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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.
Let's dive in. Dave, what questions we got
David:coming Hey, got a question from Jim. Jim asks, having two annuities, what is the best way to handle RMDs on them? That's a required minimum distribution for those who are 73 years old. Yeah. Roughly, the rules change occasionally.
David:Jim sees two options if the annuity provider provides its value. Under secure two, he's referring to the secure CERC two point o, yeah. Two point o act. It appears that they aren't required to. So method one, annuity payments alone satisfy the RMD.
David:You simply receive the payments according to the contract. Method two, aggregate the annuity with your other IRA assets, adding twelve thirty one annuity value. So the previous year's ending market, fair market value, right?
Mike:Yeah, so every December, just end of December, you're gonna get fair market value of the annuity itself.
David:Yeah. They'll send you in the mail what the fair market value was. And then that determines what your RMD is, right?
Mike:Yeah. So the It's a bit of a complicated situation because typically people assets in an annuity, and then they have assets in the market. So for simple terms, at least for today's conversation, the annuity self satisfies its RMD. You're still gonna wanna do IRA to Roth conversions in your other assets. You're still gonna wanna do the calculation of total contract value in the annuity, and then total value of your accounts elsewhere, the brokerage account and so on.
Mike:And every year you need kind of do that that new calculation. The income coming from the annuity does contribute to satisfying the RMD, but may not always satisfy it. So don't assume that it will always satisfy it. And and the reason why I don't wanna oversimplify, or I'm kind of oversimplifying the answer here, is because the rules keep changing. So I don't want this to go on YouTube for example.
Mike:Someone listens to it and then forgets to check the current rules. Yeah. So the idea is the the annuity should always self satisfy its RMD requirements, but may help or not be enough for the other assets. So do a simple calculation. And you could ask your AI and say, based on today's tax law, like what's going on?
Mike:Mhmm. You should be able to Google this as well and and get some articles. There's always articles being published. Kiplinger, I mean, I'm biased. I write for Kiplinger.
Mike:But they they will publish how to do all the RMDs this year. But this tax law keeps changing.
David:Yeah.
Mike:So just the the definition I like is, they should always self satisfy. The annuity will never get in the way of an RMD.
David:If it's an income? What if your annuity is not income? It's just Then
Mike:you have to pull out the the asset. Like, you have to do a distribution.
David:Yeah. And then the annuity will usually, if you log in, it'll to your account, it'll tell you like, this is what your RMD should be, right?
Mike:Yep. Yeah. But that's the RMD for that account.
David:Oh
Mike:yes. You've got other accounts. You have to take the the aggregate or all of them, and then figure out the total RMD. Now you don't need to do an RMD of every account based on that account. So let's say you've got a 100,000 in annuity and a million dollars in your IRA.
David:Okay.
Mike:Okay? And the let's say it's, I don't know, $4,000 from the annuity, and then $40,000 from your IRA. You can leave all the money in the annuity and just take a little bit more from your IRA. It's all reported back to the IRS. Okay.
Mike:So you don't have to take each one from every account. You can just take it all from one account and it satisfies the other ones.
David:Oh, good.
Mike:So it does all kind of work together. But it is something you don't want to miss because if you miss it, there's a hefty penalty. And they keep changing the rules. I mean they've changed it several times over the last decade and I expect that they will continue to change the rules. There's speculation, they're gonna kick back the RMD here as well.
Mike:So I don't know.
David:Like make it later in life like
Mike:Yeah.
David:80 years old or something?
Mike:Yeah. So it's just tax laws written in pencil. Yeah. Be careful.
David:Yeah. And why do they keep changing it? Do we know? Do we have any idea? Political talking points?
David:I don't know. It's not
Mike:like they're actually trying to do legitimate tax planning for the government. It's usually to win votes. Tax laws often to win votes.
David:Right.
Mike:In my opinion. Yeah. My very jaded opinion.
David:Yes.
Mike:Equal opportunity to hate both sides of the aisle.
David:Yes. There we go. That's right.
Mike:Alright. So I got a question
David:Okay.
Mike:If you inherit an IRA, do you have to continue the RMD schedule on your own disease? So inherited IRAs are on their own independent schedules. You have IRA RMDs, they're yours. And then inherited RMDs, which are on the ten year schedule. And they've also changed that by the way.
Mike:Because they had set of rules and then they changed it for COVID and then they sunset those rules. And so again, because this content ends up on podcasts and YouTube and so on, I wanna be very careful about not over explaining it. It's this is why you pay a one time fee or you do a bit of research on an article that was published in the current tax year
David:Yeah.
Mike:On how it works today. Which are readily available and those are those articles are free. But that those are the kinds of things you just have to make sure that you're up to date on because it's a moving target. You have 10 to take it out. Most people will take it out slowly over time.
Mike:With the Roth, they might kick it to the towards the end to try and grow it. But everyone's gonna be different on what they want and how they want their money to serve them. Mhmm. Alright. So the
David:day you take over the Inherited IRA, does the clock start then? Hey, you've got ten years to spend this thing out?
Mike:I mean it's the day you inherit it, you've got the person who gave it to you, they have to satisfy their RMD in that first year. And then the clock starts ticking.
David:I see. As of now, that's how it works.
Mike:Yeah. As of now could change.
David:Okay. So yeah, be aware of that. Yeah.
Mike:Alright. What's the next question?
David:Hey, just sent one in. Thanks Linda. Linda asks, or she says, I am 65, husband is 71, have about the same amounts in traditional IRAs. We will be doing some Roth conversions. Should we focus on his or mine and why?
Mike:So because you're married, assuming you're married. Did they say they're married? Husband, so Husband and wife, okay.
David:We'll just assume they're married filing joint for the sake So of this
Mike:because you're you're If one spouse passes, you're gonna not receive an inherited IRA, but it becomes your IRA. Married couples, they absorb the spouse's IRA a little bit differently. Because of that, it's kind of the same thing, assuming you don't have marital problems and you're not in the invisible divorce. The invisible divorce is where you're married and you kind of resent each other because you both had professional lives or one was at home, one was at work, and now your worlds are colliding. That's a very real thing.
Mike:More people divorce in retirement than any other age group. So assuming you've got a good happy wonderful marriage, and you intend to stay married for the next twenty or thirty years, you would want to favor, in my opinion typically, the the older person's IRA or Roth. But just know that if divorce hits the person who didn't convert, that's you're getting screwed.
David:Oh, right.
Mike:And then also you wanna consider just the timing of that. You don't typically you don't wanna convert all of your IRA assets. You wanna convert enough that your future IRA distributions are within a lower tax bracket and fulfill the income you wanted anyway. Yeah. So another way of saying that is, look, if you want, you know, I'll pull the tax tax calculator here just for fun.
Mike:But like if if you're taking, let's say, I don't know. I'll throw an arbitrary number. Let's say you're taking 60,000 from your IRA and you're taking 60,000 because of your combined social security. Okay? You're in the 22% tax bracket.
Mike:Not that big of a deal. Maybe you do some conversions. So where your ordinary income, okay, is about 48,000. So you're that in other words, I'm saying that your RMD is less than 48,000 projected. The income is gonna come from your IRA is 48,000 or less.
Mike:It keeps you in a lower tax bracket or tax situation. It keeps you in a lower effective tax rate, which means you're getting more out of your money. Rushing from IRA to Roth conversions and paying 24 to 32% for every dollar you convert, doesn't make sense if you're able to bridge the gap, kinda find that silver lining. And for you both, as long as you're both alive to be in the 12% tax bracket. And then social security is on top of that.
Mike:So just These are things you wanna think about. Their every decision is a multi layered decision. Because not only have to consider your IRA to Roth conversions while you're alive, you also wanna consider the widow tax. The widow tax is what happens when you gosh. I I gave you the single tax bracket by the way.
Mike:Shame on me for that. Yeah. So for married filing jointly, you've got a lot more room. Yeah. You got 96,000.
Mike:Like that that seemed wrong. You're in the 12% tax bracket. Why would you want to do IRA to Roth conversions in the 22% bracket when your social security and your IRA to Roth conversions keep you in a very tax efficient bracket. But when you pass, you're gonna like make a subtle adjustment to then stay in the lower brackets because the single bracket is less favorable than the
David:other bracket. Yeah. Get more of a deduction. Right? Standard deductions higher for married filing jointly than Yeah.
Mike:There's more room to do married Roth conversions.
David:Yes.
Mike:And your lifestyle is kinda the same when you're married or when you're single because it's the same Netflix subscription, the same cable TV. Mhmm. Like there's a lot of things that are kinda they they stay the same. And then some things will change. So it's Planning is multi layered.
Mike:It's not just who's gonna do the hourly rate conversions first. You gotta look at family history. You gotta look at longevity. You gotta look at your current health as well. Then you gotta look at, okay, how's the status of the marriage?
Mike:What happens if this or that? These are why the ongoing conversations are so important because the little adjustments make significant differences long term.
David:Yeah. Bottom line, we kinda wanna just we we want we wanna stay when when doing Roth conversions. Let's make sure we don't push ourselves inadvertently into some higher tax bracket.
Mike:Yeah. Don't paint yourself into a corner. But generally speaking, if you have an older person in the couple, you'd favor his IRA to Roth conversions.