Understanding the New RMD Rules for 2025

Peter, very good to see you.

Welcome back, everyone. Today we get to talk through those new RMD rules for 2025. These new rules could catch retirees off guard, which is why we want to make sure everybody is well aware. And if you don't follow those rules, you might be facing some unexpected taxes and penalties. So starting this year, required minimum distributions have to be the first money out of your account. What does that mean exactly? And how does it affect rollovers?

Yeah, and I wonder like how stringently this is actually going to be enforced if there's going to be any, you know, plead of ignorance to this. But as the letter of the law stands, it can create some pretty interesting dynamics, especially when rolling over or consolidating retirement accounts from different types. A specific example, like if you had a 401k and you are 73 and had an RMD required, right, the math for RMDs on IRAs, you can aggregate those.

But for a 401k, that is a separate math equation. It requires a separate RMD. But if you wanted to take that 401k and roll it over to an IRA, you must take the RMD first. It's not like you can roll over the 401k to the IRA and then take the RMD. The first money out of any account that requires an RMD is going to be deemed to be the RMD. So I think where this could catch people off guard and have some unintended consequences, the big situation in my mind was for rolling over accounts.

Like if you intended to roll over and consolidate and clean house a little bit and have fewer retirement accounts to thereafter have to worry about these RMDs from, well, make sure before you do that, if you are eligible age for having an RMD required of you, that you satisfy that first before taking care of that housekeeping and consolidating and doing those rollovers. Otherwise, you could have dollars that are deemed to be a taxable distribution that you just rolled over into another tax deferred account. And well, what's going to happen then is those dollars are intermingled and IRAs is going to say, well, not our job to worry about that and keep track of them. They're all taxable again. So we don't want to have unintended taxable dollars with dollars we thought were going to be a tax-free rollover. And that's where I see the biggest implications of this, although we're going to talk about another one with qualified charitable distributions in a moment, I think.

Right now, I just want to clarify because I'm not sure that I understood. I did want to ask, is there a penalty if you make a mistake? Because of course, unintended tax consequences, is that a penalty?

So we're splitting hairs here, right? The term penalty is a specific kind of definition. If dollars come out of a taxable account after 59 and a half, there's not a 10% penalty per se, like if those same dollars came out before 59 and a half.

So there is not a penalty here, but you are creating a taxable distribution on dollars that you thought were going to be a non-taxable rollover potentially with these new rules. So it's not a penalty per se, but we don't want to, like taxes are a pain anyway. Unintended accidental taxes are perhaps the worst kind of pain. I agree. I'm just calling. I feel like taxes are a pain.

Health-inflicted injury. Yeah. Okay. So as you mentioned, though, we have talked many times before about qualified charitable distributions. These are great tax strategies for those who are charitably minded. Used to be you could wait until the end of the year to make a QCD, but not anymore really.

Explain what's going on here. You technically can, but you're risking missing out. Like any distribution from an account that requires a minimum distribution, it counts as the RMD. So you don't want to be taking money out or doing a rollover at the first part of the year and then miss the opportunity to qualify the charitable distribution as a QCD and then deduct that, write that off on the top half of your tax return.

And QCDs are, they're sort of funny anyway because there's no official form for a QCD. You sort of have to write that into your tax return and provide documentation. And even though the money is technically going to the charity, generally they send the check to the person, but made out to the charity and you have to reroute it. So they're already difficult enough.

Like don't muddy the water here. If your plan is, if you are charitably inclined in any way, you're donating to a 501c3, supporting a church, charity, nonprofit organization of any type, like you want to do this out of your IRA after 70 and a half rather than out of cash because you get the benefit then of doing this with money that you've never paid tax on and the charity doesn't have to pay tax on it either. But specifically now after RMD age, after 73, you need to be careful to do this with basically the first money out of the account over the course of the year. Because if you take out income or do that rollover and then at the end of the year, you're like, okay, now it's time for my QCD. Well, you've already been deemed to have taken that RMD.

So again, I think the rollover, the first example is the cut and dry example where it can have some unintended consequences where there is a measurable cost that we did not intend, unintended self-inflicted taxes. But this one is like better safe than sorry and easier to do it in a way that is very clear and cut and dry that this was the RMD, here was the charitable distribution. I took care of that early in the year and the rest of this is just regular distributions, not required minimum distributions.

All right. Now I want to talk through the penalties of missing an RMD because those rules changed kind of recently. It used to be one of the stiffest penalties that you could face.

Yeah. And there was like very little forgiveness on it. Basically, it was like the bookie. It was time for the IRS to collect. They had the bat, the knees were subject and they were going to take you out if you didn't pay. You do have a debt to the IRS.

It's inside the balance of your IRA or your 401k or your tax deferred account. And when it comes time that they want to collect, like they were pretty serious about that. It used to be a 50% penalty for what you were supposed to take out. So if your RMD was $20,000 and you forgot or missed it or dog ate your, your distribution paperwork or whatever, that's a 10% or I'm sorry, a $10,000 penalty. And then you still owed taxes on the full 20,000.

Now they've become a little bit more reasonable and forgiving on. So the secure act changed that it was part of the, the, the secure act 2.0, where they brought that down to a much more reasonable 10%, but you still don't want to forget it. Like don't pay the IRS more than you have to in penalties.

Just, you know, understand the rules on this, execute the RMD, get it done in a timely basis. And, and the first year that you are eligible for RMD, like the year you turn 73, I've heard people talk about, well, technically I don't have to take it until next year. You should take it in the year that it is first required. Because if you, if you don't take it the year you turn 73, then ultimately you, you have to take that years by April 15th.

But guess what? That one plus the one for that year are both due in the same year. So now you've doubled up in your taxable income for that second year. It's better just to space it out, spread it across multiple tax years and, and go ahead and take that distribution there. I suppose could be some mitigating circumstances for individual particular situations where, you know, you're going to have, you know, higher income in one of those years, but like for the majority of cases, it just typically makes more sense to go ahead and take that RMD when they are, when the IRS tells you, you need to start.

So high level RMDs affect your taxable income. What is your top piece of advice for retirees considering these new rules? Well, keep in mind like that the IRS allows you to defer paying taxes. They implemented those rules that allowed you to defer paying taxes a long, long time ago. And they didn't do it out of the goodness of their heart. They saw forward decades into the future and said, Hey, if we allow people to defer taxes now, we get to collect more on down the road.

Like they're not dummies here. And, and we need to have that same kind of long-term vision when we make the arrangements for how we're going to save our money. When we put a dollar into an account and it's got specific tax qualifications, that, that, that means rules, like we should understand those rules, not just the little advantage carried on a string that we get at the beginning, but like, what does that mean at the end of the road down decades into the future? How much ultimately am I going to have to pay? How much control and say, do I have over how much I have to distribute? So ultimately my advice would be like, have that long-term vision, understands the rules of each and every dollar and required minimum distributions, like the word requirement that it that's mandatory, you have to do it.

And like, maybe that's not ultimately what is in your best interest when you are required to make a move. So the default plan that the IRS has might not be the plan that is in your best interest. So maybe be a little bit more proactive in paying some of those taxes along the way, younger savers, uh, those that are into retirement, like you need to be careful with it because there are consequences and implications and kind of double and triple whammy compounding impacts of, of taking taxable distributions from your IRAs, uh, social security can be affected. Medicare can be affected. Capital gains can be affected all of those things, but like defaulting to the IRS's plan generally is not the plan in, in most people's best interests. So being, being a little bit more proactive and having that long-term vision with those retirement accounts, being efficient with taxes is one of our best opportunities.

It is as effective as shooting for higher returns in many cases, but with far less risk. Right. And now is the time to have that conversation while we are still sitting in historically low tax rates. So Peter, if somebody would like to talk through any of these changes, the new rules or how to be more efficient with their RMDs, how can they get ahold of you?

Yeah. Give me a call at Rashan planning for our clients. We put together personalized long-term diversified strategies and we call it the optimized retirement plan at Rashan planning. That's what you get, the optimized retirement plan. And if you would like your optimized retirement plan, give me a call 9 1 9 3 0 0 5 8 8 6 9 1 9 3 0 0 5 8 8 6.

Appreciate the opportunity to shout that out Aaron. And again, it's not just your finance, it's your future. So optimize your plan, get your optimized retirement plan, give Rashan planning a call 9 1 9 3 0 0 5 8 8 6. And uh, we, we, we continue to see market volatility just to throw that out there as well.

I know a lot of people are worried about that. Having a solid plan is going to help you whether market conditions, economic conditions, understand tax conditions and implications like all of this should be brought together as a plan. And that's going to give you a lot more stability in your mentality and peace of mind about your investments.

Absolutely. Well said, Peter, thank you. Thank you Aaron. Hey folks, Peter Rashan here with Rashan planning.

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This is the resource where you can go. You can plug in your own numbers, your information. You can slide the, the, the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be. If you default and defer to the IRS as plan versus what you could potentially bring that tax bill down to a lot of times it is a very significant savings. So if you have not yet go to the website 9 1 9 retired.com run your numbers on the retirement tax bill calculator.

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