How to Plan for RMDs (Required Minimum Distributions)

How to Plan for RMDs (Required Minimum Distributions)

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The Smart Take:

In this podcast, hear Tyler Emrick, CFA®, CFP®, delve into the often misunderstood world of Required Minimum Distributions (RMDs). Join us as we uncover the essential strategies and tips to help you navigate RMDs and make informed decisions for a secure and fulfilling retirement. Whether you’re new to RMDs or seeking to optimize your distribution strategy, this podcast is your go-to resource for mastering the art of income and distribution planning.

Here’s some of what we discuss in this episode:

  • An explanation of SECURE Act 2.0 and the legislation that was passed.
  • A high-level overview of Required Minimum Distributions and how to calculate them.
  • Highlighting the key changes brought about by the SECURE Act.
  • What planning opportunities does this present?

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick  00:01

In this episode, we’re about to dive into the often misunderstood world of required minimum distributions. Join us as we uncover the central strategies and tips to help you navigate RMDs and make informed decisions for a secure and fulfilling retirement. All coming up today on retire smarter.

Walter Storholt  00:24

Hey, thanks for joining us on today’s episode gonna be another good one Walter Storholt here alongside Tyler Emmerich. Of course, you want to join us each and every episode here for great financial information, guidance and conversation. We’ve got that in spades today is Tyler Emmerich, a certified financial planner as well as a Chartered Financial Analyst from true wealth And the true wealth design team joins us as he does each and every episode. And Tyler, I am excited for our topic today to get some more clarity around those RMDs. I love it, we can take something that you describe as often misunderstood, and hopefully flip that around the other directions. That’s got to be a big payoff for you as an advisor when you have somebody that comes into your office, and they’ve got one of these often misunderstood items in their portfolio or in their financial life, and you can get things straightened out.

Tyler Emrick  01:12

Oh, absolutely. Well, just like anything else. It seems like legislators like to keep us financial advisors employed. And sometimes they make things as complicated as possible. So over the last few years, there’s been a number of Legends, or I guess a number of legislation passed that has sort of tweaked and changed require minimum distributions. So we figured we would dive in today a little bit and uncover them and peel back the onion on required minimum distributions and how families should be thinking about them. Before

Walter Storholt  01:42

we dive into all of that financial conversation and talk everything going well in your world, how’s the family?

Tyler Emrick  01:47

Family’s doing? Well, no complaints on my end is January here and Northeast Ohio. So you know, the weather’s come along. I think we hit six degrees last week and got our first, maybe not our first but a pretty decent sized snowstorm come in over the weekend. So we gotta go sledding. And I have a four year old and a two year old so they really got to enjoy getting out in the snow for the first time this year. It’s

Walter Storholt  02:10

like starting to hit some prime sledding ages there. Right. Like you don’t have to tackle the enormous Hills for it to be exciting. Yeah.

Tyler Emrick  02:18

No, not at all. Although I did get a little overzealous and my youngest. The two year old, I put her in the sled first and went a little too fast. And she fell out and it took me half the time that we were out there. I was trying to fight them like Hey, come on. Let’s try to get let’s try it again. Eventually, we got her too. But yeah, it’s definitely daddy messing up and having a mistake. They’re a little over excited.

Walter Storholt  02:42

One of my favorite stories that my mom tells about her, you know, her motherhood Quest was when she was dragging me in the sled in the snow up the drive. We had a long driveway where where I grew up, and she’s pulling me behind and she’s just so proud of herself. She’s looking back up at the house, and dad’s waving at her like from the window and she’s waving back at him like yeah, look at me go. I’m pulling wealth on the sled. And he’s pointing and waving. And she’s like, Yeah, look how cool this is. And she’s just oblivious and running all the way up to the top of the top of the driveway. Good distance. And she turns around finally to you know, talk to me and look at me in the sled and I’m nowhere to be found. So she starts panicking and like running back down the hill retracing her steps, and she’s like, Oh, my God, where did he go? That was all the way back at the very beginning. totally flipped into the snow. I was really young. So what like I was walking around or anything at that point, I’m just facedown totally in the snow. And she’s like, way back in the beginning. She flips me over my face is all red. That’s what my dad was pointing at. He’s like you’re left behind.

Tyler Emrick  03:49

That’s exactly what happened to me that far. But I found my little one facedown in the snow not moving turn. Oh. So I can imagine your mom’s face when when you were turned over there. But

Walter Storholt  04:02

she says I had just a big grin on my face. It didn’t cry whatsoever. So she was like he was best destined to enjoy the snow. And so that has never changed since that day. So

Tyler Emrick  04:12

she was on the fence. It’s easy. It’s easy to do. You

Walter Storholt  04:15

don’t wait too much back there. Right? You had a little bump and the kids right out.

Tyler Emrick  04:20

So and you’re having some fun yourself. So it’s like exciting. And oops. Ya know, so it’s good to get out and enjoy the weather a little bit here for stories, good

Walter Storholt  04:30

stories. All right. Well, let’s talk about those changes that, you know, the government has kind of made and requirements required minimum distributions. And you talk about how they like to make things a little complicated. They they passed this thing called the secure act. And then they’re like, yeah, that didn’t make things clear enough. Let’s let’s muddy it up with the secure act 2.0. So they like passed this legislation that amended it almost right away, right? No,

Tyler Emrick  04:50

you’re exactly right. And I think the primary objective of secure act 2.0 was really to encourage people to save more in their retirement and utilize those ALEKS because they are such wonderful places for you to be saving. And there was a whole host of changes that were in there. And some of them go in effect at different times. So the secure act 2.0 was passed in 2022. So you’re the first set of changes were in 2023. We have others come in here and 2024. And then certainly some a little bit later on as well. So they impact a wide variety of retirement accounts, from individual retirement accounts, IRAs, all the way to your employer plans, your Roth accounts, so on and so forth. We’re not going to dive into all of it today by any means. There are a few things if any, listeners haven’t heard of, to secure act 2.0. And you’re coming up on retirement, and you’re looking for ways to utilize some of those retirement plans that are available to you. You know, it’s a good legislation to look up some of the impacts, because it allows for increased contributions to 401k is there’s some pretty cool five to nine provisions in there. If you have a five to nine account for some of your children or grandchildren, where you can more effectively utilize them and potentially move them over to a Roth down the road. So a lot of a lot of good changes. By no means, like I said, are we going to dive into all of them, we really want to just focus on the required minimum distributions, and kind of what families need to be thinking of, with these required minimum distributions. So what were the changes? And how do we probably most importantly, how do we plan around them? And what are some things that you can do to put yourself in a little bit better situation, you know, as these things start to come up? Now, granted, you know, our industry, while we love our acronyms, So, from here on out, when I’m not going to allow required minimum distributions, we’ll just refer to them as our MDS. Funny thing

Walter Storholt  06:48

is it still takes like I, you know, I’m I’m one of these a broadcaster, right? So I put thought into these things of like, the acronym should make it easier to say. So you’ve got required minimum distributions. Yes. It’s a mouthful, and it takes a lot. But our MDS doesn’t necessarily just roll off the tongue, right? Like you still have to emphasize each letter to get like we need a different they need to do that again, like another like I think of, you know, FINRA, right? FYI, NRA, we can just FINRA, you know, nice. Lindsey rolls off the tongue, very little minimal vocal effort. That is a good room does rims rims.

Tyler Emrick  07:27

And for those listeners, wondering what FINRA is, would not expect you to know that that’s molts expertise coming through a little bit? Yeah, just industry regulator.

Walter Storholt  07:36

I read that word at a disclaimer a couple of times, right. I almost said to Eric Holder myself on that one. Right.

Tyler Emrick  07:45

I if I had the button, it would have been it definitely would have been pushed no doubt about it. But

Walter Storholt  07:50

I’ll cue it up and slip up again soon. Before

Tyler Emrick  07:53

we get too far into these RMDs. And what were some of the changes are I mean, for those individuals and families listening that maybe I’ve never had to worry about RMDs? Or haven’t really thought about them yet? You know, the question becomes as well, what are these things and essentially required minimum distributions are when the IRS says, Hey, we’ve allowed you to keep money in your pre tax retirement accounts. Long enough, now, we want you to start pulling money out on a year in and year out basis. And that is the required amount that they want you to pull out. And of course, they say, Hey, we’ve let you defer those taxes long enough, we want to get our hands on a little bit of it. And we want you to start paying taxes on some of that money. So that’s their way of making you start that process. Now, to actually calculate the required minimum distributions, how you’re going to do that is essentially, one, when it comes time for you to start these RMDs, you’re going to look at your account balances on the prior year, December 31. And then you’re going to take the that balance, and you are going to go to what we call the life expectancy tables that are published by the IRS. And we’re going to go to your age on that table and look at what number corresponds to your age. And we will take that balance on December 31 the prior year and divide it by the corresponding life expectancy factor. And that will tell us how much has to come out of your pre tax retirement counts. Now, of course, there’s a many, many online calculators, well, that will do that for you now. So you don’t necessarily have to pull up the life expectancy tables to figure out what your required minimum distributions are. And for those of us that like to speak in generalities, and that first year, you have to start pulling out those required minimum distributions. You’re going to pull out a little under 4% is what that first year comes to. So you’ll take your balance on the prior year and ride around or just under 4% is going to be the amount that you’re going to have to pull out that first year and that will steadily increase from a percentage standpoint. As you As you continue to age and get go through retirement makes

Walter Storholt  10:03

a lot of sense. So yeah, a lot of changes in how these are calculated and what years you got to pull things out. And I know that’s caused maybe people that that some of that consternation with trying to keep up with the rules surrounding all this stuff. Yeah, absolutely.

Tyler Emrick  10:15

Well, in to, you know, the type of account does matter a little bit when you go in and do those calculations. What I mean by type of account would be is your money in individual retirement accounts, or IRAs? Or is your money still tied to your employer and 401k plans and four, three B plans. And depending on what type of account, you still have your money in your there could be some calculation differences and some rules that you need to follow on which account you pull that required minimum distribution from so you cannot have a little bit of complexity there. Certainly, for some individuals that are still working, and they’ve hit that magic age where the RMDs are going to begin. Some retirement plans and current employer retirement plans actually do not require you to pull out minimum distributions until you officially retire. So there are some quirky rules there that you need to be mindful of, of course, as always, right, the details are going to matter there. But that’ll give you at least a baseline of hey, what are we talking about required minimum distributions, the amount you have to pull out of your pre tax retirement accounts, and then the calculation, roughly 4%, or a little less than 4%, of what your prior year account balance was on December 31. So what did the secure Act actually change in regards to required minimum distributions, and one of the biggest things that they changed it changed would be when these required minimum distributions actually had to begin. So used to be the age you had to start taking these was going to be 70 and a half. And well, I don’t have any idea why they chose seven and a half. It always stuck out at me as like calculating that half year was a bit wonky.

Walter Storholt  11:54

And they want to make things harder than they need.

Tyler Emrick  11:57

Exactly right. So they did push that age a bit. So now starting, actually starting last year, January one, so in 2023, in the year you turned 73, is when your required minimum distributions would begin now 2023 was a transition year. So if that was your first year of expected, required minimum distribution, actually, no one had to pull out that first year RMDs. So because he actually went from 70 and a half to 72. And then obviously, secure act 2.0, changed age to 73. So of course, changes upon changes, but that 2023 was a transition year. So if you are already pulling out your required minimum distributions, of course, you had to continue to that. But if it was your first one, they said, Nope. 2024 will be that first year for your RMD. They also changed and said, Hey, is starting in 2033, your RMD would not start until age 75. So kind of kicking the can down the road a little bit for the younger generation. So what do I mean by that? I throw out a couple of different numbers here. And it really boils down to well, what year were you born, right. And if you were born before 1950? Well, you’ve already started to take your required minimum distributions. So there was really no changes there. But if your birthday was between 1951 and 1959, what that means is your first year of your required minimum distribution will be in the year you turn 73 If you were born after 1960, or later, so born and excuse me born in 1960, or later 75 will be the first year you have to start pulling out those required minimum distributions. And again, when I say the first year, you have to start pulling out those required minimum distributions. Again, there is another little quirky thing there to where, technically, in the first year, you pull out your required minimum distributions, you can defer that first year’s payment up until April 1 of the following year, and take two out the following year. So there is a little bit of a quirky role there. But generally speaking, when you turn 73, or when you turn 75, depending on the year you’re born, you’re going to have to start looking at your retirement accounts. And if you’re gonna have to start pulling out these required minimum distributions, it’s a lot

Walter Storholt  14:15

for people to try and kind of plan for and figure out to begin with, let alone when you make these more recent changes, just throws a few additional kinks into the works, I suppose. Are there any other changes that are worth noting, from secure act 2.0? And how they specifically affect the RMDs? There

Tyler Emrick  14:33

are and when you said, Hey, a lot to plan for I mean, I think that’s key. You know, we’ll finish up the podcast today on kind of some of the things you can do to help plan for this. But that is key, as with anything is starting to think about, well, when are you going to have to start pulling these distributions out and how is it going to affect things like your tax situation, and so on and so forth. So we’ll touch on that a little bit here towards the end, but there were a couple other changes with Secure act 2.0. And the first of which was a pretty welcomed change, which is they adjusted the penalty for not taking this. So the penalty was pretty steep while basically, under the old rules, if you did not take out your RMD, they hit you with a 50% penalty for missing it. So whatever your RMD was half of it gonna go to the IRS as a penalty. I mean, that is not a small chunk of change, right? Right. To say the least, right, so if you had 100, that, let’s say if you had $100,000, in your pre tax retirement accounts, we said the required minimum distribution was just under 4%. In that first year, so let’s just say you had to pull out roughly 4k, well, hey, half that 2000 bucks was the penalty, not a small chunk of change. So they did change that. So under the new laws, essentially, what happens is, is that if you don’t take your RMD by the IRS deadline, you’ll get hit with a 25% excise tax on insufficient or late RMD withdrawals. And if your RMD is corrected, and they call a timely manner, the penalty can actually be reduced down to just 10%, which, again, 10% is nothing to balk at, but certainly a far cry from half of what it is before. But so you want to be on top of this, and make sure that these things get out in a timely manner and done in the year that they need to get done in. Now, another maybe not so I don’t wanna say not as important because it’s all certainly important. But for those individuals that this impacts, it can be important, they did also make a change to how they account for Roth accounts and employer retirement plans. So a lot of individuals as you’re working, their employer will give you the option to save inside of your 401 K or four, three B in two different ways, either pre tax, or Roth monies. And depending on your tax situation, that’ll determine you know, which options are going to be best for you now used to be where if you had Roth money inside of your 401 K plan, and you left your money with your employer after you retired, and these RMDs started, then the amount of money that was in the Roth, and in pre tax, both inside your 401k went towards that RMD calculation. So essentially, if you had Roth mind your account, it kind of ratcheted up how much you had to pull out of your account. And traditionally, when you think about a Roth IRA, for example, those accounts do not have required minimum distributions. So it was, again, ratcheting up the amount that you’d have to pull out, which was a bit of a downside. So they went in and the secure act 2.0 kind of changed that rule and said that Roth accounts under employer retirement plans would be exempt from RMD requirements starting in 2024. So that was the other little minut change that they had for this year. So hand in hand, I guess, the two big things is, is if you were one of those individuals that didn’t have to start your required minimum distribution in 2024. This will be the first year in this track, change that. And then, of course, if you still had money inside your employer plan, you have some Roth might want to take a look at that. But but those were some of the changes, and frankly, give you a little bit of a high level of well, how do you go about required minimum distributions? What are the amounts? And what are some of the deadlines on how you have to take them out? So let’s move on to maybe some of the more fun aspects for and that’s how do we plan for these things? Once they start? Or if you’re not taking RMDs? How do we plan for them coming out?

Walter Storholt  18:29

You always view these things as opportunities, right? So hey, new legislation, new things are happening, here are new rules. Okay? What are the opportunities that we can use for better planning?

Tyler Emrick  18:38

You got it. Now, if we break this down into if you’re, you’re in the camp of, well, hey, I’m actually taking my required minimum distributions, or I happen to turn 73, this year in 2024. So this will be the first year that I have to take it. And you’re looking for ideas on well, how do we plan around this? I don’t want to say it’s quite too late. But your options are going to be much more limited, because of course, they’ve already started, right. So you’re at that point to where you actually are going to have to start doing the distributions. So really, the biggest planning tool that you have available to you are what’s called qualified charitable distributions. So this is where the IRS will actually allow you to lower the RMD amount if you gift it directly to a qualified charity. So if your RMD amount was $4,000, for 2024, and you gift $2,000 to a qualified charity, then your required minimum distribution would only be half or $2,000. And that’s what you would actually end up paying taxes on and having to pull out of your pre tax retirement accounts. So these qualified charitable distributions allow families to essentially save the tax hit on these RMDs. And I think that’s a pretty big deal for a lot of individuals because with the tax law change Just that happened, the standard deductions are very, very high. And a lot of individuals do not get much of a tax benefit for gifting to their church or charity, or schools or whatever the case may be. So these qualified charitable distributions are a nice, easy way for you to not that you’re gifting for a tax benefit. But of course, if we can save some money from good old Uncle Sam, and this is a nice, easy way to do it, especially if you’re doing that gifting already, to qualified charitable distributions are a wonderful tool for individuals that have to start taking required minimum distributions.

Walter Storholt  20:34

Yeah, all good points on that one, what else? Should we keep our eyes open for chances for us in the future with these RMD changes?

Tyler Emrick  20:41

Sure. So if you’re listening to this, and you’re going, boy, you know, I’ve got a few years before I’ve got to start pulling these out, what are some things that I can do to help alleviate some of that pain, and that tax it once they do start, and the first thing you can think of is, well, hey, if you did turn 70 and a half, you can still do these qualified charitable distributions. So the secure act did change and kick out the year where RMDs have to start. But they did not do the same for those qualified charitable distributions. So individuals that are 70 and a half, or in the year that you turn 70 and a half, you can start doing qualified charitable distributions, even though your RMDs would not start to either 73 or 75. So keep that in your back pocket as well. But, you know, the big thing would be well, planning ahead and trying to understand, well, how does my tax situation change once these RMDs start? So I think every podcast that we have, well, we talked about some some sort of financial planning and stress the importance of having a financial plan, right, almost sound like a broken record, I would assume at this point. Hey, Robbie, financial plan. That’s right. Well, and and even when we start working with new families, right, when we walk them through what we call our retire smarter solution, where, you know, we hit on a lot of the big financial planning topics that we feel like is important to dive into an understanding, and one of those sections that we call the tax smart distribution strategy, which essentially is saying, hey, when we create this financial plan, and we start looking out five years, 10 years, 20 years down the road, and trying to get a handle on how your assets change. One of the things we’re trying to get a handle on is, well, how does your tax situation change. And a big part of that is understanding when these RMD start and what it does to your overall tax situation, for example, a lot of families once the start, that’s going to bump them up into a higher tax bracket, right. And it could be pretty substantial. You pair that with the fact that under current tax laws, rates are set to go up in 2026. While a lot of individuals, especially are in their early in their retirement might be in a lower tax rate than they are when the RMDs begin. So the question is, is putting some thought into well, how should I best utilize these pre tax retirement accounts with the understanding RMDs are coming up? And the only way you’re going to be able to answer that question is having some understanding of what does your tax situation look like down the road? what tax bracket would you be in under current tax law, and then use that information to help make better decisions on how much and when you do distributions from your retirement accounts? I say it all the time. But Roth conversions, and potentially pulling more money out of your retirement accounts than you need to spend on can be a very, very advantageous tool in the right circumstance. And a lot of times when we recommend large Roth conversions for families, and that’s taking money, again, from pre tax retirement accounts, and moving them over and paying taxes on them and putting them in a Roth, where that Roth would now grow tax free, and where that Roth does not have required minimum distributions really helps put some forethought into well, how do we alleviate some of that tax pressure down the road? That’s a great tool to utilize, you got to do it smartly. And you got to do it with an understanding of, well, I don’t want to pay more taxes now than when I’m going to down the road. So you have to do some of that front end work to get you in a situation to help alleviate it. Because if you don’t do the work up front, well, really the only tool that you have in your toolbox is qualified charitable distributions once RMDs begin, because there are no, there’s no other way to stop them. The IRS is going to make you pull them out, and you’re going to have to pay taxes on them. Now, of course, I was actually having a conversation with an individual who we’re getting ready to start working with. And she made the comment that hey, I’ve already done a Roth conversion this year. So that should give me some pressure off of my required minimum distribution because this was her first year to actually start taking it out. And I had to remind her that hey, the amount that you converted to Roth does not go to satisfy your required minimum distribution amount. That doesn’t mean that you can’t do Roth conversions on top of the RMD But you still have to satisfy the RMD first and then look to Roth conversions. She was under the understanding, well, hey, I’m still pulling it out of my retirement account, right? I’m paying taxes on it. But of course, the IRS wants to alleviate that, then make sure that we do it in a right way. So you want to be cautious and be careful to make sure that yes, Roth conversions and income targeting can be a very, very valuable tool in your toolbox. But you want to make sure that you’re doing it smartly and within the confines of what rules you need to follow.

Walter Storholt  25:31

Okay, very good. We’ve certainly have done some shows in the past about some of those kinds of conversations arrma and income targeting any final details we should be aware of with this RMD conversation? I know, we’re just scratching the surface here. And there’s probably all sorts of other elements we could get into Tyler, but in the scope of today’s episode, yeah,

Tyler Emrick  25:49

I think it’s just the big thing is understanding when these required minimum distributions start with gave you a little bit of a quick and easy way for you to find out how much your RMD is going to be, of course, there’s more in depth calculators, and you can actually go through the in depth calculation, but again, just under 4% of your account balances and pre tax retirement accounts are going to come out. So understanding when that starts and understanding a ballpark of how much that might be. And then in turn, you can take that information to better plan for and say, Well, what does my tax situation look like? And should we start doing some of these Roth conversions? Will you have the qualified charitable distribution in your back pocket that you can use? And you can start to get a framework for? Well, what is going to be the best use and planning tool for you to help alleviate some of that extra tax hit that so many families feel when these things begin? And like I think you mentioned Yeah, we did go over quite a few or we talked about income planning. I feel like all the time. This is just another a piece of that. And I think we went into a two-episode series almost in August of last year where we talked about income targeting, and tax-smart distribution planning that if you want a little bit more details on this, and want to understand a little bit more of the levers that you can pull leading up to those RMDs I think those are wonderful episodes to catch back on and take a look at

Walter Storholt  27:08

very good if you want to learn a little bit more about what it’s like to work with. Tyler Emmerich and Kevin Crosby and the team at true wealth design. All you have to do is get in touch with the team by going to true wealth Click on the Are we right for you button then you can schedule a 15 minute call with an experienced advisor on the team. Again, just go to true wealth Click Are we right for you. You can also call 855 TW D plan. If you have any questions, that’s 855 pwd plan and get in touch there as well. All that contact information is in the description of today’s show. Don’t hesitate to reach out if you have any questions on your mind at all. Well Tyler, thanks for the great breakdown today. Really appreciate catching up with you and getting this good information for folks. And believe it or not, we’ll be seeing you my friend in the month of February here very soon as we get ready to turn the calendar page.

Tyler Emrick  27:57

That’s right. Had a good time. Yeah, it’s

Walter Storholt  28:01

good to be good. Looking forward to it and hope everybody has a great couple of weeks and we’ll talk to you again next time right back here on retire smart.

Disclaimer  28:13

information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable but their accurateness and completeness cannot be guaranteed all performance references historical and not an indication of future results benchmark indices are hypothetical and do not include any investment fees.