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January 16, 2018 9:41 am
Most people are aware that they're required to start withdrawing money from their retirement accounts at some point. Some people even know that the magic age for this is 70 1/2. But very few people have appropriately factored this into their retirement income plan.
This is Mr. Stillman's opus motorsport with you today. As host along side the founder of Rosewood will Mr. Johnston jump seven talk about RMD's today your favorite topic everyone's favorite topic. Everybody is really excited about the fact that they have to take their RMD's. Yes, exactly.
So RMD's are required minimum distributions while the times even though I know what they mean that verbiage just kinda goes into my head and dissolves.
We talk about we talk about required minimum distributions and some people call it MRD's minimum required distributions. It's all the same RMD's or MRD that sentiments if you hear MRD's that's different. That's military that meals ready-to-eat, rather, that yeah everybody would rather have MRD's than MRD's or RMD's.
In any event, basically you enter into a contract with Uncle Sam. Whenever you contribute money to tax-deferred account tax-deferred account be a 401(k) and IRA your federal employee your TSP your thrift savings plan. If you work for school or a nonprofit 403B what about a Roth IRA not part of this category itself that would be tax-free. Were talking about tax deferred accounts disqualified the word qualified equal tax-deferred typically well qualified actually would encompass both tax-free Roth and traditional IRA so qualified would be like an umbrella over Geisler talking about any any sort of retirement plan. What were talking about here is money where you put it in. You've contributed that money and you didn't pay taxes on it that year you maxed out.
If you're 50 years old and you max out your 401(k) $24,000.
You have $100,000 salary 24,000 in your 401(k) well. The IRS says that you only had a $76,000 income that year because you put 24, and a 401(k) so when you do that you enter into a contract with Uncle Sam that says I understand that I'm not paying the taxes now on this money, but I'm going to let it grow and I'm going to use it for my retirement and when I retire to take the money out and I'm going to pay taxes on it everything I've contributed as well as all the growth on those contributions. I'm going to pay the taxes at that point well, let's suppose you get to the ripe old age of 70 1/2. Why does the IRS make it 70 1/2, I've never heard anybody explain that, but if you get to age 70 1/2 and you haven't taken money out of your retirement account yet.
Why might you have done what may be retired and you had a nice pension yet a nice Social Security benefit may be on a couple rental properties and those are giving you income. Maybe you didn't need any of the money in your 401(k) or your IRA to fund your lifestyle. Well, the government starts to get antsy once you hit age 70 1/2 and they say yeah, we really want some revenue from these tax dollars. You no longer allowed to keep deferring that forever. We are requiring you to start taking money out of those accounts so that we can tax most folks don't realize that that's the contract that they entered into with Uncle Sam, but that is the case any of those tax-deferred accounts. Once you hit 70 1/2, you're going to have to start taking some out every single year.
Whether you needed or not, because the government wants their tax revenue and that's why they wanted. So, are there any ways to avoid doing this lesson we don't want to withdraw that money. If you waking up at 70 1/2 and saying how I get around this know there's really not a way to avoid it. I mean, what you can do if you don't want to deal with the withdrawal portion you can just send the RMD straight to a nonprofit. So let's say your RMD is $10,000 you have to take out well.
Essentially, the government saying right take out $10,000 give us 20% of it and you can keep 8000 well if you just send the whole $10,000 to a nonprofit, you don't pay the taxes they don't pay the taxes you don't of course get any of the money but that cannot bypasses the whole, instead of you.
Note taking 10,000 out donating it to the nonprofit and then having a list that deduction on your taxes so that you get a refund you get the $2000 at the end of the day use industry to the nonprofit. So if you want to say that's getting around fine. It's not really getting around that. You still have to take the money out of the account so the only way to really quit and go get around it is to not put the money and in the first place is to contribute to your retirement savings differently on the front but once it's done it's done. There's really no escaping no offshore accounts we can utilize anything like that right no secret islands.
The Vermont Dutch Sandwich approach and again I think they're getting rid of rid of some of those tax loopholes. Unfortunately, the Dutch Sandwich will no longer be a thing unfortunate there to get together to get a one way shape or form. By the way that the Dutch Sandwich is not something they serve it merits grill in Chapel Hill it's it's actually a tax loophole becomes a very fascinating chart if you look at is called the Dutch Sandwich. Can you John give us an example of a situation you seen where somebody made a mess for themselves on the tax front because they inadequately plan for these RMD's.
They were in the crowd that kinda woke up at 7 1/2 and realized hope I get to do something well, let's think about the example I just gave where you got a nice Social Security benefit. Nice pension couple rental incomes that all the income you need.
Maybe that's paying you 10,000 a month between those income streams.
That's all you need for your income and let's say you've amassed $1 million in tax-deferred accounts. By the time you hit 70 and half well, you're going to have to take out in that first year's distribution about $36-$37,000 of that million euro going to be required to withdraw so if you want planning for that in advance, that money could bump you up into another tax bracket so you can end up in the highest tax bracket on that money that you're withdrawing and you're given away more than 1/3 of it to the government so you want to.
If possible, set your retirement income plan up in a way that the money that you have to take out for your RMD's is money that you need anyway you want that to be money that you have to take out from your lifestyle. Not money that you're being forced to take out whether you want it or not you want to be in a position where you want it. So when you get a 7 1/2 those RMD's.
You're kind of thinking equipment from wrong in the order of operations you want those to be the first things to come and start paying the budget down because you need that money to cover the budget. Other resources can then be your sort of fun money or pay now we fulfill the need. We don't need to pull those resources out. If you need $10,000 a month for your income. You want your plan to include you in your RMD is to be part of that 10,000 if at all possible. And you know what if there's no avoiding it. If you end up with more income you know so be it. More income.
Still better than less income but to the extent you can avoid it. Yet you don't would be bumping up into another tax bracket and sounds like your baseline funds that your pulling out are your minimum distribution and Social Security. A timer setting 1/2 measure certainly drawing on Social Security.
At that point, and that's forming sort of your base level right accents rights and it is pretty good example John.
How do you plan though. In such a way as to prevent RMD's from causing real tax problems down the line, what would it be more proactive about this, but generally you want to start the conversation as soon and your late 50s or early 60s and start putting that retirement income plan together that shows how is it that were going to create our income in such a way that incorporates our tax-deferred accounts and doesn't just assume that we can put that money off forever. For example, a few months ago I was working with Tom and Diane. There were 68 getting ready to retire. They were selling their house downsizing to a much smaller house they were going to end up with almost $250,000 in cash okay after downsizing to a smaller house because they were so Micah $650,000 house to pay cash for you know three $50-$400,000 house junction and they've got all this excess cash that they'll have in the bank.
Well what their thinking was sorry were 68 we put that money in the bank.
It will just draw down that money from the bank for probably 78 years is all will need because they had pensions and Social Security. They did need to take but two or 3000 a month from that pot in the bank so they think about the last several years so I said look, we don't need any of this money in the IRA for seven or eight years.
So were going to invest that not super aggressively, but we don't have to be too conservative with it because we'll need that money for seven or eight years well again. They were 68 yes they did need the money for seven or eight years, but they were going to be required to start taking some of the money in a couple years whether they wanted to or not. So we needed to invest enough money with in the account within the IRAs so that it was conservative, and we knew that it was gonna be there when they had to start taking the money out because you know everybody understands.
Buy low and sell high right what you don't ever want to sell low.
You will ever want to be forced into a situation where you have to sell low. And if you have to take money out of your IRA to create income you're selling your selling to do that and if the market happens to be down your hand is forced you have to sell low and so we want to create a situation where you have assets that you can sell to create your income without ever being forced to sell low. If that makes this these numbers may not make sense but I think the concept does of let's say you've got $200,000.
You know you have to take RMD segment 800,000 and put it in very stable, safe assets because you need that for a period of five, six years of RMD's. But the other hundred thousand you can take a little bit more risk with let's look at it in really simple math terms would say have million dollars When split in half with a 500,000 goes into an aggressive pot and 500,000 goes into a conservative pot. Let's say the markets up you get to your age 70 1/2 a cow you have.
You have to take money out were to take a more aggressive side looking to take it out of the side that's up organist sell high. From that side to create our income.
What if the markets down oil was so low that counselors take it out of the conservative side, which isn't down nearly as much right. That's where were going to generate the income from in that particular year. So most people have not plan like that ahead of time to be sure that they're making the most of their investments. On one hand, it's a tax problem but on the other hand, it's an investment problem because if you're being forced to sell anything in that crude can create problems. If you didn't plan well in a timing problem.
On top of all that is well that to me is the true difference of financial planning of of what you do and anybody can kinda look and say all right. I've met 7 1/2 I've got a withdraw money that sort of the the NexGen stats you know if you're following sports or something like that. That's the next level of planning that you can get into yet and it's amazing how many people just haven't thought through the implications there RMD's because they here I live.
Take money out one 70 1/2. I'll deal with it then well know, you really need to start the planning process several years in advance of that. I think it's a pretty good way to end the conversation.
Hearing about John's sort of Spidey sense how he's able to kind of, you know, figure out this tax plan. This investing issue that pops up with RMD's how you can ever figure that out on your own, or at least the majority of us. I'm sure that makes your head spin a little bit.
So if you need John's help, need some guidance when it comes to planning for your RMD's weather in that category of hoops I got pretty close to 70 1/2 now I figure out what to do or you're in that ballpark of you know 50s early 60s somewhere in that range anywhere. Start planning a little bit better for your future RMD's reach out set up that time to meet have that conversation, 391-3446 is the number 919 area code 6 919-391-3446 were always email@example.com Rosewood wealth management.com for John on multiple talking next time Mr. Skillman surface