Calculating Your RMD

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Today's show is calculating your RMD, and if you don't know what that means, then you're going to be glad you listened. That's good. I was thinking, you know, I love Christmas movies that I actually watch from year round, and of course, they're still very prevalent right now. So, you know, while I was sick with COVID, I watched a whole bunch of them, and I watched this one. It was a Christian Christmas movie, so I did not expect this to happen. But at the very beginning of this movie, this older man was describing his relationship with Christ, and he says, you know, I think I've finally got enough done.

Do I feel comfortable? I'm going to make it into heaven. You know, and he said, I've had enough done for the church, is what he said, that I feel comfortable. I want to make it into heaven. And I thought, oh, my goodness, this poor man, he thinks he has a required minimum in order to be a contribution.

Yeah, it would be RMC, right? Required minimum contribution in order to make it into heaven. And so let me just say, at the onset of this show, when it comes to heaven, there is, on your part, no required minimum contribution. There is on the part of Jesus' merit. Like, he paid it all, okay? All to him I owe. The only way I get to heaven is based on what Jesus did, not what I did. So don't let the RMC in today's show confuse you whatsoever. But I hope you know what I'm talking about, that in order for us, in order to spend eternity with God, we do have a required minimum, but we get that through the merit of what Jesus did on the cross, literally taking my sin on his and so that I have, you know, the required minimum once I accept what he did. So it's not on me. There's nothing that I earn.

It's a gift, and it's from God. However, the IRS has a different view on RMD, and so this is our expert and certified financial planner, Hans Schiel, to help us with. So Hans, what is RMD? RMD is required minimum distribution, and that would be from your IRA or your 401k. So, and they start now at age 72. So we didn't have any RMDs or required minimum distributions in 2020 because of the coronavirus relief. Everybody was given a pass for the whole year where they didn't have to take required minimum distributions. And then in the year before that, they raised the age to where it's now 72.

So all that history you don't need to worry about, it's now 2021. If you're 72 or older, or you turn 72 during this year, 2021, you need to take your first required minimum distribution. If you're older than that, you need to take every year, you need to take your required minimum distribution out of your IRA. So we're going to take that we're going to talk about that a little bit.

And the calculation of it is really the simplest part. It's really understanding like why it's there, what are the ramifications of it. And if you've waited until 72 to put together a plan, and then your plan is just to comply with the IRS, you're really on the government's plan, and they like the plan you're on.

So we're going to just talk about that today is help you understand required minimum distributions, why they're there, and how to make these work to your best benefit. Right. And so if you're 72, and wow, from what I understand, a lot of those people are mad about this deal.

Oh, yeah. Like, what are they doing to me? They're making me distribute this money. And a number of them are mad years later, you know, they're 76, 77, 78. And we're taking them in as a new client.

Maybe they're an existing client, and we're just updating things. But we're finding out about all their money. And we're finding out where it is, what it's invested in, how much is in an IRA, what are the other accounts. And then people, yeah, they make me take money out of that every year.

And, you know, I have to pay that tax. I don't really like that. They're upset about it. Okay.

And I don't try to make them un-upset. But, you know, what perhaps I'm going to do is explain like why it's there, why the government put that in there. Because, keep in mind, you haven't paid any taxes on this money for your whole life since you started making deposits way back in your 20s and 30s. This is avoided tax or postponed tax is what it really amounts to. And we're only talking about traditional IRAs and traditional 401ks. If you have a Roth IRA, you got no minimum distributions. There's no required minimum distributions. Right. So the idea of required minimum distributions really is the government saying at some point you are going to get taxed for this. And so we might as well start small.

Well, it's deeper than that. The government is saying, you know, not only are you going to get taxed, but they're saying you need to create an income from this. You're now 72. So if you're not retired yet, we're going to call you retired. And then they make you distribute it over your life expectancy. So you still got a pretty long life expectancy at 72 according to the government.

I mean, you got like 24 years. So they're going to make you take whatever the balance was at the end of last year, divide it by 24. And, you know, whatever that number comes out to be, you're going to have to withdraw that. Now, remember, you're getting this money. You're not sending it to the government. It's being distributed to you.

It's like a forced distribution. Right. Because people don't have pensions like that. And this was kind of like, okay, your pension needs to start because you need to start taking this income and paying the tax on it since it hasn't been taxed. However, this is your money and you can go invest it in other instruments, right?

Yeah. And every year, it starts a little less than 4%. The example we had in the blog we wrote about this was a person that has $100,000 divided by whatever your life expectancy, somewhere around 24, 25.

It equals like 3.95%. Anyhow, it was $3,900 and some dollars, almost 4% is what you got to pay to yourself. So remember, you're getting this money and then it's going to be added to your income. So you're going to have to pay some tax on this. Now, people that pretty much live off their social security and maybe a little other income or a little other investment income, many of them when they take this minimum distribution, they still owe no tax because if they had a small IRA, but the people with the bigger IRAs and have other income sources and pensions and just other investments where they're showing a lot of income, well, then they got to pay a lot of this tax on this required minimum distribution. And they're going to pay a lot more tax in the years to come if they stay at the minimum. And they're still keeping that current tax at a minimum. But then ultimately, they're going to have a big balance in their IRA. And then when they die and they leave it to their kids, which is where it ultimately is going to end up, maybe it's the spouse first and then the kids. And there's a big balance.

What do you think the kids want to know when I talk to them after there's a death and they're the beneficiary of an IRA? Right. How much do I get?

Yeah. And say, well, you know, you can get this much, which is all the money that's in there or their share, you know, say it's $200,000 or you can spread this out over 10 years and just take 20,000 a year. And then you're going to have a smaller tax hit. Well, how much taxes do I have to make? Pay on the whole $200,000. Well, what's your tax rate now? How much do you make, you know, if their kid makes 100 grand a year or 80 grand a year and he's in the 20% bracket or the, you know, add 200 grand all in one year to that bracket. And so I don't want to get too much into the calculation on that, but a lot of the kids are just going to say, okay, so it's 200 grand minus, let's say 80 grand. That means I can have 120 now and take the money and run.

Yeah. There's many kids they send me a check. You know, I'm in middle age. I got kids to educate and bills to pay and I'm really glad dad left me. Kids aren't worried about the 80 grand in tax.

So my overall advice is to try to reduce your IRA balance, your traditional IRA balance over your lifetime in smaller amounts or smallish amounts, maybe larger than the minimum, maybe start earlier than the minimum start in your sixties so we can make these amounts smaller so that you finish the game or you finish your life and leave it to your kids and you have a very low IRA balance. Even if you put this money over in a taxable account because your kids are going to receive all of that or your heirs or whoever they are tax free. Right.

So the kids now see how much is in their, how much is in their savings account. Well, it's 180,000. How much did you get? Well, 180,000. Right.

And what's the tax liability on that? Nothing. Absolutely. So, so if we take this back to the here and now, what I want to teach you about RMDs and you can get some of that reading my books and watching the videos that we have at cardinalguide.com and listen to the show. I want to teach you about them, but then more importantly, I want to talk to you about the importance of having a distribution strategy or you could call it a withdrawal strategy over your lifetime. And I'm not going to tell you what that should be or what it ought to be. I'm going to figure out what you need and what you need this money to do and how much of it you need to live on. But my overall goal that I'm going to advise you of is to have a lower ish or lower balance in these IRAs at the end of your life, just to prevent them from getting gobbled up with taxes. Right. And so no doubt, we are talking today about IRAs and that RMD mean requirement distribution.

So you maybe you got those two things down already. I hope you do. They're in Hans's book, the complete cardinal guide to planning for and living and reducing for and living retirement.

One of the seven worries tabs is IRAs, which is what we're talking about today. Of course, all you have to do is just email Hans or go to cardinalguide.com and get that information. If you request his book, he would love to send that out to you.

Of course, we've got a lot more on calculating your RMD today on Finishing Well, so stay tuned. Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic group. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans expertise in qualified charitable contributions, veterans aid and attendance, IRAs, social security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian, or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner, Hans Scheil. Today's show, calculating your RMD, which we now know is required minimum distribution from your IRA, but I like the word that you use even better is not a required minimum of distribution, but getting it in your own money. I mean, essentially you're just receiving your own money.

You're distributing it to yourself. And when you're doing an RMD, required minimum distribute, you're distributing the minimum to yourself in order to pay the minimum tax. When I hear that out of folks, a lot of them have used their IRA as a savings account, and it was really never intended to be a savings account. The lion's share of their money is in this IRA, and they're wanting to keep it there, and they're not wanting to pay tax. That's all fine and good, but if that's their main thing of savings, if they had an emergency come up, and they all of a sudden needed 30 grand to pay for something, they're going to have to draw out 40 or 50 to pay the taxes to net 30, and then the 40 or 50 is going to be added to their income for that year, and it's going to totally throw a retirement plan that we've put together into whack. So first of all, not everybody in their 60s has the luxury of waiting till 72 to make withdrawals from their IRA. A lot of you folks, you need the money. That's why you come to us. You need an income from that thing.

So we start on a lot of distribution plans for people in their 60s. All right. That's the word you use. So instead of RMD, RMW, like required minimum withdrawal. There you go. Yeah. Right.

Yeah. And so we're going to start an income plan where they're just going to get a set amount of money right out of their IRA. It's a withdrawal. It's not a required withdrawal, but their budget and their banker requires it because they need the money to live on top of their social security check. Those folks, by the time they get to RMDs, they've already drawn it down a bit, and they're drawing much more than the RMD because they're living off of it. So they don't really have a problem with all this.

We always need to check it and make sure they're taken enough. But I'm talking about the people that just want to postpone taxes. That's where their money is sitting, and they really think that they're accomplishing something great by just building up this money they never paid tax on. But what I'm going to tell you is the IRS is going to get their money sooner or later, and they very well might get it from your heirs or your children. They're going to get the money out. They're going to get the tax money out of it.

And so what is a wiser strategy is to have a plan to have a strategy and to start now and to start small. And just depending upon where your income is and what your social security, we can come up with an amount that's going to start drawing this thing down. Maybe that's $10,000 a year. Maybe it's $5,000 a year. Maybe it's $30,000. I mean, it just depends on how much you got, what your income is, and what your tax return is going to look like year after year after year in your 60s by drawing this money in. So we've got several thresholds we look at. But the whole point is you want it to have a declining balance in your IRA, and you want to start that declining balance before 72.

Right. So even people that are in their late 50s begin. So when you turn... Well, you can't do it until 59 and a half. Late, late 50s.

Late, late, late, late, late 50s. I mean, there's some ways around that. But you know, and I don't really recommend doing it before you're retired. So if you're still working in your 60s, I don't want you to read that as a blanket recommendation. So you go ahead and contribute and accumulate, but... But they could be contributing or changing over to a Roth IRA.

So is it not... Well, yeah, but even that's going to be a withdrawal, okay? So because that's where I was going to get into next is, so when we start withdrawing this money in our 60s, if we don't need it to live on, what do we do with it? Well, we certainly don't spend it, okay? I mean, one option would be to pay the tax, which you got to pay the tax.

And then what's left, we could just save it, and we could save up for something. The other thing we could do is we could convert it to a Roth. You can't convert RMDs. So when you get off to 72 and you got to take that minimum, you can't convert your RMDs.

That doesn't work. But if you're before then and you take a withdrawal or a distribution, even if it's systematic, we could convert that amount to a Roth. So it's still in the bank. And your income is still not taxable, right? It's still not going to be taxed. It's never going to be taxed.

And it's not going to have an RMD either. And your kids aren't going to have to pay taxes on that money, right? And you're not going to have to pay taxes if you need it when you're in your 70s or 80s or 90s. Yeah, it's a beautiful, so that's one option.

Well, actually it's two options. The first option was to put in a savings account, save up for something or some type of investment. Second option would be to put it in a Roth, characterize it as a Roth. You still got to pay the tax, but now you got this money with tax-free accumulation and tax-free spending it or tax-free willing it to your kids. It's good money to leave kids as Roth IRAs. And then a third option would be to buy a life insurance policy. And the premium could be the amount of these early withdrawals. And then you're just moving it into the life insurance.

You still got to pay the tax. So we could move the net amount after we pay the taxes, just we can figure all that out. And then you're now building cash value in an account you can make a withdrawal from if you need it for something. Or you could even make it a hybrid long-term care, right? You could do all kinds of things. But if you do nothing, which is a lot of people do nothing, they just pay the premium on the life insurance and, you know, maybe that stops after a number of years as it's a limited pay life. And then they die and then their children get that whole amount tax-free. So there's all kinds of things we can do with this stream of income or these withdrawals or distributions with the IRA starting in your 60s that's just smart. So that by the time you get to 72, you got a plan in place and you just keep doing it.

So that's one thing I want to get across. We had a client that is not a new client, but they've been with us for a number of years. And so here's the scenario is they have about $400,000 of her IRA that we are managing over on the investment side. She's now moving this annuity that's maturing that they put 280 grand in there 12 years ago. And it's now worth about 650 grand.

So, you know, and it's just over with. And so they don't want to pay all the taxes. They don't want to spend it. They don't want another annuity.

So we're just moving that. So now they're going to have about a million bucks in her IRA and she's 72. So we're doing the distribution about 40 grand. So she's going to have to pay taxes on that 40 grand. She absolutely doesn't need the money. Very high income, both of them do.

And so she's still working and has very high income, professional job. And she, so I explained to her what a QCD is, qualified charitable distribution. So once you get to minimum distributions, you can now just donate the whole minimum distribution up to a hundred grand a year. You can donate to the church and you'll never pay taxes on it. You can even use it in replacement of your other giving strategy. And it just so happens that this person gives a hundred thousand dollars a year to the church and missions and other qualified charities, but it's mostly to the church and that's her goal every year.

And she's a really good follower and tither and all that kind of stuff. And I just showed her, I said, you know, if you give that whole hundred grand through the IRA, it's just like getting a full tax because you're not going to pay any tax on it instead of giving it out of your other money or your income. And then I showed her, I said, you're really not getting the full tax benefit when you give them the hundred grand out of your income and then you take it off your taxes. You know, I just got her to trust me on that.

You're not getting the full tax deductible benefit, but if you do it through a QCD, you are. So now she's doing that. But I said, then you can't give it in the plate every Sunday or whatever. I mean, you've already given some money so far this year.

So I don't know how we want to take all that into account. Well, Tom's going to figure it all out. The point I wanted to make is once you get to minimum distributions and after we calculate them, you can give this money away, even if it's in replacement of your other giving and now you're getting a tax benefit out of it.

That's really cool. Now, her husband is like 77. He's never taken a minimum distribution out of his IRA.

It's just been sitting there. These people have been sleeping through a number of things because they're very well to do and they're very busy business people. And so he's got some real issues there because, you know, we're going to have to go back and calculate the minimum distribution every single year back to when he was 70 and a half, calculate what it was, and then his penalty on that is 50%. So, you know, if it's 100 grand in makeup distributions, 50 of that right off the top is going to the IRS. And then the other 50 is going to go to him, but it's going to get taxed. So probably another 20 of it is going to be gone in taxes.

So he's going to get about 30 grand out of that deal, but at least he's going to be cleaned up and right with the IRS, which is... It's all the more reason to pay attention to what RMDs are, right? You don't want to leave that money sitting there and not attend to it.

Or if you find yourself in that position, that'd be a great time to call. Yeah. Well, and so just to gloss the whole thing over, these people are going to buy long-term care insurance with a big hunk of either one of their IRAs, and they're going to actually use IRA money. It's too complicated to get into this show, but it's going to cover minimum distributions for them. We may deplete his entirely after we do the minimum distribution thing, and then to make up the difference out of hers. So we might have two policies that cover both of them, and it just all works out that they buy long-term care insurance with a lump sum.

They're all for it, now that I got their attention. So it's pretty cool. Calculating your RMDs is something that you can do when you're 55. From a standpoint of you're looking at this, and I think it's a beautiful thing to understand that the idea behind the IRA or a 401k originally was to create an income, and that income is what they're going to be looking at. And that income is what they're calling a distribution, which I like the word withdrawal better, because when you say distribution, you think you're giving the money to the government, but you're not. You're giving it back to yourself, and by creating a strategy, right? Right.

Early on, even in your 50s and 60s. A distribution strategy. Right. That's what you need, and that doesn't mean you just spend the money after you pay the taxes on the distribution. You can do that. If you need an income and you need to live off it, we can plan it out so that balance will be zero when you die, and you'll have the maximum income that you can get out of that, and it will just send you a check every month, and you won't ever have to worry about it.

It's called an annuity. That's one solution. We could do that with half of it.

I mean, we've got all kinds of ways to do that. You need to be familiar with this stuff, and if you come to us, we're going to do a lot more than calculate your RMD. I mean, I can teach you how to do that in about two hours.

I mean, I could get you proficient where you could calculate it. The real joy in this is the strategy to minimize the tax over a whole retirement, and then minimize the taxes to the heirs in passing on what's left. There you go. Today's show is about IRAs and required minimum distribution.

It's all there, and Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, which you'll find at cardinalguide.com, where you can email Hans if you want the whole book, or just look at the subject matter. Plus, many shows that we've done on IRAs are there on the podcast of finishing well now that we're almost two and a half years into doing these. So there's a lot of shows on this subject. So how fun. Running out of time again, but great to have you. 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' bestselling 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.