In today’s episode, you’ll learn more about:
- When you can combine RMDs across IRAs and why 401(k)s follow different rules
- How qualified charitable distributions (QCDs) can help reduce taxable retirement income
- Why inherited IRA rules differ depending on who inherits the account
- How eligible designated beneficiaries may qualify for life-expectancy distributions
- Why Roth conversions and other tax-planning opportunities don’t necessarily end when RMDs begin
Listen Now:
The Smart Take:
Required minimum distributions (RMDs) are an important part of retirement, but simply taking the required amount doesn’t mean you’re making the best financial decision.
In this episode, Tyler Emrick, CFA®, CFP®, and Walter discuss four common RMD mistakes that could create unnecessary taxes or cause retirees to miss valuable planning opportunities.
Whether you’re already taking RMDs, approaching the required beginning age, or managing an inherited IRA, understanding these rules can help you avoid costly mistakes and make more informed retirement decisions.
Go Inside the Episode:
0:00 – Intro
2:46 – Mistake #1
5:43 – Mistake #2
8:25 – Mistake #3
11:38 – Mistake #4
14:06 – Why Planning Matters
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Walter Storholt:
If you are retired or getting close to that exciting date, you’ve probably heard about required minimum distributions or RMDs. Essentially, the IRS comes along and says, “Hey, we’re going to require you to start taking money out of certain retirement accounts.”
Tyler Emrick:
Yeah. And most people think it’s, hey, the goal’s pretty simple, right? Hey, figure out how much you got to take, make sure you take it and avoid any penalties.
Walter Storholt:
Which sounds pretty straightforward, but apparently, Tyler, it can’t be that simple and we need to get smarter here. There’s more to this, right?
Tyler Emrick:
There is. And here’s what I think often gets overlooked. You follow all the RMD rules, take exactly what you’re supposed to, and could still pay in unnecessary taxes.
Walter Storholt:
Yeah. So it’s not just about taking the right amount and walking away.
Tyler Emrick:
Exactly. It’s about which accounts you take it from, how they’re coordinated with your charitable giving, what happens when you maybe inherit in retirement accounts and whether just taking the minimum is the right course of action.
Walter Storholt:
All right. So what we’re going to do today is give you four RMD mistakes you need to make sure that you avoid.
We’re back again on Retire Smarter. I’m Walter Storholt alongside Tyler Emrick. He is a CERTIFIED FINANCIAL PLANNER, a chartered financial analyst, and one of the wealth advisors at True Wealth Design. Tyler, when are you going to add some more designations to that tagline?
Tyler Emrick:
I think I’m done. I don’t know. We’ll see. Maybe one day. I’m going to try the CPA route. I don’t know, EA, we’ll see.
Walter Storholt:
Oh, yeah. There you go. Why not, you overachiever?
Tyler Emrick:
There’s always more that can be on there.
Walter Storholt:
Oh, it’s good stuff. Well, today we’re talking about RMDs as we mentioned moments ago and four mistakes to avoid. But I wanted to highlight something real quick here, Tyler. You had a line in today’s outline. The thought was really sharp. RMDs are often treated as a compliance exercise when really you guys approach it more as an opportunity, a planning opportunity. But a lot of people don’t view it through that lens until I guess you kind of open their eyes to the possibilities here. So I thought that was a good scene setter for today’s show.
Tyler Emrick:
No, absolutely. Well, and if you’re on any retirement news outlet, they always have the top 10 RMD mistakes or all those articles that are coming out towards this time of year. So we wanted to maybe take a little bit different view and not go down the typical ones. Sure, we’ll hit some of the big heavy hitters, but we also wanted to maybe look at it through a planning lens and connect the dots on like, well, how should you be approaching these as opposed to just very formulaic, hey, it needs to get out and be done with it, right?
Walter Storholt:
Yeah.
Tyler Emrick:
So, absolutely.
Walter Storholt:
A slightly bigger task than just checking the box, but actually looking for an opportunity within the box checking.
Tyler Emrick:
A hundred percent. Well, and I think it starts with too, just truly understanding, well, what accounts does this truly apply to? And I always kind of put retirement accounts in two buckets. You got your employer retirement plans, 401(k)s, 403(b)s, and then you’ve got your IRA accounts, individual retirement accounts. And for RMD purposes, those buckets and that differentiation can be very important.
For example, I have an individual where he is actually still working. He’s over his RMD age and his 401(k) that’s tied to the employer that he is working for does not require RMDs while he is actively employed. So as long as he is still employed with that company, that particular plan, this does not spread out to any other retirement plans that he has, but that 401(k) specifically does not have required minimum distributions.
Now, well, if he left on December 30th, he would have one because he wouldn’t be employed for the entire year. His RMD would start and he’d have one. So we got to be mindful of when he’s looking to officially wind down and retire. But for some individuals that think, “Hey, I’m RMD age. I got to go into every retirement plan and pull it.” If you didn’t know a little quirky rule like that, you might go in and say, “Hey, I got this 401(k). I got to pull it from.” So understanding the account types and when an RMD is going to be applicable, I think is kind of like that first step.
The other is the logistics of actually getting it complete. And this goes back to that account type as well where, hey, over the years, it’s not uncommon for families or individuals to accumulate multiple retirement plans. Maybe you have multiple employers, maybe one 401(k) you rolled over to an IRA and one you left in there because you thought the investments were doing pretty well or something like that. Well, when it comes time to start pulling out required minimum distributions, well, the IRS is going to look at each of those accounts potentially a little differently.
They group your IRAs all together. So that’s pretty easy-peasy. That’s good. But if you’ve got an old 401(k) out there, you would be required, not could be, you would be required to actually pull a separate RMD from that account. Specifically, you couldn’t aggregate them together and pull that RMD from your IRA because they’re looking at those account types a little bit differently.
So understand the account type, understand how your RMDs are going to be impacted, I think is a good first step as you’re kind of diving down into maybe some of the more granular or maybe some of the more opportunities that you might have when the time comes for start pulling these.
Walter Storholt:
Yeah, makes a lot of sense. I mean, and kind of interesting how just understanding which accounts have which rules automatically set you up for success just from that perspective.
Tyler Emrick:
It can, well, and it could drive where you’re holding your money and all that type of stuff, right?
Walter Storholt:
Yeah.
Tyler Emrick:
But once you hit RMD age, now the question is like, “Well, what’s the best tool in the old toolbox to maybe limit those RMDs?” And the first one of which is qualified charitable distributions. We’ve talked about it many a times on the podcast, but this is where the IRS essentially allows you to gift directly from your individual retirement account to church or charity. And by doing that gift, it would actually lower your RMD amount and you do not have to pay taxes on that. So generally in most all circumstances, it’s the best way to do your gifting once you hit that age.
Now, the big caveat is that a lot of individuals don’t realize that age at which you can start those qualified charitable distributions is actually a little younger than when most people will have to start pulling out their RMDs. Once you turn 70 and a half, the old RMD age, you can actually still continue to do qualified charitable distributions out of your account. So you definitely want to be mindful of that. But charitable distributions by far are the best way to avoid paying taxes on those required minimum distributions.
And it goes into our planning. Just a couple of weeks ago, we were sitting down with a family and we were talking through what we were going to do from a bunching strategy because they were going to make a large gift to a donor advised fund, take the deduction, all tax deduction in this particular year. And actually one of the spouses was only a few years out from turning 70 and a half. So generally the initial strategy or plan from them was, “Hey, we want to probably put a little bit more. We’re going to do some more gifting. Hey, we’ll eventually gift it out. No big deal if we over-fund it, but we want to shoot for maybe four to five years worth of gifting.”
And when we started talking about qualified charitable distributions, we kind of changed our opinion a little bit and smacked it down and only did three years in their scenario worth of gifting to that donor advised fund because we knew once he turned 70 and a half, well then, hey, it’s going to be much more efficient for us to likely pull from qualified charitable distributions and just gift it directly from your individual retirement account going forward.
So it affected how we were doing some of their charitable planning now, even though we were still a few years away from actually being able to do qualified charitable distributions, which in turn we’re even a little earlier than when RMDs would start.
Walter Storholt:
The definition of being proactive there.
Tyler Emrick:
You got it, right? How does it fit in your plan? What are you trying to accomplish? All that stuff is very, very good. So qualified charitable distributions I think are, again, like I said before, a wonderful tool that you have available to you.
The other thing that I kind of wrote in here for RMDs is that I’m seeing a lot more individuals run into inherited RMDs or inherited accounts. So this is, hey, you have a sibling who passes away or a family member and you inherit their retirement account. What happens is for a lot of individuals, you are going to have required minimum distributions that you have to pull from that account. Okay?
Now these rules with some of the legislation changes over the last handful of years, well, they’ve gotten even more complex on, well, hey, how do you tackle and how do you understand what your required minimum distributions are on these accounts? And one of the things that I find that people, often where the opportunity is missed, is that when they inherit these accounts, they default to the, “Hey, SECURE Act, I got to have everything out of this account within 10 years and I have a yearly RMD, but I’m going to have to pull more than that each year or at bare minimum, within 10 years, have that account balance zero.”
Those are the normal kind of standard rules. But what happens is a lot of times you might be eligible to defer those payments, not necessarily defer them, but stretch payments, excuse me, out over your lifetime like the old RMD rules were.
So I had an individual where her sister had passed away. She was not more than 10 years younger than her sister when she passed. So what happens is she qualified as what’s called an eligible designated beneficiary, which she wasn’t subject to that 10-year rule unless she wanted to be. She can actually stretch payments out and take RMDs each year over the course of the entirety of her life.
So when we look at these inherited accounts and these RMDs that have to come from them, I see a lot of people that, “Well, hey, I would much rather stretch it out, but I didn’t know that I was subject and had this eligible designated beneficiary option available to me because it wasn’t discussed by my mom and dad’s planner or my sibling’s planner or wherever that you got the inherited account from.”
I’ve actually had two calls in the last six months where individuals thought they were under the 10-year rule and wanted to say, “How can I go back? I’m an eligible designated beneficiary and nobody ever told me.” Because once you sign up or you inherit these retirement accounts, those RMDs are coming and how much you got to pull each year and that stuff are going to be varied depending on what type of beneficiary that you are.
So spend some time talking with your advisor when you have one of these events where you inherit some of this money to make sure that you get the distributions right for sure.
Speaker 3:
What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no-cost, no-obligation discovery meeting. Just click the link in today’s show description to get started.
Walter Storholt:
I always love hearing about the nuances like that and the big differences that they make. That’s pretty cool.
Tyler Emrick:
You got it. Yep. So the final opportunity, I guess, that I kind of wrote down here is the-
Walter Storholt:
I thought these were mistakes, but now they’ve all been reclassified as opportunities.
Tyler Emrick:
Opportunity, mistakes, yeah, yeah, yeah. Could be your mistake, but it’s an opportunity on the other side of the coin, right?
Walter Storholt:
It’s just our glass-half-full way of approaching life, right?
Tyler Emrick:
Eternal optimist, right? So this idea, we touched on it at the beginning where it’s like, “Hey, it’s not just formulaic.” You just don’t, “Hey, what’s my amount? Process it, pull out.” Because I’m finding more and more families in a situation where once they turn RMD age and they have those first distributions, they look at qualified charitable distributions, maybe that’s for them, maybe it’s not, but they have those RMDs that have started.
And when we get down into that tax plan and really start to take a look at, well, how high do we want to actually take your income? What is your tax bracket 10 years down the road? What about for your surviving spouse? What’s the tax bracket for them? And you kind of paint the picture a little bit on what it looks like down the road from a tax standpoint, oftentimes it might make sense for individuals to actually pull out more than their required minimum distribution to where, hey, they might have been reserved to the fact of, “I don’t need this money. I’m living off maybe pensions and social security. IRS is making me pull out 20 grand this year.”
Well, when we get down into a tax projection, for more and more families, that conversation is going, “Hey, we think you should maybe pull out another 20 or maybe another 15, and here’s why. This is how it fits into your plan. You’re still in the same tax bracket. You’re not increasing your healthcare costs.” All these things. And then, “Oh, by the way, surviving spouse tax bracket’s going to be much higher because they’re filing single versus joint. Hey, from an estate standpoint, kids, it’s much better to get money in a Roth than it is in an IRA.”
So you start building out this picture of what their plan looks like and you’re using it to help make more informed decisions in the here and now, it’s much, much better than just the tick box of, “Here’s my RMD, that’s all I’m pulling out this year.” When in actuality, we might want to pull out even more, which is counterintuitive, right? Hey, why am I sending good old Uncle Sam more in taxes? But when we get down to the plan and we get down to the numbers, well, it’s not uncommon for us to take that approach and really want to continue to add income.
Walter Storholt:
Well, pay me now or pay me later. And for some people, the pay me now sounds great and is advantageous. And for others, it’s the pay me later. And so that’s where the planning comes in to figure all that out. So it makes sense.
Tyler Emrick:
It is, right? Well, and this is where your relationship with the family or the individual that you’re working with and really what their end goals are, what they’re trying to accomplish, who gets this money when they pass, all that stuff, being armed with that allows us to be better advisors when we’re kind of breaking down some of the more nuanced decisions to help paint that picture as to why you might do something that’s maybe out of the ordinary or a little unorthodox or not what you expected.
Walter Storholt:
Yeah, great points. Well, hey, this just illustrates just one of those areas of the planning process that True Wealth Design walks through each and every day with various clients and folks looking to learn a little bit more about their financial plans and how to best prepare for the future.
So if you’re approaching retirement or already into it, trying to make the best decisions about things like RMDs and all sorts of related retirement planning topics, that’s what’s covered in the relationship with the team. And so if you’d like to talk one-on-one about your individual situation, you can do that with an experienced advisor on the team, have a discovery call, and see if you’re a good fit to work with one another. That’s really the first step to take in your financial planning journey.
So if it’s the first time you’ve ever really put together a plan or maybe you’re looking for a second opinion about how you’re currently planning for retirement, that’s what I would do if I were you next, is to schedule a discovery meeting and see if you’re a good fit.
You can do that a couple of different ways. One is to just click the link in the description of today’s show. You should be able to find it pretty easily and you can schedule that 20 minute-or-so visit at your discretion. Or you can go to truewealthdesign.com and look for the Let’s Talk button and schedule it the same way. But there’s also lots of other great information on True Wealth Design on the website. They’ve got resources, blog articles, past episodes, of course, and much more at your disposal. So go check all that out. Thank you so much, Kevin. Oh no, I called you Kevin.
Tyler Emrick:
Oh, Kevin. Oh, wow. It’s been a while since he’s been on, too.
Walter Storholt:
Wow. Where did that come from?
Tyler Emrick:
That’s all right, nothing wrong with that. Hey, blast from the past. We do need to get the man back on the podcast here pretty soon.
Walter Storholt:
A synapse fired.
Tyler Emrick:
At some, right? Absolutely. Nothing wrong with that at all. We’ll get him on here one of these days.
Walter Storholt:
Oh yes, that’s our call. Kevin, come back. Join us for an episode.
Tyler Emrick:
Absolutely.
Walter Storholt:
Tyler, my friend, thank you for your hard work today and I appreciate it. I’m not giving Kevin credit for something.
Tyler Emrick:
Fair enough.
Walter Storholt:
Hey, we’ll talk to you soon. Thanks so much.
Speaker 4:
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