5 Things You Need to Know About Required Minimum Distributions (RMDs) When Planning for Retirement

Most people don’t start thinking about Required Minimum Distributions (RMDs) until they start nearing those milestone ages, but you should start incorporating strategies into your planning further out to give yourself the best chance to maximize those withdrawals.

In this video, Ryan outlines five crucial things you need to know about RMDs, including when you need to take them, how to calculate them, and strategies to reduce them for tax efficiency. These five things will help give you a better understanding of RMDs and the role they play in building an income plan, which will also help you be more efficient in retirement.

Whether you're nearing retirement or planning ahead, this episode is packed with valuable insights to help you better manage your retirement income and avoid common pitfalls.

Here’s what we discuss in this episode:

0:00 – Intro

1:46 – When do you have to take your first RMD?

5:00 – Calculating RMDs

7:39 – Can RMDs be aggregated?

11:16 – Why reduce RMDs?

15:06 – Strategies to reduce your RMDs

Full Transcript:

Ben (00:00):

Well, a lot of people are thinking about Required Minimum Distributions as they get close to those key ages, but you should be incorporating that RMD planning into your retirement planning as you approach that big day. So today we have five things you need to know about RMDs and we'll do that next with Ryan Cravitz.

Announcer (00:16):

This is Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial & Insurance Solutions.

Ben (00:24):

Well, hello. Welcome in to Candid Conversations Retirement Talk with Ryan Cravitz. I'm Ben George, he's Ryan Cravitz of Cravitz Financial in Orange, California. Ryan, how are you today?

Ryan (00:34):

I am doing pretty good. How about you, Ben?

Ben (00:36):

Doing well. I know RMDs is a big topic of conversation for people you work with, especially retirees. They get in there and they're thinking about starting to pull that money out. It becomes a bit of a challenge and a lot of it is a lot of people aren't thinking about it until it's time. Right? That's part of the problem.

Ryan (00:51):

Yeah, it's so true. I mean, all part of structuring that retirement income plan is thinking through all the things that you got to think through in the future, including the RMDs. So knowing about RMDs or Required Minimum Distributions isn't just something you need to know about once you reach the age you need to take them. It's about planning and preparing ahead of time in order to understand how it works in order to help make your plan more efficient from a tax standpoint and everything else.

Ben (01:19):

Yeah, so today's conversation is going to be all about that five key things we'll talk about when you need to take r and ds. We'll talk about calculating them ways to reduce them. So a lot of beneficial information in this episode. If you'd like what you hear, please hit subscribe on the channel as well. We'd appreciate that. Ryan has a lot of other content on the channel. For those that are listening maybe on podcast form, come over, hit subscribe, watch a lot of great content there to help continue to educate you as you prepare for retirement and just try to learn more about financial planning. So Ryan, we got five key things we want to hop in here today on RMDs Required Minimum Distributions. What do we want to start with first?

Ryan (01:53):

Well, let's start with number one, right? When must you first take your first r and d? And so let's hop on over to there. Now we're going to look at this from two perspectives. So the first perspective is based upon your date of birth. So if you were born on January 1st, 1951 through December 31st, 1959, you have to take it your first one at age 73. If you were born though January 1st, 1960 or later, your first r and d needs to be taken when you're 75. Now, let's dive a little bit deeper here. Kind of look at this based upon account and a couple of other things. So first off, if you go down to the bottom there, you'll see Roth IRA and you'll see designated Roth accounts. Now, note with those accounts, you do not need to take out RMDs from those, so we don't need to even worry about those.

(02:48):

But if we go back up there to the top in that section, the IRAs, the SEP IRAs, the SIMPLE IRAs. So again, with these we do have to take out an RMD. These are the accounts that we've been funding on a pre-tax basis, right? So at some point our friendly IRS wants to get their tax money and such. So we have to start taking this at either 73 or 75 depending upon the year you were born. However, your first RMD, you can wait up until April 1st of the following year. So if you have to take your first one this year, 2024, you can wait up until April 1st, 2025 to do that. However, do realize that you'll have to take two RMDs next year. You'll have to take one that will satisfy this year's RMD, and you'll have to take the second one by December 31st of the end of the year.

(03:42):

So you need to plan for that. Now, it's a little bit different, but not too much if you have a 401(k) or 403(b) or 457(b), and you'll see there's some specific possible exceptions. Again, the April 1st of the following year, that thing is still the same. But here's the key point is with these types of plans, you may be able to delay, you may not want to, and we'll talk about that later, but you may be able to delay if you're still employed until April 1st of the year after you retire. It may be possible only for if it's your most recent employer and the specific plan allows it, and you can't be more than a 5% owner of the business. So some very specific rules around that. So that's number one.

Ben (04:34):

Now see, so basically when I turn for RMD age, whether it be 73 or 75, depending on when your birthday falls, I've got till April 1st. But then after that, it's year to year. So once that April 1st comes, you still by the end of the year that year to still pay your second one, right? So that's how it breaks down

Ryan (04:49):

Exactly. And each and every year thereafter, you've got to take that RMD.

Ben (04:54):

Ok, very good. And I see the Roth's obviously not included, which is one of the benefits there of a Roth.

Ryan (04:59):

Yeah, you got it.

Ben (05:00):

All right, very good. All right, what's number two?

Ryan (05:02):

So second one here, calculating RMDs. And now if you're not a math person, you might be looking at this going cheese. There's a lot of numbers on this. I'm just going to tune out right now, right? This is crazy. But here's the key thing. I just want you to know kind of big picture how the calculation is done. You don't actually have to make the calculation. I'll explain why in just a second. But here's what you have to know is that let's say you have to take your first RMD at 73. What you'll need to do in order to, if you're running the calculation, is you'll look at the balance, let's just call it of your IRA account at the very end of last year. Take that balance and then divide that by the distribution period number. So at age 73, you would divide that year end balance last year by 26.5, and that is what your RMD is for that particular account.

(05:55):

Now, what I do want you to notice is that over time, that distribution period number is dropping. Okay? So what that means is that you're going to have to take a higher percentage of your account balance each year to satisfy that RMD. And you'll notice if you live to be 120, I don't think many of us will, but if you do, then that number's two. So you get to take out, or you would have to take out half of it at that time. So that's how that works. Again, don't worry, you don't need to do this calculation if you have your money let's say like for us, our investment money for clients is held with either Fidelity or Charles Schwab. The custodians run the numbers for us, so we know they give us the amount of the RMD. Now it's on us though to make sure that we're taking out the proper amount. So that's what you need to know as it relates to calculating your RMDs.

Ben (06:55):

I've never seen that chart before and it's very confusing just looking at it first glance, and to me, it just seems like a bunch of random numbers. Why am I doing 26.5% this year or divided by 26 and a half? Why am I divided by 25 and a half, 24 point, just on and on and on. But it's good to see this laid out. Cause I always wondered how the RMDs, what you actually had to pull out was calculated. Now it's much more clear,

Ryan (07:18):

And I should note, Ben, that this chart should not, it is written down there at the bottom, but it should not be used when the spousal beneficiaries more than 10 years younger. So there are some exceptions here, but this is the main chart that most people are going to fall. And again, the custodians are going to crunch those numbers for us.

Ben (07:36):

Good to have a financial professional on our side for something like that. All right, what do we have for number three?

Ryan (07:40):

This can be a complicated subject, but I'm going to attempt to make this as simple as possible, and there's a lot of confusion here when it comes to IRA aggregation. So here's the deal. Let's say that you have two IRAs. You can take your RMD from one IRA and take your RMD from the other IRA, or you can take the RMD just from one of those IRAs. So let me give you an example. Let's say IRA number one has a RMD of $10,000, and IRA number two has a RMD of $5,000. So you can take 10 from the first one, five from the second one, or if you want to, you could take $15,000 just from one of them. So you can aggregate those accounts any way that you like. The IRS just wants to know that they're getting their tax money. Now, you need to be very, very careful here.

(08:42):

These rules are tricky. So the only accounts that can be aggregated together are the IRAs, the SEP IRAs, and the simple IRAs, as you'll see right there on that first line. Now, if you have a 403(b), if you have multiple 403(b)s, those accounts can also be aggregated together separately. So even if you have ten 403(b)s, you only need to take the RMD out of one of them as long as the IRS is getting the full amount of whatever that RMD is. Now, if you have a 401(k) or 457 or other qualified plan, then you cannot aggregate those. You have to take the RMD from each of those separately. So this is just one of the reasons why it can make sense to consolidate your accounts, especially as you're getting closer to retirement to help simplify your life, make things a little bit easier, and give you more flexibility on withdrawals and such.

Ben (09:37):

This is where planning comes into play, right, Ryan, because it's about figuring out what's most efficient in terms of withdrawing these, whether or not you aggregate, you might not, whatever strategy works best, but that's why you have to have a plan for how you're going to take these RMDs.

Ryan (09:50):

Yeah, definitely. I mean, sometimes when we're doing planning, we're designing income plans. The idea might be, let's say we have two different IRAs. We might want to just take income from one IRA to satisfy the total amount of that RMD and let the other IRA continue to grow, and we don't need to touch that and just know that we're getting the full amount. So it definitely comes back to what the plan is as far as how much you're going to withdraw and when to meet your income needs. So absolutely right, Ben. All right,

Ben (10:22):

So that's the first three things you need to know about RMDs. I know people would probably itching to hear about some strategies or way to maybe get rid of these RMDs because maybe after all, we don't want to take that money out. So what else do you have for us for number four?

Ryan (10:35):

Well, before we get to number four, that bright yellow right there, that's an important thing, and that can be tricky. You'll see it says, can marry couples aggregate accounts for R Ds. So this comes up a lot. You'll have a married couple, John and Jane, each of them have an IRA and they're thinking, well, I'm married. We file jointly or we're married, we file jointly. We each have an IRA. So because their IRAs, we can aggregate those, right? And the answer is no. So you cannot aggregate those with your spouse, only with your own IRAs. That's very important, and it trips people up a lot.

Ben (11:15):

Yeah, I can imagine. So that's good information.

Ryan (11:16):

So number four, why might you want to reduce RMDs? Number one, of course is to help control your taxes, right? I put here to defer or not to defer, right? Because so often we just get conditioned, especially as our younger years when we're really trying to accumulate for the future. We just want to defer the tax accumulate as much as we can. But as we're approaching retirement, the name of the game is how are we going to get money out of there? It's going to be taxable when we do. So it's just about being thoughtful on when we're going to take those withdrawals to find opportunities to help minimize what we need to take. I'll give you a great example. I was talking to a guy the other day and he was on the verge of retirement, had a couple hundred thousand dollars just sitting in a savings account, and the thought was, well, I'll just take money from there in order to satisfy my living expenses for the first year.

(12:11):

I'm going to pay nothing in taxes. This is money that's already been taxed. I don't even have to worry about that. Well, he also had an IRA, so there was an opportunity there in his situation, even if he just took the standard deduction to withdraw some money and not have to pay any taxes on his IRA again, just because of that standard deduction. So there's all different opportunities, all depending on where you are within the tax brackets to find opportunities to get money out and minimize the taxes that you have to pay. Next thing won't dive into this real deep because I've done this on other videos. I'm sure I'll talk about it in the future, but if you have to give up that flexibility because now you have these high RMDs, you may not be able to reduce the taxes on your Social Security.

(13:01):

Keep in mind that depending on what your other income is, you'll either pay taxes on 0% of your Social Security or up to 85% of your Social Security, never more than 85, and we're talking at the federal level. But there are different strategies you can utilize. Maybe take some money from an IRA because your RMDs are only so high. Maybe you have a Roth, you could take some money from there. Then you have Social Security, so you're working to kind of minimize that Social Security. So a lot to say on that, but that's all we'll get into here today. Now, IRMAA, this is another big one here too, Ben, and this is the surcharge that some people have to pay for Medicare right now. I believe the premium, the normal premium is $174.70 for part B, it changes every year. But a good example, I'll get to that in a second when I get to the widow's tax trap, but if you have higher income, you are going to have to pay more for part B and for part D.

(14:02):

Now, the widows tax trap, another thing to be thoughtful or thinking about you're married, let's say you may not need more money coming out of your IRA right now, but you need to be thinking of what would happen if one spouse ends up passing away. Because remember then you'll have to file as a single person. Tax brackets aren't as favorable. If you're taking the standard deduction, you lose one of those. And so now you might have to pay even more taxes on your IRAs and you may have to pay more for IRMAA or pay more in taxes on your Social Security, all depending upon what your income is. So a lot of things to be thinking about there. One thing about that IRMAA is let's say your income's $130,000 for the year. If you're married, you're going to pay the standard part B premiums. But if you're now single because one spouse passed away, you're paying a surcharge and your Medicare part B premium is, I believe it goes double at that threshold. Not to mention Part D goes up to. So all these different things that you want to be thinking about.

Ben (15:05):

All right? A lot of good reasons why you might want to reduce RMDs. So that takes us to number five then, Ryan, what are some strategies in order to do that?

Ryan (15:14):

Yeah, last but not least, right? So let's just get into a few of them. Obviously, there's a lot of things that we could talk about here. Only going to touch on a few things real quick. Already kind of talked about this too, is number one there you'll see withdraw money. Now to meet income needs, let's say you retire at 65 and you don't need to take your RMDs until into your seventies. Well, you may want to start taking money out sooner. Again, it's how do you get money out of there and still minimize the amount of tax that you'll have to pay over the course of your lifetime. So it's being thoughtful. Thinking about your overall income distribution plan, you also might want to think about converting to a Roth IRA. Now you can convert all of it, right? A full conversion, you can do partial, which is typically more common where you're just converting some maybe this year, some next year, and the amount that you may want to convertagain, it's going to depend on where you are within the tax brackets.

(16:11):

Maybe you're in the 12% tax bracket, you could realize some additional income before you get bumped up into the 22%, for instance. So again, it just all depends upon you. Last thing to kind of think about there is the Tax Cuts & Jobs Act will sunset here in a couple years, so tax rates are going up. So another reason to be thinking about this. And then finally, not going to get into deep here, but QCDs, these are Qualified Charitable Distributions. If you're charitably inclined, and if you're taking your RMDs and it's more than you actually need in retirement and you would like to give some there to charity, that could be another solution. And you can contribute, or I should say, donate quite a bit of money to A QCD up to $105,000 now this year, if you wanted to do that, now there's some very specific rules on this. It needs to be a qualifying charity. Talk to your tax professional, financial professional before you do anything here, because I'm just touching on that at a high level. So that's it. These are the five things to know here, Ben.

Ben (17:19):

Yeah, and this covers a lot of the key information with RMDs and stuff that you really need to know about, and let's kind of finish it here, Ryan, I know at the age of 73 and 75 for people for RMDs, and that might seem like if somebody's in their late fifties, early sixties, well, I've got plenty of time before I need to start worrying about it. But the truth is, you need to incorporate these strategies as soon as possible to be thinking about how it's going to work within your plan.

Ryan (17:43):

Absolutely. It's not just defer, defer, defer. It's having a game plan, how you're going to get your income year by year, all throughout retirement.

Ben (17:52):

Awesome. Well, if you want to learn more, talk about those different strategies, how you're going to incorporate your RMDs, you can always give Ryan a call, 714-462-9155 or log on CravitzFinancial.com. And most importantly, please subscribe to the channel. We appreciate your support. We'll continue putting out new videos. I know Ryan has put a lot of time and effort into this, and all we ask is that you help us continue to grow, and the only way to do that is by hitting subscribe. So we appreciate your support, Ryan. As always, thanks for your time and we'll look forward to doing it again next week.

Ryan (18:20):

Good to see you, Ben. Absolutely.

Announcer (18:21):

Thanks for checking out today's episode. Please remember to like the video on YouTube and subscribe so you never miss an episode. If you're within five years of your desired retirement date, let's make sure you're on the right track with a free 20 minute consultation. Ryan can help answer your pressing questions such as, when can I retire? What are my options for healthcare in retirement? Should I adjust my investment strategy as I get older? And when should I collect Social Security? This consultation is the perfect starting point to craft a sound retirement plan. Schedule your call now by clicking the link in the description or visiting CravitzFinancial.com.