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Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast.
If you're a high-earning professional, business owner, or someone approaching retirement
and wondering whether you are truly on track, you are in the right place.
This podcast is all about helping you make smart, confident financial decisions without
the fear, confusion, or sales pressure that so often comes with money advice.
Each episode is designed to break down complex topics like retirement planning, investing,
taxes, and cash flow in plain English.
So you can understand what really matters and avoid the most common and costly financial
mistakes.
Everything you hear here is educational, fiduciary focused, and grounded in real-world
planning experience working with clients just like you.
I'm your host, Josh Duncan, partner at F5 Financial Planning.
Let's get started.
Here's something most people already know.
Once you reach a certain age, the IRS requires you to start withdrawing money from your
retirement accounts.
What's less understood is that the age itself depends on when you were born, that the
first year works differently than every year after it, that there's a real cost of missing
one, and that there are two distinct ways to reduce the size of that withdrawal years
before it is ever required.
I'm Josh Duncan, partnered F5 Financial Planning, where we take a fiduciary approach to
maximizing our clients' wealth.
Today I want to walk you through required minimum distributions or RMDs from start to
finish.
You'll learn exactly when yours begins.
How the first year works differently, what happens if you miss one, and two strategies
that let you get ahead of the whole problem before it ever shows up.
A required minimum distribution is the amount the government requires you to withdraw
every year from accounts like a traditional IRA, a 401k, or a 403B once you reach a
certain age.
You don't get to leave the money in the account and let it keep growing tax-deferred
forever.
The whole point is those accounts.
were there to let you delay tax, not avoid it permanently, and at some point the IRS wants
its share.
So it requires withdrawals, whether you need the income or not.
For years, the RD age was 72.
With the passing of the Secure 2.0 Act, the RD age depends on the year you were born.
If you were born in 1950 or before, your RDs began the year you turned 72.
If you were born between 1951 and 1959, you're required
Beginning age is 73.
If you were born in 1960 or later, your required beginning age is 75.
Picture two brothers two years apart.
One was born in 1959, so his RMDs began at age 73.
His younger brother was born in 1960, so his RMDs don't begin until 75.
Same family, same kind of accounts, two entirely different starting lines, simply because
of a two year gap in birth year.
If you've been carrying around a number in your head from an article you read a few years
back, it's worth checking that number against your actual birth year today.
There's one more detail worth knowing if you're still working.
If your RMD would come from a current employer's retirement plan rather than an IRA, and
that plan allows it, you may be able to delay your RMD from that specific account until
the year you actually retire, as long as you don't own 5% or more of that business.
That exception applies only to the plan at the employer where you're still working.
It does not apply to IRAs, including SEP and simple IRAs, or to old employer plans left
behind to previous jobs.
So it doesn't cover every account you own just because you're still on someone's payroll.
One more important piece: this rule applies to traditional IRAs, SEP IRAs, simple IRAs,
and most employer retirement plans.
It does not apply to Roth IRAs during your lifetime.
If you've been building a Roth IRA, that money can sit and grow for as long as you're
alive with no force withdrawal at all, which is exactly why so many people work to move
money into those before RMDs ever start.
We'll come back to that in a few minutes.
Your birth year is what determines your required beginning age, not a single number that
applies to everyone the same way.
Once you reach your applicable age.
Every year after the first year works the same way.
You take your withdrawal on the schedule.
The first year is the exception and it works differently than most people expect.
The rule gives you an unusual amount of flexibility in year one.
Instead of requiring your first RMD by December 31st of the year you reach your applicable
age, the IRS allows you to delay it until April 1st the following year.
On paper, that sounds like a straightforward benefit.
Extra time, extra flexibility, why wouldn't you take it?
Here's the detail that matters.
If you delay that first withdrawal into the following year, you still owe your second RMD
by December 31st of that same year, which means you couldn't end up taking two full
distributions in one calendar year, both landing on the same tax return, both stacking on
top of each other.
So imagine a retiree who turns 73 this year and decides to wait, since April sounds more
comfortable than December.
Come next spring, that first RMD gets withdrawn.
But the same year's
Own RD, the second one is still due by the following December 31st.
Two distributions, one tax return, one much larger number showing up as income, then
either withdrawal would have created on its own.
This isn't just a technicality.
Two RMDs landing in one tax year can push you into a higher tax bracket, and it can also
increase your Medicare premiums two years later, since those premiums are based on the
income you report today.
A decision.
That felt like extra flexibility in the moment ends up creating a larger tax bill than
either withdrawal would have created alone.
The delay option is not automatically the right move.
For most people, taking that first RMD in the same calendar year, you reach your
applicable age rather than pushing it into the following spring keeps your income spread
out and your tax bill more predictable.
There are cases where delaying makes sense, usually tied to a specific known drop in
income expected the following year.
But that should be a deliberate decision.
Made with your planner, not a default one.
Now let's talk about what happens if an RMD gets missed entirely or if you withdraw less
than required.
This penalty used to be steep, 50% of whatever you failed to withdraw.
That's been reduced, but it's still meaningful.
Today, if you miss the full amount of your RMD, the IRS can charge an excise tax of 25% on
the shortfall.
If you catch the mistake and correct it within two years, that tax drops to 10%.
Here's
what that looks like in practice.
Imagine someone who was supposed to withdraw a certain amount for the year and simply
forgot, maybe because they changed custodians, consolidated accounts, or a new advisor
didn't have the account flagged properly.
Whatever amount they should have taken and did in the IRS can take a quarter of it on top
of the ordinary income tax still owed once the distribution is actually taken.
On a meaningful shortfall, that adds up and it's the kind of mistake that's avoidable with
a little bit of tracking.
This penalty isn't automatic or final.
If the shortfall happened because of a reasonable error and you're taking real steps to
fix it, there's a process to request that the penalty be waived.
It involves filling out a specific form, form 5329, with your tax return and attaching a
letter explaining what happened and how it's been corrected.
This exists because mistakes happen, especially when someone has multiple accounts spread
across multiple institutions.
Each with its own calculation, its own paperwork, and no single custodian keeping track of
the full picture on your behalf.
Missing an RMD is a real financial cost, not just paperwork, though it's also fixable if
you catch it and correct it quickly.
The moment you suspect one was missed, deal with it directly rather than waiting.
Okay, so far we've talked about
Rules for handling an RMD once it exists.
Now let's talk about something more useful: reducing the size of that RMD before it
becomes a factor at all.
There are two main tools for this, and they serve two different goals.
The first is the Roth conversion.
A Roth conversion means moving money out of your traditional IRA, paying the income tax on
it now, and placing it into a Roth IRA where it can grow tax-free with no future RMD
attached.
The years between retirement and your applicable RMD age are often the best window for
this because your income may be lower than it was while you were working, which means the
conversion can happen at a lower tax rate than you might pay later.
Every dollar you convert during those years is a dollar permanently removed from the
balance your future RMD will be calculated against, which means smaller required
withdrawals, smaller tax bills, and less risk of the bracket jumping issue we just
covered.
I walked through the full mechanics of this, including when it makes sense and when it
doesn't, in a previous video on Roth conversion.
So I won't repeat all of that here.
In the context of RMDs, the goal is simple.
Every dollar you convert now is a dollar that will never generate a required distribution
later.
The second tool is the qualified charitable distribution or QCD.
If you're charitably inclined, this is one of the most efficient moves available.
Starting an age 70 and a half, a few years before the earliest possible RD age, you can
send money directly from your IRA to a qualified charity.
Once your RDs begin, that same QCD counts towards satisfying the requirement, but it is
never included in your taxable income at all.
There is an annual limit on how much can be sent this way, adjusted periodically for
inflation.
So check the current figure with your custodian or your advisor rather than assuming last
year's number still applies.
Compare a QCD to writing a check to the same charity from your bank account.
In that case, you'd still owe tax on the full RD, and you'd only get a deduction for the
donation if you itemize, which fewer people do now that the standard deduction is so much
higher.
With a QCD, the tax question disappears entirely for that portion of the withdrawal,
whether or not you itemize.
Picture two retirees, each with the same RD, each getting the same amount to their church
or favorite charity every year.
One writes a personal check after taking the full RMD into their bank account.
The other directs that same amount straight from the IRA as a QCD.
Both gave the same amount to the same cause, only one of them paid tax on the money that
was headed to charity anyway.
These two tools solve different problems.
A Roth conversion is about long-term tax bracket management done in advance.
A QCD is about the giving you're already doing redirected to be more tax efficient the
moment RMDs begin.
Many people benefit from using both in different years and for different reasons.
And using one doesn't require giving up the other.
Now, the single biggest mistake I see with RMDs isn't a bad decision, it's no decision.
People treat the whole topic as something to figure out the year it finally applies to
them instead of something to plan around years in advance.
Here's a simple habit that solves most of this.
Every December 31st, take stock of every account that will eventually be subject to an
RMD.
Not just one IRA, but every IRA.
Every old 401k sitting with a former employer, everything, including your spouse's
accounts, if you're married, since each of you has your own applicable age and your own
separate calculation.
Each of those balances feeds into the total once RMDs begin.
And a lot of people underestimate how large the combined distributions turn out to be
simply because they never added the accounts together in their head.
From there, treat Roth conversions and QCDs as an ongoing decision reviewed every year.
Rather than a one-time choice made after the first RMD notice already shows up.
Are you in a lower income year that makes a conversion attractive?
Are you already planning charitable gifts for a year that can be redirected as a QCD
instead?
These aren't decisions to make once, they're decisions to revisit annually, the same way
you'd revisit your investment allocation or your household budget.
Ideally, with your financial planner and tax preparer in the same conversation, well
before December, rather than after the year has already closed.
The options with it.
It's also worth glancing at your beneficiary designations during the same annual review,
since the accounts subject to RMDs today are the same accounts your heirs will eventually
inherit.
RMDs reward people who plan ahead and cost people who wait.
Treat this as a recurring part of your financial life, reviewed every year well before
your applicable age arrives, and it becomes just another line item you've already
accounted for, rather than something that shows up unannounced.
All right, let's bring this together.
Your RMD age depends on your birth year.
73 if you were born between 1951 and 1959.
75 if you were born in 1960 or later.
The first year works differently than every year after, and it often creates more tax
problems than it solves if you delay.
Missing an RMD carries a real cost, though one that can be fixed if you act quickly and
file the right form.
And you have two genuine tools: Roth conversions.
And qualified charitable distributions to shrink the size of the problem long before it
ever arrives, whether your priority is managing your tax bracket, supporting the causes
you care about, or both at once.
None of this replaces a conversation with your own financial planner and tax professional,
since the right mix of these strategies depends entirely on your specific accounts, your
income, and your goals.
But now you know the questions to bring to that conversation well ahead of the year you're
actually needing the answers.
If you found this episode helpful, please consider subscribing to the podcast and leaving
a review.
It helps more people find the show and continue learning how to make smarter financial
decisions.
I'm Josh Duncan, partnered F5 Financial Planning.
If you would like to learn more about how we help our clients achieve financial freedom
for personal significance, please visit our website at www.f5fp.com.
Thanks for listening, and I'll see you in the next episode.