penalty lowered if the air is for a reason that's acceptable to the IRS, or the error is corrected in a timely fashion. But nothing there is guaranteed. And as steep as a 25% penalty seems, it's actually much lower than it was until very recently. Prior to the passage of the secure act 2.0 at the end of 2022, the penalty for a missed IRA was 50% of the shortfall. So the IRS is not messing around when it comes to RMD's.
And the final frequently asked question about RMD's... question #8. What is the tax rate on my required minimum distribution? In other words, if my RMD for the year is $100,000 total, how much tax will I pay on that $100,000? After all, one of the biggest reasons for a dentist to defer income is likely because they’re currently in a higher tax bracket, but expect to be in a lower tax bracket at some point in the future.
Alright so this is an intentionally loaded question to drive a point home.... The amount of tax due is usually unknown. That's because tax rates and tax brackets are established by the IRS and they're written in pencil, not pen figuratively speaking, meaning they can likely will change in the future.
In addition, the amount of tax due on your RMD will be combined with and depend on your other sources of taxable income for a given tax year.
So the point I’m trying to drive home is that, if you’re goal is to pay the tax you are legally obligated to pay, but no more, than the best way to do that is to understand how RMD’s work, and the rules associated with them. And the second point here is to have a strategy around RMD's to make sure you don't do anything to overpay what you owe the IRS. Another way to say the latter it's important to be intentional about your taxes post clinical…and to be proactive with your plan, instead of reactive.
Alright there you have it… the 8 most frequently asked questions related to RMDs. This episode was all about information and education. In our podcast set to release so about a month from now, we'll dive deeper into the specific way that not having an R&D strategy can increase your lifetime tax bill.
So to bring it all full circle, just like with baseball, it’s critical to be up to date with the rules of the game as it relates to taxes. Sometimes we can go long periods of time without changes to the rules, but recently there’s been some pretty big changes recently. We can’t control the rules, but we do need to understand them so we can apply them and play the tax game, if you can call it that, to the best of our ability.
So that’s all I’ve got for now. I hope you found this information helpful, and we’ll talk to you again very soon.
Thanks for listening and following along. Are you a dentist nearing your retirement from clinical or have you already hung up your handpiece? Would you like a treatment plan for the financial components? Of your exit from clinical? Our company that does exit planning helps dentists like you reduce taxes in retirement and optimize how to best live off your assets including the ideal time for you to start taking Social Security. If you'd like guidance on those critical pieces, or just a second opinion, schedule an initial consultation with us on our website. Our web address is dentists exit.com And there's no obligation for your initial consultation, that website again dentists exit.com.
As a reminder that says Exit Planning and turtle advisors LLC is a registered investment advisor. The information presented should not be interpreted or construed as investment, legal tax, financial planning or wealth management advice. It does not substitute for personalized investment or financial planning from just exit planning or federal advisors LLC. Please consult with your accountant and attorney for tax and legal advice. This podcast conveys the views and opinions of Sean Carroll and his guests and the information herein should not be considered a solicitation to engage in a particular investment tax planning or financial planning strategy information presented is for educational purposes only and past performance is not indicative of future results.