In today’s episode, we’re tackling these topics:
- Why RMD planning is really tax bracket management over time
- How Roth conversions can shrink future Required Minimum Distributions
- Smart timing and withholding strategies that create flexibility
- How Qualified Charitable Distributions (QCDs) reduce taxable income
- The role of income targeting and IRMAA awareness
- What types of assets to convert — and why it matters
Listen Now:
The Smart Take:
Required Minimum Distributions (RMDs) are not just mandatory withdrawals — they are forced taxable income that can quietly reshape your retirement tax picture.
Higher income from RMDs can trigger increased marginal tax rates, IRMAA surcharges, greater Social Security taxation, and long-term compounding tax consequences — especially for married couples navigating the widow/widower tax penalty.
In this episode, Tyler Emrick, CFA®, CFP®, breaks down how to think about RMD tax planning as a long-term process — not just a once-a-year withdrawal decision.
This conversation is designed for individuals approaching retirement or already retired who want to make more intentional decisions about Required Minimum Distributions and lifetime tax planning.
The goal isn’t avoiding taxes altogether. It’s deciding when and at what rate you pay them — so RMDs support your retirement plan instead of quietly working against it.
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
Sign up for our newsletter on our podcast page: https://www.truewealthdesign.com/podcast/
Have questions?
Need help making sure your investments and retirement plan are on track? Click to schedule a free 20-minute call with one of True Wealth’s CFP® Professionals.
Subscribe:
Click the below links to subscribe to the podcast with your favorite service. If you don’t see your podcast listed with your favorite service, then let us know, and we’ll add it!
The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Walter Storholt:
We are back at it again on Retire Smarter. I’m Walter Storholt, alongside, of course, Tyler Emrick, a Certified Financial Planner and a Chartered Financial Analyst, one of the wealth advisors at True Wealth Design, based in Ohio but serving folks all across the country, wherever you are. Welcome to the show, and a good topic of conversation today, Tyler, because we’re talking about RMDs, but the big thing is like, “Hey, you don’t have to worry about this thing until your 70s.” Not necessarily the case. It may not happen until our 70s, but you’re wanting people to plan for it a little bit earlier.
Tyler Emrick:
We’re building out these retirement plans and thinking 30 years down the road and what it might look like. Well, inevitably, if you’ve put any money inside of your retirement plans, specifically the pretax retirement plans … think your 401(k)s, 403(b)s, IRAs … at some point the good old IRS is going to come a-calling and they’re going to say, “Hey, we want you to start doing distributions out of those accounts,” and you’ll have this required minimum distribution that you need to start thinking about. So it’s going to affect most of us, and it’s always a good planning topic, because as with anything, the earlier you start, well, hey, the more options that you have to alleviate or plan around how these distributions are going to impact you. So a jam-packed episode today, talking everything about required minimum distributions or RMDs, as we’ll refer to them probably throughout the rest of the episode.
Walter Storholt:
Well, what caught my eye when you sent me the outline for our episode today and how you wanted to approach things was you described it as this RMD tax chain reaction. And so, I don’t know, that stood out to me, the chain reaction part and the fact that RMDs are causing this, but I think of a chain reaction as something at the beginning, at the beginning of my retirement, a decision that causes a chain reaction.
Tyler Emrick:
Chain reaction.
Walter Storholt:
I feel like RMDs are this thing at the end process, but you’re saying there’s this chain reaction that comes along with this, so I’m looking forward to those details.
Tyler Emrick:
Oh, absolutely. Because if we think about just the basics and, hey, we’ll start there, right? Hey, what are these RMDs and how do they impact? It’s like, hey, once they start, there’s no real stopping them. And it’s like this chain reaction that builds on itself that’s going to literally be there throughout all of your retirement once you hit RMD age, which for most individuals is going to be 73. If you were born after 1960, actually RMDs will begin in the year that you turn 75. That was under the new SECURE Act 2.0. As it currently stands, 73 and 75 are those the magic ages that you need to think of, and how big of a chain reaction is it and how big of a tax hit can it be?
Well, generally speaking, that first year of your required minimum distributions, you’re looking at just under 4% that’s probably going to have to come out of your accounts. Now, of course it’s not a percentage calculation. They wouldn’t make it that easy. There’s a very official calculation where you’ll actually look at your balances across your pretax retirement accounts and essentially use those balances and go to what we call a IRS life expectancy factor, which is basically just a number based off the age that you are, divided by the balance on 12/31 in each respective account, and that would be your required minimum distribution that has to pull out.
But for purposes of the episode today, roughly that 4% is a good roughly starting point there as you think about it. And of course, once this happens, those distributions, and the big premise behind this wall is that hey, IRS wants those to hit your tax return, so that way they can get their tax money. And they’re saying, “Hey, we’ve allowed you to save in these pretax retirement accounts throughout your working career. Now comes time where we want some of those taxes,” and this is their way to do that.
So RMDs are going to essentially hit your tax return and they’re going to go traditionally into your adjusted gross income number, whether you need that money or not. So as you can imagine, if these required minimum distributions are a good size, well, I mean, that can cause all sorts of problems. That can maybe be taxed at higher marginal tax brackets if it pumps you into the next tax bracket. Obviously good old IRMAA surcharges, which we’ll touch on a little bit today, and then of course it can increase your taxation on your Social Security, impact capital gain stacking. I mean, it could cause all sorts of problems because, hey, once it starts, it’s not going anywhere. You’re going to have this required minimum distribution each year, so that tax impact really compounds over time.
And with the way the calculation works, generally speaking, as long as your account balances are traditionally going up and earning, that divisor that they use, that life expectancy factor, will essentially increase that percentage you have to pull out each year. So not only does it not go away, but you’re likely going to be pulling out a little bit more each year that actually has to come out of the account. So we figured today, hey, let’s talk about all the planning options that you have available to you to lessen maybe some of that tax hit that’s going to be coming down the pipe when these start.
Walter Storholt:
Like everything we seem to talk about, Tyler, this definitely seems to fall into that category of make sure you approach it with a long-term lens. This isn’t just some quick, one-time, “Hey, let’s do this one thing for this tax benefit and call it a day,” kind of opportunity. This is going to fit into a larger plan. It’s going to be part of this conversation that’s ongoing. The tax chain reaction is almost a good thing, right, because it makes sure that we’re viewing things from a long-term perspective.
Tyler Emrick:
Perspective, correct. Absolutely, 100%. Well, and some of the planning opportunities that you have around it. You’re going to have to understand how your tax situation is likely to change over time, so that way you can make very effective decisions. The first thing we’ll talk about is good old Roth conversions. We talk about them quite a bit.
If there’s any listeners out there that haven’t done conversions yet, basically all we’re simply doing is saying, “Hey, should we be taking money out of our pre-tax retirement accounts and shifting it over into a Roth account?” By making that shift or conversion, essentially what we’re doing is we’re saying, “Hey, we want to pay taxes on that money now,” at whatever your prevailing tax rate is in that year. Once that money is in the Roth, essentially that is going to grow, and you won’t have to pay taxes on that money or any growth inside of that account again, right?
So what these Roth conversions allow you to do is they allow you to be very deliberate and very specific on, well, hey, do we want to start doing these Roth conversions earlier? And then what that’s going to do is get money out of your pretax retirement accounts, thus lowering the required minimum distribution amount that has to come out each year, because you have less in those pretax retirement accounts. But just as anything, right, there are very important rules and some tactics that we could potentially take advantage of that can really make these Roth conversions fit within the grander scope of your plan and pick up some efficiency here.
So a couple of things I want to mention is, one, don’t assume that you need to wait until your 60s to start doing Roth conversions. I mean, we have individuals, especially individuals that are retiring early, in say their mid 50s or late 50s. You can still do Roth conversions even though you’re not that magic age of 59 1/2, because you are not penalized on Roth conversion dollars if you convert before 59 1/2. Traditionally there’s that 10% early withdrawal penalty if you haven’t reached that age yet, so you can still do conversions, but of course you’re going to have to pay those taxes that are due from the conversion from somewhere else. We can’t withhold those taxes when we do the conversion, because if you pay taxes with IRA money, that is not a conversion, that is a distribution, and if you’re not 59 1/2, they can hit you with a 10% penalty, so you want to be quirky on that.
On the flip side of that, I don’t think Roth conversions stop once you hit RMD age or required minimum distribution age. Depending on your tax situation, depending on a number of other factors, you could process your required minimum distribution and then potentially do a small conversion on top of that, to fill up a tax bracket or an IRMAA bracket or something like that as well. So a lot of individuals think there’s this magic window where like, hey, you should be doing Roth conversions generally in your 60s. Yes, that’s a very impactful place to start it, but obviously there’s no real rules here. It really depends on, well, hey, what’s your current tax situation? What’s your expected long-term tax situation, and do those things jive out?
The other thing that we want to consider is the actual processing of it, meaning that, well, when we do these Roth conversions, we have some timing considerations throughout the year. If you’ve gotten to the point to where you are like, “Hey, I am going to do a Roth conversion this year, I know the amount,” well, now you get down into the question of like, well, when do you actually complete that Roth conversion. Do you complete it earlier in the year? Do you complete it at the end of the year? Do you maybe do a little bit of both? So I think that is an important factor that’s often maybe not analyzed enough as you think about, well, hey, if you do a conversion earlier than the year and that converted dollars increased because the market went up or whatever, all that growth is within your Roth.
If you wait until the end of the year to do your conversion, well, all the growth that those investments had are still in your pretax account, and obviously good old Uncle Sam’s going to get their hands on a piece of that. So I think about, well, the timing aspect of when these conversions are. Those are a couple of things to keep in mind, and just don’t assume that, “Hey, I’m not a certain age or I’m going to wait till the end of the year to do my conversions,” or anything like that. It can certainly be a little bit more nuanced than that when you think about it from that perspective. So Roth conversions are a big one for sure.
Announcer:
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:
Makes sense. I know whenever we have this conversation, Tyler, QCDs, just to add to our alphabet soup, right? Those qualified charitable distributions, they seem to really go hand in hand with RMDs.
Tyler Emrick:
They do, they do. So what they are essentially, Walt, is the IRS will allow you to, where if you are doing gifting each year … now, this isn’t gifting to children or family or things like that, this would be gifting to a charity, church, something like that that will qualify … the IRS will allow you to actually do your gifting directly from your retirement account, and any distributions that come out of there will not be taxable to you, so they will not even hit your tax return.
A lot of individuals say, “Hey, I don’t keep track of my gifting because I don’t itemize anymore. I take the standard deduction.” I mean, the standard deductions, Walt, are so high right now. That’s the case for a lot of individuals. Well, these qualified charitable distributions, or QCDs, they bypass all that. They essentially allow us to say, hey, even if you’re gifting 500 bucks, hey, you can take a $500 distribution from your IRA. As long as you follow the rules and send it and make it payable directly to the church or charity, that is a qualified charitable distribution.
That will actually not even hit your tax return. And what it also does is it lowers your required minimum distribution amount. So for example, if your required minimum distribution is ten grand for this year and you gift five grand to the church, well, you only have to pull out an additional $5,000 that is actually going to be taxable to you in that year. So if you’re already doing quite a bit of gifting, these qualified charitable distributions, Walter, are a wonderful way to plan for that.
And then of course, I mentioned it a little bit earlier, but the age 70 1/2 rule, actually that is the age you can start doing qualified charitable distributions. So you actually don’t even have to wait until 73 or 75, which is the traditional starting age for RMDs. You can actually start doing this at age 70 1/2. That used to be the old RMD age, and when they updated the legislation, they didn’t push the QCD age. So that should be something everybody, that if you do any type of gifting, should really consider and start looking at once you turn 70 1/2, especially if you’re taking the standard deduction and you’re not getting a big deduction for your gifting. QCD is wonderful.
Walter Storholt:
It’s a great point that you bring up, because it’s not like … this train that’s coming down the tracks, this RMD train, it’s not like we have to sit there and wait for it to hit us. We can be proactive. In the years leading up to it, if we don’t want to have our hand forced, there’s lots of options leading up to it. We can get off the tracks, we can change the tracks. We can do a lot of different things to avoid that inevitable collision.
Tyler Emrick:
You got it, yeah, and the two big tools in your toolbox definitely are these Roth conversions, which I think are a little bit more proactive, planning side of things. The QCDs, obviously it’ll start at 70 1/2 so it’s a little bit earlier, but the QCD is really that last tool that you got if you are doing the gifting and already doing that within your plan. Once the RMDs start, that’s pretty much the only other option that you have to alleviate some of those actually hitting your tax return. So outside of that, it’s happening, and those RMDs are coming down and hitting your return.
So as we’re wrapping up and we’re finishing up the episode here today, I want spend the ending part really talking and focusing on the process around these maybe Roth conversions and how to be thinking about the amounts, timing, what to convert, that type of thing, because Roth conversions truly are the biggest tool in your toolbox here as we think about RMDs and planning for that tax hit. And inevitably it’s very important, and this is why we go back to the plan that I mentioned earlier.
We have to have some resemblance of what it looks like, what your tax situation looks like when these RMDs begin. Why that’s going to be so important is because then we can say, “Well, what is that tax bracket, and how does it compare to the tax bracket that I’m in now?” We can also test it, and if you’re married and you’re filing jointly, if something were to happen to you and your surviving spouse has to continue with these required minimum distributions, we would also want to know, well, what happens under that scenario as well, right?
Traditionally the tax brackets are much more condensed if you go from filing joint to single, so your surviving spouse might be going up into those higher tax brackets. So the question becomes, when you’re planning that Roth conversion, well, hey, maybe your long-term tax bracket while you’re both alive and married filing jointly is about the same as it is now. But if something happens to one of your spouses, that tax bracket goes up, those Roth conversions still might be very advantageous as you think about planning for how much you want to do.
Another caveat there would be your estate planning and how it fits in there, Walt, as well. You look at, hey, you’ve built up a good amount of assets. You’re not going to spend through those assets. How much is being passed down to your heirs? Well, what is your heirs’ tax bracket likely going to be when they inherit that? Is it higher or lower than where you’re at now? So there are a handful of considerations when we’re really thinking about the amount of those Roth conversions.
And I’ll also put in there too like, if you’re working with your advisor and your advisor is saying, “Hey, you should probably convert around 30 grand this year, talk to your CPA,” that’s probably not the way you want to be working with your professional. Might be a little bit of a red flag, because what that tells me is they’re maybe not looking at your entire tax situation. Because when you look at these Roth conversions, there’s a number of considerations that aren’t at around about 30K or 40K, right?
We want to be very precise or as precise as we can, because when we do Roth conversions, that does add to your adjusted gross income. That could affect your IRMAA premiums if you go over those cliffs. Obviously you have portfolio income that’s going to be considered in there that might be subject to net investment income tax if it goes too high, so you might be paying more tax there. And then of course, as you look at your tax bracket management far off, it might bump you into some of those higher tax brackets and not make it as advantageous.
So this is something to where you really want to make sure that your financial advisor, if they’re driving it and running it, is being very precise on the amounts, what tax withholding. And if you’re not working with an advisor, obviously your CPA or whoever’s filing your tax return, to ensure, hey, you’re being very deliberate on the amounts, because we have it all the time. Well, hey. We talk to a new family, start with, “Hey, you did a Roth conversion last year. How did you come up with that amount?” “I just kind of picked it.” That is very, very common, right? 40K felt about right, and that’s how a lot of individuals are doing that, and I would really caution you on picking that out of the hat or not being specific, because it can get you into trouble.
Also when we think about these conversions, we also want to be very deliberate on what we are converting over into Roth, what type of investments. When we think about overall asset allocation, normally your higher expected return investments we want to have in that Roth because they grow tax-free, so that asset location when you’re doing these conversions becomes much, much more important. If you’re one of those individuals that’s maybe doing a Roth conversion early in the year and maybe part at the end of the year, maybe we won’t convert stocks. Maybe you would convert a higher-yielding investment because you don’t want it to be subject to market conditions over the course of that year, and then you’ll switch.
So there’s definitely a lot of planning opportunities there when we think about, well, what assets are we moving over into the Roth, and what underlying investments do we want to hold in there. I would argue the same goes for your actual tax withholding and how you’re actually paying taxes on these Roth conversions. Of course, for a lot of individuals, the answer is, well, hey, if you’ve got enough money sitting in your checking account, savings account, something like that to pay the taxes, well, that’s going to allow you to convert more money over into that Roth, and use that money potentially and go from there.
If you are not in that situation, maybe you have a lot more money in pre-tax retirement accounts and you don’t quite have the other assets outside of retirement accounts to pay that tax, but you still want to do the conversion, well, hey, you can do a $50,000 Roth conversion and go ahead and take 10,000 off the top and send it to the IRS and convert 40. That’s fine, but then the question becomes how and when do you pay those taxes? Do you wait till the end of the year, do a one-time distribution out of the IRA and pay it? Do you do it at the beginning? That brings up that whole awareness of timing, how it’s constructed and how it fits into the overall strategy.
And I think it’s worth bringing up again, obviously for those individuals that are approaching RMD age, you’re always dealing with IRMAA as well and being very, very mindful. That IRMAA lookback, that’s that Medicare surcharge on your Part B premiums if your income goes too high. That’s a two-year lookback. So do you have a qualifying event? Did you retire? Can we appeal that? That type of thing obviously always goes into these Roth conversion plannings.
So I wanted to finish there because Roth conversions is probably, like I said before, the biggest tool we got in our toolbox to handle these RMDs. It requires the most planning, probably the most in depth, but I wanted to make sure we shared what a family should be thinking about as they may be embarking on, “Hey, do I have a problem with required minimum distributions down the road? All right, is qualified charitable distributions going to be something that I have available to me? If not, well then, hey, should I be considering Roth conversions now to alleviate some of that RMD pain down the road and some of the tax hit?”
Walter Storholt:
I keep having this vision come to my mind as you’re talking today, Tyler, and it’s like, all right, I’m going to renovate a room in my house and I’ve got a contractor, and then I have the True Wealth Design contractor come by. And the normal contractor is probably going to do a great job with the plan and with the ultimate renovation, but they might tear down some drywall and find some unexpected surprises that they then have to react to and figure out. That’s like getting to RMDs and being like, “Oh, okay, we’ve got to deal with these now.”
You guys are the contractor that comes in. Maybe you’ve got the stud finder and the other one doesn’t. So you knew where the studs were, you knew exactly where to drill, you knew how to make it happen. You planned, and you knew where there were maybe some surprises already behind the wall and had planned for them. So it’s just done more efficiently, it’s done without surprises, and maybe you’re able to obviously save money in this particular case because you’re then not having to adjust down the line and lose opportunities. So you guys have the super fancy stud finder in the way that you do due diligence and the work ethic and just the level of detail that you go into the planning.
Tyler Emrick:
It takes time, right, to plan that out, think things through. It’s not going to be perfect.
Walter Storholt:
Yeah. It comes through when you’re talking about something like this.
Tyler Emrick:
Yeah. When you have to take the time to do it to understand, well, what is that hit, right? How big? Are RMDs even a problem for me? Are they not? What does that look like? And to get there, well, a lot of times you’re doing that planning early, so you’re already 10, 15 years down the road maybe before RMDs start. Well, what does that look like? You gotta have some type of basis to make those decisions off of, and hey, just the more data points that we have, we think you’re just going to put yourself in a little bit better situation or at least have a better understanding and framing of what you’re doing.
Because, hey, well, you start doing these Roth conversions and you see the check that goes to the IRS, that’s not a small chunk of change. So you gotta have some conviction with like, “Well, why am I doing this, and what’s the understanding,” because it is certainly a long-term play and we’re planning for something that is a long-term issue. RMDs aren’t going away for individuals once they hit the early 70s.
Walter Storholt:
So my final thought too is that you also need experience when it comes to this level of detail. So a lot of do-it-yourselfers will get to this point. They don’t have years of experience built up to know what’s the difference if I make decision X over Y, or if I do A, B and C to my plan, or which paths do I choose. You guys have worked with so many families over the years. You have all that experience to know what moves the needle, what’s worth doing, what’s worth exploring and talking about, the questions that need to be asked, that maybe DIYers don’t. I think that’s an important clarification too.
So if you have any questions for Tyler and the team at True Wealth Design, a great place to start is with a discovery meeting. Find out if you’re a good fit to work with one another, where you stand right now financially. Is that a good spot? Do you have some gaps in the plan? You can start exploring that with an experienced advisor on the True Wealth Design team. All you have to do is go to truewealthdesign.com or click the link in the description of today’s show, whether you’re watching on YouTube or listening on your favorite podcasting app, and that’ll let you schedule that visit as well.
It’s just a 20-minute discovery call to see how in good a shape you are for your retirement future and your finances, and you can see again if you’re a good fit to engage further after that, but it’s a great starting point for many families. So again, truewealthdesign.com, or just check the link in the description of today’s show to schedule that time to visit. Tyler, thanks for walking us through this great conversation on RMDs and giving us some great details to think about, and we’ll talk again soon.
Tyler Emrick:
Absolutely.
Walter Storholt:
All right. Take care, everybody. We’ll see you again next time, right back here on Retire Smarter.
Voiceover:
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 reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.