This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com, with certified financial planner Hans Shile, best-selling author and financial planner, helping families finish well for over forty 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 Shile, and today's show is required minimum distributions, an RMD strategy, and so you may know if you have an IRA that when you reach certain ages, it's. comes time to take it out. It's fascinating that this a completely different season.
Of course, the Bible has a lot to say about seasons, especially in Ecclesiastes chapter three. It talks about there's. A time for every season under heaven, right? A time to born, a time to die, but it talks about a time to plant and a time to pluck up what is planted. And so, you know, most of us have been earning in our IRAs, etc., all our lives, and so now the season is changing.
And the beautiful thing about this particular season, when it comes to your IRAs distributions, is that some you could be planning for even in your fifties when you begin to understand. And what's coming, and so it's kind of neat that God provides for the seasons, you know, with leaves that fall and spring that flowers come up, and all sorts of things that are giving you indications of the season.
Well, here these are pretty obvious too, right, Hans? Oh, they are, yeah. You know the interesting thing with the title is I wanted to make a video and do a radio show where I just teach you about RMDs or required minimum distribution, but the end of the title, the last word is strategy.
So, and what the purpose of this show is to teach you about this stuff, but for the reason of formulating a strategy around paying the taxes. On the money that's in your IRA, that's what it really boils down to. And I'm just going to tell you, most people don't do this. Most people just go into retirement, and they want to know, like, how much income that can produce out of their IRA. They want to know a lot of things, but they're focusing too much on the here and now.
Like I'm taking a person that's 65, and they come into us, and They want to do retirement planning. They're going to retire. They're already retired, and now they got to plan their income. And we're going to plan, you know, around all seven worries: Social Security, Medicare, long-term care. I'm going to go through all seven of them.
And the area with an IRA is that most people haven't dealt with is you haven't paid tax on this money yet, and but you will, and you're going to pay tax. On it, and if you're successful in keeping a lot of the tax inside your account or not paying taxes on it, then your heirs are going to really pay taxes on it.
So the government's going to get their money, and one way or another, they already have a strategy for you. It's called required minimum distributions.
So what we're going to do today is just talk a little bit about the rules. But the whole idea is for you to formulate a personal strategy, so that RMDs or required minimum distributions at seventy three or seventy five don't come and hit you like a two by four alongside of the head. No, and the beautiful thing about the whole thing, from my standpoint, Hans, is what a great problem to have. Wait a minute! You're telling me I got to figure out how to get my money.
I've got all this money, and now I'm gonna.
Now, you know, like my boss once said, "Boy, I long for the day when I used to have to pay taxes." Right? The reason why you're paying taxes is because you got a bunch of money. That's a really good thing because they worked really hard to get it.
So I love it. Yeah, and so my suggestion is. When you turn sixty, now you've just passed fifty nine and a half, so there's no penalty on taking money out of your IRA, and that ought to be a little signal to you that you don't have to take money out until you're seventy three. I don't recommend taking money out before you retire.
So, because we we want to build it up, well, we're working. We want to build this up, build it up, build it up, build it up. Um, but what we're talking about here is having a strategy to get it out, okay? And that strategy needs to start, really, even before you retire, but specifically when you retire, if you still got some runway between now and seventy three or now and seventy five. You've got a window of time where you can start pulling money out, paying the tax, where you're in control of it.
It's not somebody, the government, telling you you have to take it out. It's you proactively doing it, and then what you do with it—that's what we're going to talk about here on the show. Yeah, that's that's beautiful, and you know, so critical at a time in your life when you're trying to. I guess make a way to know that that you're never gonna run out of income.
Well, yeah, and so people all their lives. I mean, most people that have big IRAs or big 401ks, they haven't turned it into an IRA yet. First of all, they never imagined having this amount of money all in one place that they own. I mean, just most of these people, their parents didn't have these size of accounts. And because you know, people in the past had pensions, they they and then some savings, and then very wealthy people had a bunch of savings.
But you know, we see people regularly coming in here with seven-figure four hundred one k's and IRAs, and certainly multi-six-figure IRAs, four hundred one k's.
So that that is your pension. I mean, you got Social Security, and then for most people, the majority of their savings is in an IRA, and it's not taxed yet.
So, what I want you to do is, like you said, this is a good problem to have. What I'd like you to do is, when you get into your sixties, is to sit down and develop a strategy. Specifically around getting money out of the IRA and paying taxes on it, and then what's left, we can talk about what you're going to do with that. And you know, and a lot of people, you might be listening and say, "Why in the world do I want to listen to this guy? He's telling me to pull money out of this tax deferred account and pay the taxes." I just assume leave it in there and let it keep growing, tax deferred.
Yeah. You know, we could make a case for that, but what I'm telling you is, there's a problem ignored, which is this thing is building. We haven't paid the taxes; it can become a large problem in your 70s, 80s, and 90s. And let me talk about that for a minute. Is, you know, if you're 65 and you're fortunate enough to have a big IRA, a big 401k, you've saved the money, and then you're also fortunate enough.
That you don't really have to tap a lot of it to live, so you have the option of just doing nothing and letting it grow, and then dealing with the problem when you turn 73 or 75. That now the government is going to tell you, I must, you you must take this amount out and pay taxes on it this year.
Okay, that doesn't sound too bad, if you if you sit here and look at it because it's just. Compounding and that means I'll have even more money later on. But let's look at a couple of things. Is we, you know, that people, when they put off the problem, they're usually in shock. When you know, I had a guy in here just a little while back, and his wife together have over four million dollars in their four hundred one k ira fund because they both had big jobs and.
Did all the savings and you know anyhow over four million bucks and there he just turned seventy three, and what he was saying about ten minutes in, he said, "Boy, I wish I'd run into you ten years ago." You know because what he's what he's learned is he he just put off dealing with his problem. He knew that RMDs started at seventy three, but now he's seventy three. And his part of the thing, his wife's 73 next year, so let's just call it all the same year. The RMD is about four percent, or they got to take out about 160 thousand dollars this year that they don't need, or they definitely don't need it because they've been living off of their Social Security and pensions. Because these people both have a pension.
Imagine that, and they're saving money at that rate, so they don't need this money that's in the IRA.
So they just postponed the problem.
Now he's got to pull 160 grand out without any say so whatsoever, and it gets much worse much quicker. Right? That's just the beginning of the problem.
Well, yeah, and so now his Irma. Which he's been avoiding Irma all along because their income is just under two hundred thousand, and they pay the tax, and they live just fine. They live like kings. That's why they haven't taken anything out of their IRA, but now they have to, and so their hundred and ninety thousand dollar income is going to go to three hundred and fifty this year. I mean, just taxable income, and they're going to shoot up in the Irma deal.
They're going to pay more taxes on Social Security than they did before, and then they're going to pay higher marginal rates on that 160. And then he's going to start doing Roth conversions, but he can't convert the 160.
So now his income is going to go up even more because he waited till 73 to do this.
So I don't want to start laughing, but boy, he was. He's not happy, and kind of kicking himself.
So that's kind of an extreme example. And nobody listening on there's going to feel sorry for this guy, and I don't. And he's still wealthy, and he's going to be wealthy after he deals with this problem. He's just not very happy about it.
Well, the good news is he is dealing with it now in the season he's in. I mean, there's no time like the present because you know the point of it is is Here comes the opportunity to do something about it, and you know clearly when we get on the other side of the break here, we're going to be getting into all these strategies, and so I know you're excited like me to hear about that. I want to remind you right now that this show is brought to you by Cardinal Guide, CardinalGuide.com, and if you go to CardinalGuide.com, there you're going to see the the seven worries tabs, which today's worry, which would be IRA, right? And so if you Go to that. You're going to find a beautiful video with a a bunch of examples and all sorts of notes and and a you know show notes that you can see in the video as well.
It's all there at CardinalGuide.com as well as Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And then there is the. All famous, my favorite. Contact Tom and Hans. Page it's all there at CardinalGuide dot com.
We're gonna be right back with a whole lot more. How does lifetime income? Excuse me. Required minimum distribution strategy. We'll be right back.
Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. But welcome back to Finishing Well with Certified Financial Planner Hans Schaal, and today's show required minimum distributions (RMD), which means required minimum distribution strategy.
And so we we talked about some of the examples, but boy, I I love the strategies, and I love the wisdom of dealing with these wonderful problems. Let me let me just throw some facts at you about required minimum distributions, RMDs. Your first year of RMD is going to be age seventy three if you were born in nineteen fifty nine and before, which is going to include you and me, Robbie. Yeah. Age, and then seventy five is your first year of RMDs if you're born nineteen sixty and after.
So that's pretty simple, and it doesn't matter really whether it's 73 or 75. The purpose is, is if you're in your 60s or even your low 70s, use the time between now and your RMD age to formulate a strategy, which might mean pulling some money out before you have to, and we can do that with a Roth conversion.
So. The next point I want to make is the IRS is your silent partner in your IRA. I mean, let's just say you got eight hundred thousand dollars in a four hundred one k or IRA, and maybe that's you and your wife's combined.
Okay, so you got eight hundred grand, and that's you know almost a million bucks, and you're looking at that, you're proud of it, you're ready to use it, you're going to retire on it. But just understand that money is really not all yours if it's not a Roth. I mean, probably five hundred thousand of it is yours, and three hundred thousand of it belongs to the IRS, because in order for you to pull out one dollar, you've got to give them their appropriate share.
So just understand there, the IRS is your silent partner in this thing. And they're very content. The IRS is to just wait till seventy-three or seventy-five because it's either pay me now or pay me later. The required minimum distribution, and and the thing I want to take those three words, and required, it's right in the IRS code. You have to take this money out.
It's just like paying your taxes, and the word minimum. What what we want to say is you have to take out this much as a minimum, but you can take more.
So sometimes people see the amount in the minimum, they say, "Well, that's all I can take." No, that's the minimum you can take out after this age, but you can take more. And then the last word is distribution, or the D. Yeah, means distribution. You got to take the money out, and you got to pay the tax.
So, I want to cover required beginning date, and that is April 1st of the year following when you turn 73 or 75.
So it gets even more complicated. Say, oh, I don't even have to do it this year. This guy looked at that. He said, oh, I don't have to do it this year. I can wait till April 1st next year.
And I say, you absolutely can. But here's the problem. That's only the first year.
So if you wait. Until January, February, or March next year, you take out your hundred and sixty thousand. You're going to have to take out another hundred and sixty thousand next year for that year.
So you're going to have three hundred and twenty thousand that you're going to take out in that year. He didn't like that too much.
So don't take advantage of that. Wait till April first. Do your first RMD in the actual year you turn seventy three or seventy five. Wow. Yeah, absolutely, and and then when, you know, I in the video I noticed the required is like huge.
Like there's a twenty five percent penalty if you think, oh well, they're not going to do anything. Oh yeah, they're going to do something. Yeah, it's required as it can be. You don't want to miss this.
Now, another fact: your Roth IRAs. Have no RMDs. That's why we're so high on Roth conversions.
So if you start at a young age, we're doing Roth, wonderful. But even if you start at a young age, if you're in your 60s, if we start taking a little bit of that IRA every year, or maybe a lot of bit of it, just whatever you can stand, and we do that every year from now till 73, you're going to have a bunch of accumulated money in a tax-free account. It's growing tax-free, and it's not subject to RMDs.
So that that is a strategy that you can lower your RMD when you're 73 by doing little bits of Roth conversions between now and 73. The first money out of the IRA in the year counts as the RMD. The RMD is not eligible for rollover or conversion to a Roth, so you can't take the money out and then roll it back into an IRA, or you can't take the money out and convert it to a Roth. Once you hit RMDs, you got to take the money out and pay taxes on it. You mentioned earlier a 25% penalty for not doing it properly.
Twenty-five percent of the amount not taken, so that is that's pretty severe. And the tax, so by the time they catch up with you, and you have to pay the tax and the twenty-five percent penalty, they're taking more than half of it for their for their keeps. You can do RMD aggregation, so if you have several IRAs. Not going to get into the details of that on the show, but you can pull the whole RMD out of one IRA, and that covers all your IRAs. Or another way to put it is the IRS looks upon all your IRAs as one IRA now, and you can't mix 401k and IRA.
So in other words, if you have a 401k and you have an IRA. You have to do an RMD from the 401k and a separate RMD from the IRA. I'm just throwing a bunch of facts. And the qualified charitable distribution. This is from one I want to sit on for a second.
You can, when you get to RMDs, you can give all the way up to the whole of the RMD to the church. I mean, since we're on a Christian radio show here. But any qualified charity, you can give an amount up to the RMD, or really up to a hundred thousand dollars or more.
So, in other words, if you've been wanting to make a nice donation to the church or missions or something like that, you could. If you have a large IRA, you could say, "I'm going to take ten thousand dollars, and I'm going to give it to the church." First of all, you won't pay any tax on the ten thousand dollar distribution, and it counts as part of your RMD.
So, I just use ten thousand as example. Let's let's say your RMD is twenty five thousand, and so, you you know what you do is you do a QCD of ten thousand to the church, and then you do a distribution of fifteen thousand that you take yourself and pay the tax. And that way, you'll meet the twenty five thousand dollars RMD, but you were able to make a ten thousand dollar donation to the church and not paying tax on it. You do that through a QCD. Pretty nice, huh?
Oh, absolutely! That strategy always is amazing to me. And you know, what a way to that. You know, God. Gave people wisdom to, to set that up to where, literally, that's a a a way to be able to use your regular money to, not you know if you're not tithing with the money that you're using with your normal household, you're doing that with your RMD every year, you know.
I know the church surely appreciates it. That's for sure. I keep some of my IRA money and 401k money in traditional. Just so that when I do retire or I get to seventy and a half, I can start doing my donations and my tithing through my IRA, so I don't have it all converted to Roth. I have a little fund set aside that's going to be my tithing and giving fund, and I'm not going to pay any tax on that money ever.
So it's pretty sweet. Just talk quickly about qualified longevity annuity contracts, QLACS, and there's a way that we can take some of your RMD. We showed that to this guy that that I was talking about in the first part of the show. You can take a little over two hundred thousand dollars of each of their IRAs. And put it in something that's going to start paying them an income when they're like 80 or 85.
It's a way to to get out of some of the RMD and create a a big income in your old age. I mean that's a simple way to put it. We can talk more about that in a separate show. And then the last thing I want to just cover on this strategy business. What are some strategies you can do?
Distributions in the 60s that I talked about or before. Tax bracket planning. Consider the widow tax. I mean, I haven't really mentioned that. I had a couple in here yesterday when I pointed this out to them because they weren't sure about Roth conversions.
And I said, look, one of you passes away, the other one lives on. You got a lot of money in an IRA, and then you're going to be paying taxes. At single taxpayer rates, and so that's all the more reason to start doing Roth conversions now to make a smaller taxable IRA basis. You're preparing for the survivor of you two to have a smaller RMD. That they're paying taxes on, and have a tax-free account over on the side, if they need some spending money, that they pull it out of there without taxes.
Using the QCD, which we already talked about, using distributions from your IRA to delay Social Security—that's a great strategy. As somebody who's sixty-five, sixty-six, retiring. They're thinking about taking their Social Security right away, and then they're comparing that to waiting till seventy to get a larger check. Where you could pull the money out of your IRA to replace your early Social Security check, and that gets down the balance to create a larger Social Security check. It's a good strategy, and then take a look at what your Irma is going to be, the Medicare tax.
In your seventies and eighties, and we do in the financial planning software, we point that out to you, so that this whole RMD strategy protects you from having an Irma problem in your eighties and nineties. Yeah, that's huge, especially when it comes to the widow thing, because that's. That's the one that just always kind of just slaps me in the face, like really, when all of a sudden you're having to pay, you know, Social Security on single rates, and and again the Irma thing is is exasperated by the widow thing. It just is, you know. That's why that planting is it says season.
Well, it's a good time to remind you that this show is brought to you by Cardinal Guide, CardinalGuide. dot com. And if you go to CardinalGuide. dot com, you're going to see the seven worries tabs, and one of which is IRA. And as we talked about earlier, there's a wonderful video with a with a a board that shows all these strategies and things he's talking about right there, so you can see them as well as show notes and all sorts of details.
And then there's Hans's book, The Complete Cardinal Guide to Planning for and living in retirement, and a workbook that goes along with that—that's wonderful. And of course, my favorite, because when it comes to these kind of things, especially a QCD, you know, those qualified charitable deduction, you need some help with that stuff.
So I would call. Believe me, I would call. The contact Hans and Tom Page. It's all there at CardinalGuide.com. Great show, Hans.
Thanks. Thank you, and God bless you. The opinions expressed by Hans Shile and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
Investments involve risk, and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not. Suitable for everyone. Information Express does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you.
Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation. Finishing well is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC. Abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. 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.
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