Getting Your RMD Ducks In a Row

Welcome to Mr. Stillman's Opus with John Stillman of Rosewood Wealth Management and this is Ron Stutz, and we're going to talk about some very interesting stuff on today's show. Because it affects you?

That's what makes it interesting. Yeah, we've talked a lot on the Financial Symphony radio show and on the podcast as well, and you've certainly written about it in your blog. RMDs. A lot of people don't really understand RMDs and, you know, I've got a basic understanding of what RMDs are, just from talking to you so much, but there are a lot of people out there who don't really get the whole concept. First of all, what is an RMD and why is it so important? So RMD, some people call it MRDs, not to be confused with MREs from the military, which is meals ready to eat. Right. So, RMDs are required minimum distributions. Once you get to age 70 and a half, you have to start taking money out of your tax deferred accounts. Required minimum distributions. That's right.

There's a minimum amount you are required to take out so they can collect tax revenue on that withdrawal. So, obviously the reason we're talking about this, like I said, very practical, you have just recently received a letter. Right? I recently had a birthday in early June. That happened to have a seven at the first digit of that.

Yeah, it was very practical. Very high number. And, you know, it's the first time we've actually talked about this on the air, I think.

Very high number. And the point is that I will reach that magic point of turning 70 and a half before the end of this year. It will be in December. And so, naturally, I have all these questions about what am I supposed to do? I got a letter saying that I had to take a required minimum distribution from my IRA, but I didn't get one from 401k. I'm just wondering how all that stuff works.

What do I need to know? Well, so let's address that question first. Okay. Because you're still working, you don't have to make a withdrawal from the 401k at your current job.

Okay. As long as you're still working and contributing to that account, it is off the table in terms of accounts you have to withdraw from. Now, the day you retire, and even if you retired on December 27th this year, you would have to take a withdrawal from that 401k for this year. Well, I'm definitely still working. But as long as you stay employed, you're still contributing to that 401k. We don't have to withdraw from there.

Okay. Now, the IRA has nothing to do with whether or not you're still working. If you're 70 and a half, you're going to have to take money from all of those tax-deferred accounts. Now, it could be, you say, well, I've left the job, but my money's still in the 401k. I never rolled it to an IRA.

It doesn't matter. If you're not at the job, you have to take the money from that tax-deferred account. So, 401k, 403b, TSP if you're a federal employee, 457 plans, IRAs. You're going to have to take your required minimum distributions from there.

So, in your case, you have the two accounts. You have the IRA and the 401k. We're going to take the withdrawal from the IRA, and the amount you have to take out is based on your IRA balance. Okay. Not the total of your IRA and your 401k balance. It's solely the IRA for now. Okay. So, basically, the bottom line here is that Uncle Sam now has his hand out, and while I haven't been having to pay any taxes on this money in the IRA all this time, now I'm going to have to start doing that. And that applies to anybody who's in that same situation. Yeah.

So, last we looked at your IRA balance, it was what, about $25 million is what you have sitting in there, right? Yeah. So...

Easily. Yeah. But, most of that is growth. Uh-huh.

You only put in, you know, $1 or $2 million of your own dollars. True. True. It has increased 25-fold. Absolutely.

So, yeah, you save money on that $1 or $2 million that you put in, but that $25 million that it's grown to, you have to pay taxes on all that growth. Boy, I really appreciate all that growth, too. Yeah.

Well, you're welcome. Yeah. We worked really hard on that over the last few decades.

And the seed that was planted in the beginning was not bad either. Yeah. Actually.

I wish all that were true, but thank you very much for explaining it that way. Yeah. And so, you have some perspective on how much you have to take out.

Yeah. First year is going to be about 3.6, 3.7 percent of your balance. Okay. Is how much you have to take out. So, let's make the math easy.

You have $100,000 IRA, $36,000 or $3,700, roughly, is what you're going to have to withdraw in this first year. Okay. Well, that's not so bad. Now, that percentage is going to increase a little bit every year. Yeah. But, theoretically, your balance is also decreasing because you're taking money out. True.

So, depending on how the account is growing, you know, that's going to determine how much in terms of actual real dollars you're required to take out each year. Okay. Well, they've got this figured out to a T, don't they? Yeah, they figured it out. And a lot of people think they're going to outsmart the IRS on some of these strategies.

But, no, they've thought through how this is going to work. Well, now, you know, my birthday was June 10th. Okay. Okay.

December 10th is when I'll hit that magical half year. Mm-hmm. So, my question is, when does this have to take place? Does it have to take place by December 10th, by the end of the year, or what is the timing of this whole issue?

That's a great question. So, you could do it now. You could take the money out now, if you want. You could wait until the end of the year. Yeah. Anytime.

You don't have to be 70 and a half. You can do it whenever, during the course of the year. For this first one only. Yeah. You could wait and take it out in the spring. So, for your first withdrawal, you can wait up until April 15th of the following year.

Okay. So, if for whatever reason you didn't want that extra income in this calendar year, you could wait and do it up to April 15th. All of your future ones have to come out in the calendar year. So, if you put this first one off until next spring, you'd actually have to take two during next year's calendar year.

Does that make sense? In other words, you have to take another one by the end of the year? Right. Okay. And so, this first year is the only time you can carry it over to the next one. But then, the deadline is December 31st in all future years. Okay.

So, you'd essentially be taking two next year, and then it's calendar year from there. So, you just want to be aware of what your options are. Now, you say, well, why would I ever carry it over? Well, what if, Ron, you were going to retire this year? Okay. You were going to work until the end of the year and retire. Well, so, if that's the case, your income is going to be lower next year. Yeah. So, we would actually want to do that. We'd want to put that withdrawal off, and then you're withdrawing two next year, yes, but you're doing it at a lower income level. Okay.

So, it's going to be taxed less. So, that's just the kinds of things you want to be thinking about. Why is it that most people don't really, I just get the feeling that most people don't really understand all that. You know, it just hasn't been, they haven't had someone like you to sit down and explain it to them. Well, I mean, it's just one of those things. Like, why would you ever learn about this until you get that letter and you say, yes, okay, now I have to take money out? Yeah, I mean, you might kind of know that it's a thing that's going to happen at some point down the road, but most people just haven't thought about the mechanics of it until it's actually time to do it. And so, then we have the inevitable.

Question, and we probably should have mentioned this a lot earlier. Well, what if I just leave it in? What if I don't take it out? Yeah, what happens? I don't want to take out that $3,600 and pay taxes on it.

I'm just going to leave it in. What's the worst they can do? Well, the worst they can do is give you a 50% penalty on that money that you didn't take out. So, you were supposed to withdraw $3,600. Let's say you're in a 22% tax bracket. That means you would have paid $792 on that withdrawal.

Okay. But let's say you leave it in there. You don't take it out, and they say, oh, you didn't withdraw and pay taxes.

Now you owe $1,800 because we're penalizing you 50% on what you were supposed to take out and didn't. So, you definitely want to take it out. Yeah, you don't want to mess around with that. Well, Uncle Sam's going to get his. I think we know that. They've got that figured out. And so, no need to try and maneuver your way around it, I guess. That's just something that has to be done. So, I'm glad you explained it to me.

Thank you very much. Now, a lot of people like taking it at the end of the year because it basically pays for Christmas. Yeah. Right?

That's like a nice, easy timing. All right, well, we're going to put this off until December, and we're going to take out our RMD, and that'll buy the grandkids' Christmas presents, which might work. That makes perfect sense. I thought about that already. But we want to be very conscious of situations where maybe you'd be better off to take it out and pay down some debt earlier on. Or maybe you have an expense come up, and yeah, you could really use that money earlier.

Let's just be conscious of what's going on in your life. Here's another thing to consider. Let's look at where the market is at any given moment.

If the market is high, doing great at an all-time high, well, that's a great time to sell, right? In our example, we've said that your RMD is $3,600. Okay. That's based on last year's end-of-year balance. It has nothing to do with what your account balance is today.

Okay. It's based on what your balance was at the end of last year. So if the market is high, well, that's probably a good time to take the money out, because we're selling high. We're capturing those gains. Let's take our $3,600 out. Maybe that represents 10 shares of Apple.

Okay. Creates our $3,600. But what if the market crashes, and now you have to sell 20 shares of Apple to create the same dollar amount? Well, now we're selling low. You've shot yourself in the foot by not taking the money out when the market was high. So it's just one of those nuances that we want to make sure that we've addressed in terms of the timing of when you take that RMD. Gosh, I hate when that happens.

When your Apple stock gets cut in half. Exactly. Yeah. Wow. Well, thanks for explaining all that. And I think you probably helped not only me, but a lot of other folks who might be in precisely the same situation, or certainly if they're not now, they might be next year or maybe the year after that. It's helpful to know all this stuff. It can get a little tricky. So any questions, you know where to find us. North Carolina, the material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.