They say that there are two certain things in life: death and taxes. And when it comes to your retirement accounts, taxes definitely come into play.
You may have thought you were saving big-time on taxes with this method. But here’s the thing: required minimum distributions mean you really only deferred those taxes. And when it comes time to pay, the amount could be surprisingly high.
We talk about what you should be doing now to prepare for that certainty, the rules you must follow, and much more, including…
At what age you are required to withdraw money first (and how this might be changing soon)
The different actions you should take in the accumulation and distribution phases
Why RMDs aren’t designed to set you up with lifetime income
How to use your RMDs to maximize the financial benefit to you
And more
Listen now…
Transcript
April Schoen: Hi, everyone, welcome to another episode of the Secure Retirement Podcast. I am April Schoen and I'm sitting here today with John Curry.
John Curry: Hi April.
April Schoen: I am turning the tables on John today, I've got in front of me a list of questions that we commonly get asked by our clients on required minimum distributions. So we're going to go through some of these and talk about required minimum distributions, what they are and how they're going to impact your retirement planning. All right, John, you ready to get started?
John Curry: Let's go.
April: Okay, so first of all, what is required minimum distributions, and so everybody knows we call them RMDs for short, short that it's a little bit of a tongue twister so we call them RMDs is for short.
RMDs: What Are They?
John: The financial world calls them RMDs because the financial world loves jargon. I'm going to give my answer is the smart alec cancer required minimum distributions is the government's way of forcing you to liquidate your savings so they can capture the taxes that you've been avoiding all those years. So let's break that down. The money you put into retirement accounts, you think that you're saving taxes. Most people are not saving taxes. They're simply deferring the taxes from today until the future date, which sounds good. It sounds good, feels good. But then when that future date comes, most of our clients are going "ouch," because their taxes were bigger than they thought. So I'm sure I don't know all the where you want to go here. But if not, I'll circle back and we'll talk about taxes later. But it's going to be a big issue for some people
April: It is and that's the main issue with RMD is with requirement distributions is the taxes that you have to pay, and that a lot of people in were meeting with them. They don't even want to take it out. So let's break it down. So RMDs, when you reach age 70 and a half you are required to withdraw money from your retirement accounts, and the IRS has a schedule you have to follow. So we're going to kind of walk through some of that. But that's just a very basic overview of what is an RMD.
John: I hope that while we're doing that will also talk about some of the challenges with this RMDs because folks, we have an RMD calculator so that we can actually demonstrate what happens when you're taking money. Okay to cover that now?
So let's just suppose that I'm 70 and a half and I have money in my retirement account, it's just I've got $100,000 in an IRA for 57 deferred comp, 403b, or 401k, whatever, and I'm no longer working. I'm truly retired. The first year I have to divide the account balance by 27.4. Now that works out to be 3.65%. If you're wondering how I got that you simply divide 27.4 into 100. And that equals 3.65. And people say "that's not too bad." It's not too bad unless I have my money pared somewhere and I'm only earning 2% or 3%. So now I'm having to tap into my principal, aren't I?
April: Correct.
John: So now my principal goes down, down, down. So now when I'm 75, I have to take out 4.37%, because the factor is increased to 22.9. So the key point I want to make and you can elaborate on this April is as I get older, the divisor gets higher, which means I'm having to take out... excuse me gets lower, so I'm having to take out a higher percentage of my assets. So if I suffer a downturn in the market, or the low-interest-rate environment as we have now, then my money is not going to be able to perform as well because I'm being forced to withdraw money. That's why I back in 2000-2001, Congress allowed for the divisor to change from 16 to 27.4. Now how they got 27.4? I don't know, because in the past it was based on life expectancy 70-year-old had about 16 years ahead of age 86. But they changed it because people in 2000-2001-2002, we had negative stock market returns. So, people who are being forced to take money out, we're really getting clobbered.
April: Right there, what you're referring to there is the sequence of return risk.
John: That's correct.
April: Which is going to impact all of us when we are into retirement and we're taking money out of our retirement accounts out of our investments to supplement our income or because we have to because it required minimum distributions.
John: That's correct. And if we don't plan our investments properly along the way for the accumulation phase, with equally not more important is planning for the distribution face. I tell people every day, you've done a great job of accumulating money. Now, what is your game plan in the second half of the game? Think of what?
Well, the first half of the game is working and retiring. So when you get to retirement, and the official blows the whistle, hey, you're in the second half now. Your head, two touchdowns at halftime? Who cares? Doesn't matter. The game is not over until the fourth quarter now. So your games on over to you that? Right? So you accumulate it but now you had you spend it? How do you distribute those assets? And that's my focus and your focus, especially being 66 years old. That's where I spend most of my time with lunch.
April: Exactly. Good. All right. You alluded to this already covered some of this, but why is there an RMD, John?
Why Is There An RMD?
John: The short answer is so that the government can get their tax dollars back. If you think that the RMDs are set up to provide you with a lifetime income you are sadly mistaken, is not for that... it is not guaranteeing you anything. In fact, I just described in the right market environment stock market or interest rate environment, which right now is volatile the stock market, low-interest rate the lowest we've seen in 40 years.
We're in a position where people who have their money parked in money market funds, or CDs and they're having to take required minimum distributions, they're hurting you and I've seen that dozens of times. I'm thinking of clients who came in their money market was paying what was a point one 7% time until we turned it around for but it's more important on your retirement accounts that you have guaranteed streams of income coming in, that in most cases will be much higher than our Indies, which leads to another discussion somebody will say, Well, I don't move the armies anyway. And you'll move to take out even more when Yes, because from a strategic planning approach isn't Or to do that, take it to pay the tax, then reinvest it into whatever you were doing.
April: Right, exactly. Okay.
John: So when we cover this a little bit, but when must you start taking your requirement distribution, you have to do it at 70 and a half, although right now there is a bill in Congress, the house has already passed their version of what's called the securities act. And the Senate will take it up. And then if the President signed, it would be law, this portion of it would be extending RMD is from seven and a half days, 72. That's only a year and a half. I don't understand why they're doing that. I have been preaching this for 35 years, there should not be a required minimum, they should leave you alone. If you don't want the money. It's okay. They get it when you die. But, again, is a way to get those tax dollars back that they have not gotten all those years, right. It's a great plan. By the way, if you understand what this is all about. They encourage you to maximize your IRA your 401k right so that you have the government as your partner. So Silent Partner, but they're not so solid at the end of the trip. That's right. I want my money.
April: I like the analogy of taxing on the seed or on the harvest. Yes. So the idea is if you're a farmer, do you want to be taxed on the seed? Or do you be taxed on the harvest? When you have money in your retirement accounts, you've already made the choice that you're going to be taxed on the harvest. So you put in a small amount now it's going to grow into the future. You're going to take it out in retirement and you're going to pay a larger tax later.
John: Well, but maybe not. You’re maybe like the farmer, this might be one of the few years along the way that you lose all your crops. You might lose your money, you don't have to worry about the tax. I hope that's not the case. But a lot of people in 2008 experience that they could you imagine walking into retirement in 2008 and all of a sudden you lost like some of our clients who came to us? They lost 30-40 sometimes the highest ourselves at 51%. But he was very aggressive. But our clients don't experience that they will listen to us because we say don't put all your money in that has a diversified to give you protection. Right. And this is not about investments on a bit, but it is about making sure that you can handle the distribution phase that's required on retirement accounts.
April: Okay, so, yes, you have to take required minimum distributions in the year that you turn 70 and a half. Now, the IRS will allow you to delay the first year until April 1 of the year following when you turn 70 and a half. I'm not sure why they do that, but they will allow you to do it the first year. If you do that, if you delayed the following year, just know you have to take out to RMD that year, so you gotta take out your first one and your second one. So much Is the time it doesn't make sense for people to do that. From a tax planning standpoint,
John: I don't understand why anyone would do that. I've only had a few people in my 44 years of doing this, do it that way.
April: And so how much do you have to take out? John, you talked about earlier, the number for the first year is 3.65%. That's what it equates to. The IRS does have a formula that you have to follow. There are different factors and they change every year. And we're going to get into that a little bit too. So what types of accounts are subject to required minimum distributions?
John: The short answer is pretty much every retirement account you have other than a Roth IRA. a Roth IRA does not have a required minimum distribution for the retiree. What's interesting, though, is upon your death, the beneficiary has a required minimum distribution, which is interesting. Yes, because they don't have to pay taxes on it correct. But they still are required to take money out has never made sense to me. And then what about a Roth 401k? Same thing. And the key to remember is this, we're gonna get into this in a few minutes. I know from the standpoint of how to do it. But if you have money in any type of retirement account, you've not a paid tax along the way, you can just bet that there's going to be a forced liquidation of called an RMD to make you take it out.
April: That's right. Okay, so let's say someone has a 401k. And they're still working, and they reach seventy and a half. Do they have to take an RMD?
Do You Have To Take an RMD?
John: Well, I'll let you answer that because of our friend that we had this research for her. So why don't you take that?
April: The general answer is no. If you are over the age of 70 and a half, 70 and a half, and you're still working, you do not have to take an r&d on your 401k unless you are a 5% or greater owner in the company. Now, you'll also want to pay intention to your plan document for your 401k. And in the case of any change anything that's different inside your plan. But as a general role, as long as you're on a 5% owner or more, you do not have to take your RMD and your 401k.
John: And that brings up another question because what led to this research was asking this question, should you keep all of your money in a company 401k? Or should you as soon as your plan document allows it, move some of that money to your own IRA? There's much more flexibility with IRA planning. Our friend Ed slot talks about this all the time. It is a recognize IRA expert CPA, he doesn't sell financial products doesn't care what you do. He just sells information. And he is of the opinion that getting it as much as possible into your own IRA is better. We can have that discussion another time or with people one on one if they want to have a final parameter come in here again.
April: Okay. Do you have to calculate your RMD every year?
John: You do, in fact, it's done for you by the financial institution, that the burden is on you to make sure it's done. So every now and then somebody was arriving, the company does not do that for me of the bank or credit union, Iris doesn't care. That's your responsibility. However, their institutions are now required to send you something showing you what that calculation is, right? And the reason I did that is this arbitrator, he says, we want to make sure nothing falls through the cracks. So when they send you that they're also sending it to you.
April: And so how much is your r&d is taxable, so the amount that you have to take out of your retirement accounts, how much of that is considered taxable?
John: It's all considered to be taxable with but you may not actually pay tax on so for example, most of the people who work with us and not the case but because of the standard deduction being so high now 24,000 for a couple. So if you're That's the only income you have is what you're getting from, let's say social security in your eye, right? If there's 24,000 or less, you'd pay no tax. Right? But if you start adding your IRA on top of Social Security, a pension, etc, then you may find that you're in a higher tax bracket, not lower.
April: Okay. John, we get asked this question all the time. So how do I avoid paying taxes on my RMD?
John: Well, you can't, somebody is going to pay the taxes. So you're going to accumulate money, you have to defer the tax while you're growing. And then someday, when you start enjoying the money, either you or your spouse or your kids or grandkids or in my case, great-grandkids, somebody is going to pay the piper. You're going to pay to hear the music. Now, there's an exception. There's only one exception that I know of. And that is you could use what's called a qualified charitable distribution. We've had several clients that just had one last week and he did it to give money to charity or church. And it does satisfy the RMD. So what you can do is you say, this lady, you did numbers better and I think it was 5000 was going to church and 5000 to her I think correct.
And I remember one of my, my buddies his retired at that us professor, he had a lot of his money in his IRA go to the FSU Foundation, some to his church. And we did as a qualified charitable distribution, which means is not income to him, it goes directly to the charity. And for most people, that's the best way to get money now. Because if you are not able to have individual deductions because of the standard deduction is so high, that might be the best way to do it. So we tell everybody, let's at least look at that for you. But you have to be 70 and a half, you have to be eligible for RMD. So Do it. Because I'd people hear about it go, I want to do that. But you're 61 you can do right have to be 70 and a half or older to take advantage of that.
April: And is there a maximum amount that you can do QCD on the qualified charitable distributions?
John: Yes, sir. It is $100,000 per year. And that's now permanent and the new law for a while it was not, it was we may let you do it may not. It was pretty iffy there for a while, but now it is permanent. Nothing is permanent. Congress can go in there and change all that stuff. But as of right now, that is permanent... temporarily.
April: Temporarily, I like that. Okay, so what happens John, if you don't take your RMD?
John: Well, this is where the fun begins. Because I've had to class where this happened to the moon in my career, was an attorney who knew better. He said, I'm not going to take it... they won't ever catch me. They call it and they charged him a 50% penalty... five zero, on the amount he was supposed to take. And then let's just call 10,000. So he had to pay 5000 or pounding. The income tax on it was roughly 30%. That's $3000. So he had to pay $8,000 in taxes on the $10,000 distribution.
April: Ouch.
John: The second one was a little old lady that had been a client for a long time her husband had died. And one year she just flat forgot it. Yeah. And so, I went with her to the audit. It was cool. I wish I had a video of it, it was very good. She just said I forgot it. I didn't understand all of it. Just put it all in the drawer, my taxes. I just totally forgot it. And the lady with the IRS says, "I understand, that does happen." She waived the penalty. I'm told that now it's tougher to get that done. But that was back in were lowered in might have been like '89 or '90 somewhere in there.
April: Okay.
John: But it was interesting to see how that lit handle. I did not get to see the audit with the attorney. I wish I could have said he has since passed away too. But he was pretty cocky and arrogant about stuff. His attitude was, I'm smarter than you because I'm a lawyer. Right? Well, he wasn't smarter than they will catch up to you. That's right.
April: Okay, so this is a common question that we get is, what do you do with your required minimum distribution?
John: Well, people like me, we know that there's only one answer that you spend it on your grandkids and great-grandkids. The short answer is obviously you do whatever the heck you want with it. We have clients who will take it out and grumble and complain that happened to take it out and pay tax. And so here, this is something else for me. We have others who will use it to buy life insurance because they want to leave more money to their children and grandchildren. We have others who will donate it to other charities, which they shouldn't. They should use it QCD way, but they'll do it after the fact and tell us why you go down this. We have other people who, they'll, they'll literally just give the money away. They'll give it to their kids and grandkids.
April: I'm thinking of several clients that they take their requirement distribution every year. Thinking of one couple, they take a quarterly and they use it to go on a trip. Yes, every quarter they get their RMD payments in and they use that money to fund a quarterly trip.
John: That's a nice couple we saw last week. Yeah, there I was thinking the same folks. Very nice. But it comes down to really spend it on whatever you want. If you don't want to spend it, you want to save it, you just pay your tax on it and reinvest in something else.
April: I was thinking of the other couple, they'll take their requirement distribution and are using it to fund house projects. Yes, renovations. So it like you said, it comes down to doing what you want with it. But you can save it. You can spend it, you can reinvest it. It's up to you.
John: Absolutely. Absolutely.
April: Okay. And John, as we wind down here, one of the last questions that we go through with clients, it's probably one of the more important planning questions and conversations we have with clients. But do you have to take your RMDs from all of your accounts? So let's say you had multiple retirement accounts, do you have to take an RMD from each one?
John: The, the answer? The answer is yes. You have to aggregate all of them. So little more complicated, but let's just say you have four IRAs, you have to add up the IRAs divided by 27.4 to get the number and then once you have the number, they don't care IRS department...Treasury, they don't care if you take it pro-rata, month by month or four months... which leads to some tremendous planning opportunities if you know how to do this, I am still amazed at the number of people including tax attorneys and CPA is that I know personally because I'm past president the estate planning counsel who either didn't remember or didn't know or just flat forgot that you had that ability.
I'm thinking of a lady that I'm working with right now, in fact, a very dear friend she so went "John, totally, if I ever knew that I forgot and our gratitude just admitted that upfront, she says so there's plenty here so yeah, we can let one account keep on growing to take income from the other. She said that is fantastic because it fits perfectly with her desire. So let some of her money grow. Okay. But also, I'd like you to talk about it for bad... because we see this every day we have clients we have money and for the three be annuities at the university system. We have clients who have 457 deferred comp plans and a high res touch on how I was gonna, I was glad you brought that up very important. It's not just all of your retirement accounts, the IRS looks at each different type of retirement account. So if you have multiple IRAs, you can take your RMD from one IRA. If you have multiple for three beats, you can aggregate those and take it from 143 B. But if you have an IRA and a 403 B, you have to take one from each, or an IRA and a 401k. You have to take one from each.
We have clients who have all that have one of each, and then there they've misunderstood the rules. They heard somebody told them about the aggregation and that they can take it from one of the others to know you have to take it from all four. And what you can do is you can move money from 401k into your IRA or have a separate IRA. Take it from one let the other one grow. As long as there are different categories you can do it.
April: Very important to pay attention to that.
John: I think I think that the key April and I say this every time we talk, you have to have a process. I plan a methodology, if you will, where you look at everything and don't overlook stuff. And that's where the retirement rehearsal that we help people with brings because we look at everything Social Security retirement accounts, your pension if you have one for one case, whatever, that it allows you to test drive this stuff before you actually have to do it.
April: That's right. Okay.
Great. All right. John, is there anything else you want to add? Thank you for taking the time today to go through some on requirement and distributions. Is there anything else you'd like to cover?
John: No, I think we covered it all appreciate you doing this. This gift gave us the ability to do this and just 20-25 minutes There's a lot more to do we could do an entire day on this and some of our seminars coming up will do it. But I would encourage people, listen, our webinars want to do them if you can come to one of our seminars come, and we cover this and more and even more topics and more detail.
April: Great. Perfect. Well, thank you so much again for your time.
John: You're welcome. Thank you for doing it.
Voiceover: If you would 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 of Park Avenue Securities, LLC, securities products and services and advisory services are offered through Park Avenue securities a registered broker-dealer and investment advisor. Financial Representative of the Guardian Life Insurance Company of America, New York, New York. Park Avenue Securities is an indirect 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 for 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 2018. 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.
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