How to Optimize your RMDs in Retirement

Peter, good to see you.

Welcome back, everyone. Today, we're going to talk through how to optimize your RMDs in retirement. So those required minimum distributions, whether you need the income or not, the government will force you to take those distributions so they can collect their taxes, of course.

But proactive planning means that you control your tax liability. So let's start with what we need to know about RMDs. The rules changed recently with the passage of the SECURE Act. Yeah, and the SECURE Act 2.0 further changed them.

Now, I mean, let's get right down to it. RMDs are never optimal. So they are a mandate so that the IRS can collect the taxes that they are owed. So there's sort of two camps when it comes to retirement accounts, specifically tax-deferred retirement accounts. There is one camp that needs the income anyway.

And the question is, well, how do I create this income in the most efficient, sustainable way? And then the second camp has other sources of income potentially and doesn't necessarily really need the income from their IRAs or 401Ks or retirement accounts. Well, that's the camp that is affected and impacted by RMDs, required minimum distributions. These are the distributions that the IRS eventually mandates so that they can collect the deferred and delayed taxes on those account balances.

Yes, you've got a debt to the IRS right inside of your IRA. And if you don't believe that, just wait till the RMDs, a whole bunch of alphabet soup there. So the SECURE Act original version pushed the RMD age from 70 and a half out to 72 for anyone born in 1949 or before. And then the SECURE Act 2.0 said that if you're born in 1950 or later to 1959, it's now 72. If you are born in 1951 through 1959, it is going to be 73. And then if you are born in 1960 or later, it's 75. So we've got some folks that are not yet taking RMDs that it's actually even further out past the current age.

It's now 73 for most folks, right? So you've got to know when you need to start taking those RMDs and you've got to plan them out strategically so that you can make the most of what is a less than optimal situation for folks that are impacted by RMDs. Right.

So let's talk through those three strategies then to optimize. I say that in quotes, those RMDs. The first strategy, of course, is Roth conversions, because when you have those Roth accounts, it eliminates RMDs altogether.

Well, yes, it does on the dollars that you've converted, but oftentimes we don't convert over a full account balance. So there's still some residual amount left inside of the IRA. RMDs are still going to be required out of that. And the Roth conversion doesn't eliminate taxation, right? That in of itself is a taxable event, which is the end goal of the RMDs anyway.

It's just that you do it proactively and you do it on your own accord, which is oftentimes you can be a little bit more effective and efficient than simply deferring and defaulting to the IRS's end plan. And with the tax brackets, the different amounts that we look at within each tax bracket, with Social Security taxation, with Irma, all of these things need to be factored in. And generally for somebody that is going to be affected by RMDs rather than just taking distributions because they need them, those kind of people are more often the ones that would be impacted by Irma, which is means testing of your Medicare premiums.

And so we need to be real careful when doing those Roth conversions that we are still doing them as efficiently as possible and where possible, avoiding Irma. The tax brackets, if we are in the 12% bracket, not to get too much into the details here, I generally have a hard time telling people that it makes sense to push themselves into the 22% bracket unless RMDs are going to force that in very short time anyway. Between the 22 and the 24% bracket for married couples, the 22% bracket sort of caps out right about the same place where we start to encounter Irma anyway, right at above $200,000. So that one makes sense to not really leave much available room within the bracket, to try to maximize that bracket with Roth conversions and get dollars out of the tax deferred account where RMDs are going to be a factor. I don't love pushing people into the 24% bracket where they also are likely to encounter Irma. I have some folks say, well, if tax laws change, the 22% brackets going to become the 25. So why wouldn't that make sense? But we have to factor in the increases in the Medicare part B and part B premiums into that gets a little complicated.

We can run those numbers. We've got some pretty advanced tax planning software, but that's getting getting into the weeds a little bit, but important for somebody to know that just the tax bill on those Roth conversions is not the only factor to consider there. And Aaron, it does not completely eliminate RMDs on those Roth dollars because maybe not in your lifetime, but if that Roth account does become inherited by next generation, there is still an RMD that they must liquidate that account within 10 years.

Once, once it is an inherited account. So still a required distribution, it's just not taxable to them at that point in time. All right.

Strategy number two plan for strategic withdrawals before reaching RMD age to manage tax brackets, as you were mentioning, and then potentially reduce the size of future RMDs. Correct. Yeah.

And, and it's a little bit of splitting hairs six and one half dozen. The other Roth conversion is essentially the same thing, right? Is planned withdrawals. It's just the destination bucket that we are putting those dollars into then begins to grow tax free for us.

So if we look at them in, in comparison on a scale, I think that usually it's more advantageous to go ahead and do the Roth conversions, but there are some cases where just taking proactive withdrawals makes sense. If you don't need the money and are going to reinvest it anyway, then likely we would look at some place where we are reinvesting into an asset class that can give us a stepped up cost basis. If that account does end up being inherited. So again, this is proactive tax planning. That's what RMD management is all about. And we've got to look at not only the taxes immediately on getting dollars out of an IRA, but then what taxes are going to be generated when we reinvest those dollars. And then last of course, delay taking social security, which can reduce your need for larger withdrawals from your retirement accounts in your early years of retirement. Yeah, but the RMD factor isn't really an early years of retirement anyway.

I mean, if you're talking about the decision on social security, this is a decision between 62 and 70 RMDs don't come into play until 73 to 75 and beyond. So yes, delaying social security may make sense in certain circumstances, but delaying the social security for somebody who has retired early usually requires them to withdraw on assets. And I have to put those two things on a balance as well, because social security, you can't reach into and pull out extra if unexpected expenses come up or in case of emergencies. And if you pass away, social security is not inherited by next generation beneficiaries. Those are the things that your personal assets do. So does it make sense to delay social security and spend down personal assets or vice versa? We've got to crunch the numbers. And usually if you're spending down assets, if we don't do that and we look at getting some kind of return on those assets, it puts the break even point for social security that much further out.

So again, it's not like any of these factors are in a vacuum all alone as the single variable that we can test. We've got to understand that all of these things are coordinated with your comprehensive financial picture and figure out what is the most optimal or expected optimal path forward with any of these strategies here, which by the way, Aaron, another good one is QCDs. We've done a previous episode just on the qualified charitable distribution of if you are charitably inclined, this is a fantastic strategy for your RMDs. If you're going to gift money away anyway, why not do it out of your IRA where you've got truly tax free money rather than out of your bank account or your checking account where you've already paid tax once, do it out of your IRA and keep the money that you've already paid tax on from your checking account. A couple others, I mean, buying life insurance, reinvesting into those asset classes that have that stepped up cost basis.

There are things that we can do about RMDs and if it is a consideration that you face, you certainly want to talk this through and figure out all of the strategies that are available and evaluate which ones are the most optimal for your situation. Because there are so many moving parts, Peter, you have a website dedicated specifically to this topic. Yeah, 919retired.com and it doesn't get into the minutia of which strategy is going to be best for you because again, that involves a detailed forensic analysis of all the assets and income and where everything's at. But 919retired.com can give you a great beginning understanding of what taxes on your retirement accounts might look like, what you might owe over the course of your lifetime when you take RMDs, if you're to reinvest those assets and eventually on what inherited balance is left from your tax deferred accounts, you can see what that tax bill might look like and then side by side, you can see what we might be able to get that bill down to today and this can be the difference in a significant amount, right?

Account balances vary so I can't quantify a specific number but oftentimes it is a 50% savings or more on the amount that we'll pay in taxes on the account balance, whatever it is today. That's a big deal. All right, Peter, thanks so much for your time today. I appreciate it. Always appreciate it, Erin. Again, go to that site. You can put in your own numbers, crunch the numbers, see them side by side yourself.

919retired.com, 919retired.com. All right, thanks, Peter. Hey, everyone, Peter Rochon here. Hope you enjoy the content. As always, make sure that you like, subscribe, share the videos with others that may find this information helpful and as always, you're welcome to be in touch or to submit questions or comments. You can comment below the video anything that you'd like to see or hear shared on our YouTube channel and in future videos. If you got a topic that you've been thinking about or is of concern for you financially, be sure to let us know. We'd love to help you by discussing it on the channel. Appreciate the continued views and the likes and the subscribes, the shares, the comments, always helpful. We look forward to getting you the information that you need.

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