Required Minimum Distributions and How to Plan for These Laws

On this week’s episode of The Secure Retirement Podcast, we approach the end of our Florida Retirement System series. The information in this episode will be valuable to our viewers nationally, even if you are not a member of the Florida Retirement System, as these laws apply across the country. We address the universal Required Minimum Distributions and offer ways to prepare for them so you aren’t caught by surprise.

John says, “No matter what type of retirement account you have, the day will come when you have to start taking money. And that's called a required minimum distribution.”

We discuss the recent changes with the Secure Act, as well as:

  • Tax codes on various accounts

  • Penalties for not taking funds when you’re supposed to

  • Verifying your beneficiaries

  • Which account types are subject to RMDs

  • When and why congress amended RMD laws

  • And more

Mentioned in this episode:


Transcript

Steve Gordon: Welcome to Joh H Curry's Secure Retirement Podcast. I am your host, Steve Gordon. And I'm here with John today. And we are, I think, nearing the end, I think this and one more episode in our series for members of the Florida Retirement System. If you're listening to this, and you are not an FRS member, stay tuned, we're talking about a subject that actually is universal for folks retiring in the US. We're talking about required minimum distributions. RMDs. And, John, first welcome. This is a big, big topic, people get surprised by it and are worried about it, 

John Curry: Well they get surprised in a lot of ways, and we'll talk more about that some today. But the biggest thing is to understand that no matter what type of retirement account, you have, IRA, 403B, Deferred comp, a set plan, 401k, the day will come you got to start taking money. And that's called a required minimum distribution. As we get into it. I'll talk about the old law what the new secure act did. And we'll go from there. 

Steve: All right. Well, there have been changes here recently to all this. And I know that not everybody is aware of what's happening. As you're meeting with people, day in and day out, what are the big questions and concerns they have right now? About RMDs?

John: Well, surprisingly, a number of people say why do I have to even take one, I don't need the money. I don't want the money. So why am I being forced to take money out. An old law said 70 and a half the Secure Act changed it to age 72. So that's Congress's way of trying to spread it out a little bit farther. I don't think there should be a required minimum at all. I think if you have the money saved, then let it stay there until you die. And then when it goes to your kids, they can worry about getting taxes then. 

Because we keep we're being told that Social Security is in trouble. And it is, we're being told that Medicare is in trouble. And it is, and Medicare, excuse me, Medicaid is in trouble. And it is. So if all that's true, why wouldn't you just let Americans keep growing the money? And the answer is they want the taxes. So they put age limits on there, that you have to start taking it. So let's do a little history here. Let's just talk about an IRA an individual retirement arrangement. If you take money out before 59 and a half, you have to pay a 10% penalty, plus pay tax, because it is designed to encourage you to save for retirement. 

So if we believe that, and we do, that is to force you to save money for your own retirement, then why would you be forced to take it out if you don't need it. And so between 59 and a half, it was 70 and a half now 72 for most people, if you were 70, at the end of December 2019, this still applies for you to be 70 and a half. But if not, it's a 72. Unless Congress changes that which they might with the sunset of some of the tax laws. But the big issue is people get surprised because they don't know that they have to take a certain percentage. 

So I've had people say to me, oh, I've got a half a million dollars in my 403B or 457 deferred comp, I won't need that money, I'll just let that grow and sometime in my 80s I'll tap into. I said, well it doesn't work that way. At age 70 and a half, you had to take the value as of December 31 of the previous year, divided by a factor which currently works out to be 3.65%. So 3.65% of what's in that account, you've got to take out.

Steve: And that number is changes over time.

John: It changes every year. 

Steve: So if somebody's listening to this in the future, they need to check and see what the number is currently.

John: It's based on their age, and the IRS publishes a table. We have it. But just to give an example, at age 72, you're having to take out 3.91%. But at age 80, you're having to take out 5.35% at age 85 is 6.76%. So let's put this in perspective. So what if you're the kind of person you're real conservative, and you've parked your money in a money market fund, or a bank CD, that's earning 1% or less, and you're having to take out 3.65%. You're going backwards, aren't you? So it's very important that if you have money in any retirement account, that you don't just get so ultra conservative, that you say okay. I'm now retired and worried about losing my money. 

So we'll move it all over to a money market account, which we see people do. And then they get hit with the required minimum distribution. And they're seeing their account drop because they're tapping into principal. So there's a lot of moving parts here. So number one, when do I really need the income? Am I going to manage it myself? Am I going to invest in a way that I give myself a chance to outrun the distribution requirements. And then what happens when ultimately I die? Does my spouse get the money or not? Who gets the money. So there's a lot of moving parts. And on that subject who gets the money, let's think in terms of this, the secure act did away with something called a stretch IRA. 

That was a provision, Steve where if you died, and did not have a surviving spouse, you could leave the money to your children, and they could stretch it out over their life expectancy. So you're 50 years or you're 49 years old, your parents died, they left you an IRA, you didn't have to take it all today and pay taxes, you could take a monthly income based on your life expectancy. That was a great planning tool for people. A lot of our clients did it, a lot of them, because they didn't need all the money today. And they didn't want to take any but they at least they took a small sliver of it. Well, that was changed. Now, a non spouse beneficiary who gets an inherited IRA must liquidate that account, by year 10. They can take it all today. Wait until year 10 or anything in between. But 10 years after that death, that account has to be emptied. 

Steve: Wow. Big change.

John: Big change, and they did it because they wanted the taxes. It's just another way to collect taxes that people don't know about. And if they haven't been educated on it, they won't know.

Steve: Well, aside from the politics of all of that, because we don't have a whole lot of control over that. 

John: No we don't.

Steve: As you're working with people through, you know, accounting for the RMDs that they're going to have to they're going to have to contend with, what are some of the big considerations?

John: Well, the one I see most often is people have multiple accounts. As an example, I'll see someone who will have an IRA, a 457 deferred comp program with the state, and maybe a 403B from a previous employer. So they got these three accounts. And they've been told that you can just aggregate those, meaning add up the total, divided by your factor, and take it from either account. That's not true anymore. At one time, that was true, you could take all retirement accounts and bunch them up. 

Now, each account stands on its own. With this exception. If I have five IRAs, I can take it from one. If I have five 403B's, I can take it from one. So each category stands on its own. So if I've got three different accounts, IRA, 403B deferred comp, I've got to take from each code, I call it because each is based on a tax code. So I find that people don't know that. And they'll slip up and not take out an RMD that they were supposed to take. And if you if you do that, the penalty is 50% tax penalty on the amount you're supposed to take. So if you don't do it either intentionally, or you make a mistake, then if you get audited, then you could lose up to 50% of that amount you were supposed to take but did not take.

Steve: So that's, that's a huge risk, there.

John: It's a huge penalty, and it's on top of the tax you have to pay. So let's just say that your your RMD is 10 grand. And you don't take it. So you have to pay tax, let's just call it 30% tax. And then 50% penalty, you could lose as much as $8,000. Now, I've only seen it twice in my career. One was an attorney who said, nah, they'll never catch it. Well, they did catch it. And a widdow who didn't understand it. She went to the IRS audit. Said I'm sorry, I didn't understand how to do this. You know, is there any relief for it? And they they didn't make it pay the penalty. They actually refunded it. The attorney on the other hand, he was cocky and arrogant. No, sir, no relief, and he had to pay it.

Steve: Wow. So you have a note down here on on the sheet talking about tax history. 

John: Yes. 

Steve: Tell us a little bit about that and why it's important now.

John: Well, we we spent some time in one of our episodes on it. So I'd refer people to go back and listen to that. But I'll touch on it now. So we're told that when we retire we'll be in a lower tax bracket. If you go back and look at our tax history since 1913. When we first had the income tax with the 16th amendment, the tax rates go up and down. And they go up and down because there's Congress's way and whoever the current president is to argue with Congress to get their policies implemented. 

But I learned when studying for my master's degree in financial services, that it's really a controlling of the levers. See, Congress rewards and punishes us with a tax code. So they know that they need to employ more people, they will give you certain tax credits for employing people, or perhaps certain tax credits if you buy certain equipment because they're trying to stimulate the economy. Makes sense? 

Steve: Absolutely. 

John: So if you go and look at history, when we've seen massive amounts of spending, tax rates went up. What causes spending? Well, economic stimulus, or wars, go back and look at it. World War I, World War II, Korean War, Great Depression. 2008, 2001-2002. Just look at what happened with our market, stock market and taxes. And you'll see there's a little bit of correlation there. And so I tell people, when you retire, you should not assume that you're going to be in a lower tax bracket, I think you'll be in the same bracket, perhaps even higher. I don't know that until I see all of your numbers, we'll do some projections. But their RMD makes you take money out and most people that I work with, they don't really want to take it out, at least not all of it.

Steve: Well, I think this is this is one reason to begin, I think wrapping your head around this before you get there, right?

John: Yes, well, let me say this, if you're my client, I don't care if you're 45 years old, you're going to know about all of this because you'll be exposed to it. And I'll even tell you that you're you'd have no decisions to make now. But I promise you, you'll see this over and over again. Because I want you to be in a position that you're not worried about any of you already know which option to take with the state, you're going to do DROP or not do DROP, you'll be prepared. You'll know about Social Security, you'll have a good idea of when you're going to take it, you understand how Medicare works, you'll understand how RMDS work. What we're covering in this series is what I make sure that every person I work with, at least gets an overview of.

Steve: Yeah, well and, and I think that's that's the key. So we've covered these in individual episodes, because they are somewhat distinct topics. But in the practical sense, no one deals with them individually, you really only deal with them in concert with one another because they're also interrelated. And that's the thing that I've gleaned from our conversations through all these episodes.

John: And you're correct, because some things will be more important to one person than another. For example, if I have I'm thinking, one of my physician clients, he's got $3 million sitting in IRAs. That's a lot of money to be in IRAs. A lot of it came from rollover, some profit sharing plans where he worked in 401K's and things like that. Well, his biggest fear is how do I make this work for the rest of my life? 

Now, some of my listeners might say $3 million, and you're worried about that? Well, when you start determining that his age, I've got the factor, he's 75 years old. So he has to take that $3 million divided by 22.9. This year. And that's his required minimum, then you start taking into account everything else that's happening, taxation, things like that. He doesn't have a guaranteed pension. He doesn't have it. He's got Social Security. But I tell people who will listen to me that if you have a pension with the state of Florida, or anywhere, but especially the state of Florida, the value of that pension is huge. 

Because you take the monthly benefit, multiplied times 12, you get your annual benefit coming in, how much capital would you have to have invested with either a bank or mutual fund or some investment account to give you that same income?

Steve: This huge number I know.

John: It is if you if you're getting $40,000 a year, for example, let's just divide that by .04, say 4%? Because that's called the quote safe money withdrawal rate nowadays. I don't know if I believe that this one's called. You'd have to have a million dollars wouldn't you? $1 million at 4% is $40,000. Well, what if you lose some of the 1 million if the market drops, now your income drops. So these are risks that we have to explore, understand, because once you step out into retirement, you may not be able to go back into the job force. So how, how do we protect, grow and enjoy the assets during your lifetime? And then make sure that upon your death, we're all gonna die. Here's a question when? And when that does happen that's the grand exit. 

They're not going to put all that money in the casket with you. It's staying behind, so somebody will have to go unwind what you did, and deal with the taxes and expenses. So I spent a lot of time on this for clients. Because if you don't fix it, and I'll tell you the biggest thing, we have to help people do. We find people do die and have beneficiaries set up properly on their retirement accounts. And if they're not set up properly, it's a problem. Working with a couple right now, where he was arguing with me about beneficiary changes. It's all set up. It's perfect. I say okay, great. 

But until I see it, I don't believe it. Trust but verify. Well he comes back in, he said, Hey, I got eat some crow here because I didn't have a beneficiary. And his wife was angry. She said, well, what else have you not done? So needless to say, they are now going through the full planning process?

Steve: Well, it's so easy, it's just you're filling out the forms. Right?

John: Yes.

Steve: You know, it's an HR process at the time, you know, and you're filling out the forms, and you're trying to get through all of that. And you may not think as strategically as you ought to, in that moment.

John: Plus things change, people get divorced. Yeah. People die, you know. We're working on some stuff right now, for some clients that everything was perfect for them in the past, they've made some changes. I said look, let's check all the beneficiaries on everything, your retirement accounts, your life insurance, everything. Ahh, it's all perfect, we don't need to do that. I said, come on, you know, be better than that. You've been a client for 25 years, you know, I am not going to take that at face value. Let's find out. 

Sure enough, different beneficiaries wasn't set up properly. And the way it works, whoever's a beneficiary gets the money, you may have wanted your your wife to get it, I got news for you, if you named a previous spouse, they're getting the money. And you can they can protest that they can raise hell all they want like, I got new for you, ain't happening because this contract is going by beneficiary. And we see it all time. Another thing I see going back to the Florida Retirement System, is people picking an option without fully understanding the impact to the surviving spouse when they die. All this comes together. 

Let's talk for a minute about what accounts are subject to RMDs. Pretty much any retirement account, if you have a set plan or a simple IRA, if you have a 401k if you have a 403B, a 457 deferred comp, IRAs, where he talks about so any money that you put into the future without paying tax, we call it a tax deferred account, you've got to take RMDs. Roth IRAs, you're not required to take an RMD you could let the money sit there till the day you die. Now whoever inherits it will have to take some RMDs, but not you during your lifetime. And then the next thing is when do you have to take it, you have to take it by April 1, following the year now that you turn 72. You can wait and take two in one year, if you want to. I advise people not to do that. Let's take it in the year you turn 72 and then stay on track. But that's how the tax law works.

Steve: John what else do people need to be thinking about as it relates to RMDs?

John: I think one would be do you need all the income from the retirement accounts? Or can you take it from one account and let another one grow? So maybe we do enough from one account to satisfy the government's requirement and let the other accounts grow, and then reevaluate each year. I've got some people where we will intentionally spend down one account over say a 10 year period to over satisfy the RMD requirement and give them more income. But it gives them a 10 year period to let their other accounts grow.

Steve: So it sounds like there's there are a lot of different ways to approach this. And I would imagine everybody's situation is a little bit different based on where they have and what other assets they have. You know, you mentioned pension, Social Security, all of the other streams of income. And the interesting thing you said just just then was that you reevaluate this annually? 

John: Correct.

Steve: Okay.

John: They should, some won't, some will say no changes this year. So you in a couple of years. But the reason you look at it each year, what happened to your account, what if your balances had a big jump? Well, if your account grew as of December 31, so the following year, you've got to take out even more money. So this RMD is not static. It will change each and every year, if your account goes up and down. 

So you might have some years it goes down some years it went up, and most financial institutions now make it pretty easy. Because the IRS requires that they send a statement to you explaining what the RMD is. But every now and then what happens is on the statement, what do most people do with statements. They go in the trash can or the shredder, I'll help people come in with a stack of envelopes. I've been here for like seven or eight months, sometimes years. They say I didn't open these. Why? Because I didn't wanna see how bad my account was. Okay.

Steve: One of our mentors likes to say all progress starts with telling the truth.

John: That's correct. Just tell the truth, except it. I lost money. I lost money. Anyone who was invested in 2000, 2001, 2002 in the stock market, you lost money. 2008 s&p 500 was down 38%. Okay, people who stayed the stay the course it came back. But it's hard to stay the course when you got three years in a row like 2000, 2001, 2002. So let's talk about that one for a minute. How would you like to be coming out of the workforce at the end of '99, retiring, and you're all of your accounts are down? Double digits 20% plus, and you're being forced to take money out of retirement accounts. 

That's when Congress changed the factors. It used to be at age 70. You divide your retirement account by 16. They change that to 27. 27.5 I think it was. Excuse me, 27.4. Well, your life expectency did not go from 16 years to 27 years at age 70. That was an artificial number they use to give people relief, because of the having to take money out in a down market. I think that happened in 2001 is when Congress made that change. So again, we said this pretty much every episode, a lot of moving parts, and it's not static. Just look at what's happening today around us people staying home working more, pressure on businesses, a lot of things are going to come out of this. Some are going to be good, some not so good. Because more and more pressure on us every day.

Steve: Yeah. Well, all the more reason to have somebody to turn to that, as you and I like to say, question your answers. 

John: Correct. 

Steve: You know, and particularly somebody with the, with a breadth of experience.  

John: You know, I just thought of something that we'd not covered along the way, every now and then I'll have someone come to me, probably twice a year, on average, they'll come in and say, look, I can't do business with you. With any financial products because I have a relative in the business, I want to just pay you a fee. Have you looked at everything? Will you do that? Of course, we'll do that. We'll take it, we'll take you through our normal process A to Z, as if you were doing everything with us. 

And once I know what you've got, we can determine what the fee would be. Be happy to do that. We have to do that. In fact, we're to the point we're working on having a service where that's all we do. If you don't want to deal with us, you committed to someone else, come charge you a fee, we'll take you through our retirement rehearsal A to Z, you'll know everything you've got, you know?

Steve: Yeah, certainly sort things out for everybody. So John, we're getting really close to the end of this series. In fact, I think this is the last the last topic I know, in the next episode, we're going to sort of put a bow on the whole thing, and, and kind of do a summary. So I mean, definitely, you want to listen to that, because we're going to come back to this idea of how you tie it all together be you know, because at the end of the day, you know, we've said it all the way through this is like a giant jigsaw puzzle. And you don't you don't get the picture on the front of the box. So in the next episode, we're going to help paint that picture. Talk about a process to to bring it all together. Anything people should should be thinking about at this stage?

John: Well, actually, yes, there's a lot. Number one go check your beneficiary designations on every retirement account. While you're at it, check beneficiaries on life insurance policies, savings accounts, checking accounts, who is your beneficiary at the bank? Because most people don't do it.

Steve: Yeah, you just you just gave me a to do actually. Well John, thanks again for being here on this episode. Folks, go and and find all of the episodes in this series at johnhcurry.com. And and if you want to reach out to John, John, how can they get in touch with you if they want to book an appointment?

John: The best way is just call my office in Tallahassee. 850-562-3000. 850-562-3000 and just tell the folks you want to have a telephone appointment with me and if you're ready to go to work and you know you want to do business with us. Come on in for face to face or online meeting but I think it's better just have a telephone appointment to see if we get along and like each other.

Steve: Now people can be listening to this all over the state of Florida. And you actually surprised me in earlier episodes, you said, you've you've worked with clients who are state of Florida employees, but stationed in other states, that's correct, whatever your duties are, yep. So no matter where folks are, they can call that number and they can book a phone appointment. I know you work with people with video conference technology, so so you can meet that way rather than in person.

John: And have been doing that for several years. Because having clients and I think it's 13 states is a 12, or 13 states. But it's not just limited to the Florida retirement system if you have friends or relatives in another state, and we do the same type planning for them. Or if you own a business or employee and some other type business, pretty much everything we're covering applies to everybody, Steve, What's really unique is the Florida retirement pension system and how it works, and all the pieces around it.

Steve: Absolutely. Well, folks, again, go to johnhcurry.com. You can find all of these episodes plus a whole lot more. You can also find the latest dates for John's webinars and seminars. He and his team are doing presentations regularly on the topics that we've covered in this series and going in a lot more depth than on other topics. As well as they come up. You can find all of that at johnhcurry.com. And subscribe to the podcast, get the latest episode when it's released, right there on your phone, you can subscribe on Apple podcasts, Spotify, or Google podcasts.

John: Let me make a plug for that. Most of the podcasts, as you know, are about human interest things. You've been working with me talking about, hey, you really should do a series for the members of the Florida Retirement System and have several podcasts. And I gave you some pushback for a while. Said, ahh, I don't wan to do that let's just do human interest things such as friends who have retired and bought a motorhome traveled around the country, people who are retired, and volunteering, helping our community. I've got a half a dozen exciting podcasts I'll be doing in the next couple of months with people that are doing a lot of volunteer work, and looking forward to it.

Steve: Well and that comes back to something we talked about in the first episode in the series, John, and I'm sure we'll talk about in the next as well. The mindset around retirement and what is your retirement really look like? Because it really all has to start there. All the financial stuff is really just in service of how you want to live your life.

John: Correct. Begin with the lifestyle you want to live, and then make all of your financial decisions support that. But if you don't have a clue what you want as your lifestyle, no clarity, then it's difficult. So I tell people, my most valuable thing I can do for you is get clarity. Get you to get some clarity about your future.

Steve: Very good. Well, hey folks, thanks for tuning in. We will see you in the next episode.

Voiceover: If you'd like to know more about John Curry's services, you can request a complimentary information package by visiting johnhcurry.com/podcast again that is johnhcurry.com/podcast or you can call his office at 850-562-3000 again that is 850-562-3000. John H Curry chartered life underwriter, chartered financial consultant, accredited estate planner, masters in science and financial services, certified in long term care, registered representative and financial advisor Park Avenue Securities LLC. Securities, products and services and advisory services are offered through Park Avenue securities a registered broker dealer and investment advisor. Park Avenue Securities is a wholly owned subsidiary of Guardian, North Florida Financial Corporation is not an affiliate or subsidiary of Park Avenue securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use by providing this material we are not undertaking to provide investment advice or any specific individual or situation or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Guardian, its subsidiaries, agents or employees do not provide legal tax or accounting advice. Please consult with your attorney, accountant and/or tax advisor for advice concerning your particular circumstances. Not affiliated with the Florida Retirement System. The Living Balance Sheet and the Living Balance Sheet logo are registered service marks of The Guardian Life Insurance Company of America New York, New York Copyright 2005 to 2020. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities or Guardian and opinions stated are their own. 

2020-113400. Expires January 2023.