Minimum REQUIRED Distributions

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This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well. Welcome to Finishing Well, with certified financial planner, Hans Scheil, and today's show is Required Minimum Distributions. That may sound dry to you.

It does a little bit to me. However, I can tell you that by the end of this show, you're going to go, wow, that's really some cool stuff that I didn't know. But along those lines, because this show is coming up right here before Christmas, you might have heard the song, Joy to the World, the Lord has Come. Well, if you think about the next line, it says, Prepare Him Room, is actually what it says. And so a lot about what we're talking about in today's show is preparation.

But along those lines, I don't know if you knew this, but if you check it out, it's kind of cool. In the King James Version of the Bible, if you look at Exodus chapter 15, verse 2, is where that line comes from, Out of Joy to the World. It says that these guys, when they, you know, just got saved by crossing through, you know, the Red Sea, they were praising God, and they were saying, Prepare Him a Habitation, which is a Prepare Him a Room. I mean, and so as we look into that idea of preparation for 2021, as we are going into it, yeah, we can prepare for distributions, we're going to talk about in a minute. But, you know, I would challenge you to prepare, how can I give Him more room?

How can I give Jesus more room in 2021? Can I go to bed 15 minutes earlier and get up 15, I mean, go to bed 15 minutes later? No, 15 minutes earlier, so I can get up 15 minutes earlier, maybe 20 or a half an hour, whatever you want to do.

I did that over a number of years, but now I'm at four o'clock, and I don't know that I can push my stuff back much further. But what I'm thinking about doing for me for 2021, Hans, actually, is to begin an evening prayer time where I carve out another 15 or 20 minutes actually before I go to bed, where I can really just kind of process some stuff with him and maybe get a little more peace in my sleep that way too, but more importantly, preparing him room for 2021. Just a little challenge out there before we start talking about distributions, but there we go. Yeah. Well, you know, as I am preparing for the show, each time we do it, and I'm talking with God and communicating with God about this, is it just, what came on my heart is this getting redundant? You know, and God's answer to me was, no, this isn't getting redundant, go do your show. But the place that I'm coming from is it could well get redundant to me, okay, as a participant in this and the leader of that. And it's just, how many more times are we going to go over RMDs and required minimum distributions?

And, you know, the answer to that is not as many as we possibly could benefit everyone from going over it, because it's not redundant to the people listening, okay? And the context that we're coming from today is to talk about these from a tax perspective, talk about these from an income perspective, and then talk about them from a estate planning perspective of the whole concept of required minimum distributions. And required minimum distributions, the SECURE Act, which is a couple years old, changed it to age 72, where you, if you have an IRA or a 401k, or any other type of qualified plan, and you're 72 or older, you have to take a certain minimum amount out of your IRA and pay taxes on the distribution. Okay, that's what a required minimum distribution is, it's the law.

Right. Or the regulation. And so you have the SECURE Act that raised the age a little bit, which is, you know, great in some ways of looking at it. So the government is making you pay less taxes now, I guess you could say, as opposed to later. Then you have the CARES Act, which came in in 2020, as a result of the coronavirus, and trying to make it easier on people. They passed in the CARES Act no RMDs, or no required minimum distributions, during 2020. So a lot of people have taken no distribution in 2020 from their IRAs or 401ks, even though in another, if there wasn't for the CARES Act, they would have to take one. So that's going to leave even more money in there for later, which you could look upon as a good thing. So I have more money in my IRA, and I paid less than I paid less tax in 2020 than I otherwise would have. And that's what the government was really trying to just pass out some things that didn't cost them anything.

Okay. Actually, at least they didn't have to budget into the bill. Well, yeah, and in effect, it's costing them the tax that they otherwise would have received. But they don't have to put that in the budget. So they're looking, or they didn't have to put that in the spending part of the bill.

They didn't have to itemize that, but that in and of itself had a pretty big expense to it. But we're not worried about the government's perspective today. What we're trying to do is educate you so that you can formulate your distributions now and into the future around your needs, not the government's needs. So when I run into people who are doing only the required minimum distributions, or they're not yet 72, and they're taking nothing, I mean, the one thing that tells me is they can afford to do that. So they got to be making money for somewhere else. And so they don't want to do that, many times just influenced by the common group thing, which if I don't take any money out of there, I don't pay any taxes. And so I still have that money. So this is a good thing. And my thinking about that is when I hear these things out of people that are under 72, and they're taking no distributions, hearing that they don't really have a plan, or they have a plan, but it's the government's plan. So required minimum distribution plan is the government's plan. As they're saying, you're now 72.

If you're not retired yet, you probably should be. And you got this big hunk of money that we've let you avoid paying taxes on for all these years. And now we're going to make you take a little something out of that, just so that we get our tax money.

And then that little something is going to become bigger and bigger and bigger over your lifetime. And then when you pass away, if you've got a pretty big balance in there, then we're going to get the tax money out of your kids or your heirs. And so I've seen it so many times, I could just tell stories of people that have a big IRA, they pass away, they've done a good job of minimizing the taxes, they've got this big savings account, it goes to their kids, and their kids withdraw all of it in one year because they want the money. And so 40% of it is gone in taxes. And then the 60% that's left gets spent pretty quickly. In many cases, I mean, when people inherit money in their 40s and 50s, they need the money, man, and they've got bills, and they've got stuff going on, kids to educate, toys they want to buy, houses they want to pay off. So if you're on the government's plan, the government's fine with you not paying any taxes until you're 72, and then just paying the minimum taxes on the minimum distribution, and then you just accumulate it because they know that sooner or later, they're going to get a big lump of taxes. And, you know, you take your kids, if your kids are making $70,000 a year, and then they make a withdrawal from your IRA of $200,000 or their half, they're going to pay at least 40% in taxes because their income is going to go from $70,000 a year to $270,000 for that one year.

And go look up on the tax charts what kind of income you owe on that, federal and state. So I like the way you put it that perhaps we could get rid of the RMD part of that and just start talking about the distributions. And I was thinking about a couple other things along the way because you had talked about redundancy, and I thought, well, you know, I wonder how many times I've read Exodus 15-2 and totally missed it. I mean, and so was it redundant?

The one time it finally got turned on the light and went, oh, oh, okay. Well, along those lines, you know, I really, really, really wish my 30-year-old son would hear this right now, right now, so that he would begin to understand that, wow, I could flick a switch on my 401k and instead of that money going into a traditional IRA, it could go into a Roth IRA, and he would be never faced with the tax situation on his distributions. Well, yeah. Now, keep in mind, if he has, say, $100,000 in there now, and then we flip the switch, and he starts making his new contributions to the Roth, and those contributions are $10,000 a year, then at the end of next year, he's going to have $110,000 plus whatever he grew on the 100, but only $10,000 of that's going to be in a Roth. I mean, that money that's already in there is in there, and it's going to stay in there, so he's going to have part of his IRA taxable, but if he starts at his young age putting the rest of his contributions now into a Roth, when he gets to $65,000 or $70,000 or whatever point he wants to start drawing on this, he's going to have no required minimum distributions. He's going to have no distribution requirements at all on that Roth. He could just leave it there and leave it to his kids, and then his kids will have to empty it over 10 years, but the other situation is he builds up a big balance. He can start living out that and live tax-free. That's what I'm going to do with my Roth. Darrell Bock So the point that I think is beautiful that God's giving us is this isn't just relevant for somebody who is 72 or plus, you know, depending on the CARES Act and those kind of things. This is relevant for everybody who is retirement planning, whether it's through a 401k or an IRA or whatever, that you know, whatever age, they can begin to think about what the distribution plan looks like. In other words, beginning with the end in mind, I can remember that from back in the day, that that's part of preparation, you know, preparing for what the use of these funds would actually be for and along those lines. So, wow, the breaks come up fast. I hate that, but we're going to go to a break.

We'll be right back. Don't forget that this is brought to you by Cardinal Guide, cardinalguide.com, where you can find Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, which now I can finally say that. And this chapter is the seventh chapter, right, on IRAs. And, you know, you can get a download to that for free, or you can just email Hans at cardinalguide.com to send you the book.

Again, you know, I love the purpose of this show and the purpose of the book. It has really helped us all to get this information and be able to apply it to our lives to be able to make better decisions, which not only obviously help you, but I mean, it's a beautiful thing that this is a win-win deal. As we learn more, we make better decisions. And again, we'll be back with more of required minimum distributions here in just a minute. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner, Hans Scheil. And today's show, we're talking about required minimum distributions. But the idea is really to prepare for the just D part of that, which is distribution, like beginning with the end in mind, what are some of the preparations we can make at whatever age to make these distributions that would make sense is obviously leveraging your resources to their maximum capacity? Well, that's what we're talking about today is we're talking about, we're emphasizing the D and the RMD. So you got required minimum distributions. And listen, I can talk for four or five shows on what those requirements are and how you calculate those depending on your age, your marital status, the percentages. And I can give you a whole bunch of education, or you can go look this stuff up and learn about how to calculate and how to do an RMD. We're not really talking about that today. Okay.

And you don't necessarily even need to learn all that stuff. It'll just come to you as it comes to you. What we're talking about today is distributions. And I'm recommending that you consider before you're 72, making a distribution from your IRA, and that you would consider doing that every year for the rest of your life in an amount larger than the required minimum distribution. And really is I'm sitting there I'm sitting there thinking about it in this political requirement, not making any statements on what's going one way or the other. But based on what very likely could happen is we aren't going to have these really low tax rates for very long. And so 2025, they're going to sunset. Okay. I mean, just in the current law that if the new Congress and the new president passes nothing for tax law, which they may or they may not, I don't get into politics. I just take whatever they decide and I study it and try to make it best for whatever your situation is.

That's my game. But if they do nothing, the Tax Cut and Jobs Act, that's about three years old now, has a provision that it sunsets in 2025. I mean, come 2026, if nobody passes anything, there's going to be a tax increase where the tax rates are going to revert back to what they were before 2017. Which makes it a really good decision to take income now while the tax rates are lower, which has to do with distributions. Which if you're in your 60s or early 70s, that could be making a distribution for an amount that your tax return can accommodate and just moving it into a Roth IRA.

So you're not actually distributing the money to go spend. You're just moving it from a traditional IRA to a Roth IRA in an amount that we would pick together. And we do that every year between now and 2025 because you're going to have to pay taxes on that distribution. But now it's going to be in a Roth, which has no distribution requirements. And when there are distributions from a Roth, there is no tax. That's why they don't require you to take it out is because they're not going to get any tax out of it.

You already paid the tax. Right, which allows whoever or whatever you need to get it tax-free. So if you need it as a distribution, it's not going to affect your income in retirement where it's going to be difficult to, if you need the money, to pay those taxes. Yeah, so if you're over 59 and a half, but you're not yet 72, you're eligible to take a penalty-free distribution. If you're working and still making a good income, that may not be smart because that distribution is going to push you into an even higher tax bracket. So I'm not necessarily recommending this for everybody.

I'm just talking about consider it. And if we put together a plan for you, what we do for our clients is we sit down and we have a plan for distribution from now through the rest of their life. I mean, it's just, and part of that is tax planning. Part of that is income planning because your income needs are going to be different at different phases in your life.

And part of it is estate planning. And just as a general rule, you're creating a tax bomb by just creating a big account that's in an IRA that you're saving for your heirs. And I talked about on the first part of the show is it's just going to create a big tax bill because the only way your kids are going to be able to get access to that money is by drawing it all out at once, which is going to send their tax rates skyrocketing. And a big portion of the accounts is going to disappear. And as we're talking about those people that will need the money in retirement of their IRA or 401k as the case may be, you know, I personally love the idea now that I understand annuities of like one of the fears is I'm going to run out of money.

And there's by doing this preparation and planning, you know, you can, you can, you know, get some assurance that you're not going to run out of money. Well, yeah, especially if you're consuming the after tax money of the distribution, which a lot of folks are in that situation, they retire, and now they get their social security check. And now they, they need to sit down with me and figure out how much money do they need to distribute from their IRA to put together with their social security check so they can live.

Okay. And if we make that number too big, then, and then we have a bad stock market or investment year or two or something with very low earnings, they could be 82 and out of money. This is what drives a lot of people to take nothing out of their IRA.

Cause they're just, they're saving it for the rainy day, you know, or the, the rainstorm or whatever they're, they're preparing for that. And the people that need the money to live on, then we want to make it as big as it can be. And the way we can guarantee that you won't run out of money is to use an annuity. Cause an insurance company is going to be, you could, you could bring to me a certain amount of IRA money or 401k money, and we could take a balance. And then depending upon how old you are, we can move that or part of it into an annuity. And then that annuity, we can tell you exactly how much you can distribute each year to yourself. And then the insurance company will guarantee that no matter how long you live, you'll get that amount of money for the rest of your life. The way your social security works actually, right? That's exactly the way your social security. So you can turn an IRA balance into effectively a social security check. I won't have inflation in it, but we could take the other part of the money and delay withdrawals.

There's all kinds of things we can do. But again, going back to the, and they're thinking that they need this money in retirement, then 59 and a half, I guess you can start making distributions. So really their annuity could be baking, right? That's the word you use essentially by beginning that annuity at 59. They're in a whole lot better position to have more income. So if this person is still working and they don't need the income now because they're still working, but they have the possibility of moving some money out of their IRA for several years, because if they're not going to retire for several years, they could distribute it and put it into a Roth because you're effectively distributing, but they could just move it and say, we picked a number like $10,000 a year at 60.

And we did that every year till 70. And that's where you retire. You're going to have moved a hundred thousand dollars from your traditional IRA or 401k over to a Roth.

Okay. But you can't actually can't convert a Roth. So you'd need to distribute it to an IRA and then convert the IRA.

But let us worry about the specifics of that. The point being that for all folks is it would be beneficial to put together a plan, a tax plan, and a distribution plan. And to start that well before 72, or even if you're at 72 to put together a plan so that your IRA doesn't end up with a huge balance that you leave to your heirs. And I want to speak real quick to the people under 60.

Okay. What I would recommend that you do is to set up a Roth IRA or a Roth 401k. Most 401ks now have a Roth option. It will only accept new contributions. They won't let you typically convert from your old regular 401k.

But what I would recommend is that you would get on a plan so that when you get to 65, 70, and you're going to think about retiring, you've got a big balance in a Roth IRA that has no minimum distributions. Yeah. And then moving up to the guy that's 80 or the couple that's 80 or 82 or whatever the situation may be, you know, you were telling me that, you know, wow. And it's a lot of times they get up there, they're, they're required minimum distributions are like in 20% of their, you know, that's at 90.

Okay. So this guy who was a particular client was 89 and we just looking at his tax return, putting together a plan for him and the government's making him distribute his IRA over the next five or six years just because his life expectancy isn't that long now. And unfortunately we're not going to recommend more to him because that's just going to put him in a higher and higher tax bracket.

What he's actually going to do is use QCDs to get that number down so that he, he doesn't have to pay taxes on it and it doesn't create a taxable bill and he's going to do his charitable giving. But the point being, we run into people all the time in their eighties that have been on the minimum distribution plan. Now they got a big balance. That's the extent of their savings. And so we put together a plan for them to whittle these balances down, even if they just save the you know, even if they just move it over to a savings account that's going to be better money to pass along to their heirs.

Right. And so we have the people that from my perspective that are, that need the income, which we can talk about that distribution plan. You got people who are thinking about using it as an estate plan and maybe converting it to life insurance. That's another distribution plan. But even the people as you know, as they get up in their late eighties and the QCD being the qualified charitable distribution plan that, that D is still in there. In other words, this is a thought for all ages, no matter what age you are, you know, there's a way to maximize the use of this distribution. Yeah. So we're just asking you to consider alternatives. That's the message today. Consider alternatives than just using the minimum requirements of the government in terms of distribution of your IRA 401k. I guess the key is the distribution.

Yeah. And there's lots of different angles, even to long-term care, life insurance, other, you know, products that really can pay off to both your family, to your church, you know, and all so many different ways that God would give you wisdom in these times. Again, we want to tell you that, you know, we will always never have enough time for the show because we, as you could tell Hans has a lot of stuff he could share. But it's in his book, The Complete Cardinal Guide to Planning for and Living in Retirement, which you can get at cardinalguide.com or just ask for the whole book, or you can get the download of this chapter, absolutely free right there at the website cardinalguide.com. So we want to wish you a Merry Christmas and certainly a Happy New Year. And we're so grateful that you would take your time to listen, you know, to Finishing Well.

Thank you. We hope you enjoyed Finishing Well, brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.