What You Need To Know About RMDs

Benjamin Brandt: Welcome back to the Retirement Tax Podcast. I’m your humble co-host, as always, Benjamin Brandt. Joining me as always is Steven Jarvis. Steven, happy to see you again.

Steven Jarvis: It’s good to be here Ben. Always excited to talk about taxes with you.

Benjamin Brandt: Now our topic today is one of the topics that’s extremely important to our retirement tax. It’s one of the things that’s going to dictate how much retirement tax we pay, but it’s also one of the easiest to ignore. And that’s required minimum distributions. And retirement distributions has undergone some changes lately. And if you’ve been listening to the show or retirement podcast in general for a long time, you know that it used to be 70 and a half where we can only defer our IRA for so long. We’ve got to start taking out at 70 and a half. Well, those changed a little while back, and now, it’s 72. And Steven, it’s my understanding there have been some additional changes recently that you could share with us.

Steven Jarvis: Yeah. As we talk about required minimum distributions or RMDs, as we like to talk about them quite often, there’s definitely a lot of different moving pieces we need to keep in mind. That age where they start is really important, 72. And unfortunately, this is a great example of how Google isn’t always our friend, because if you go Google RMD factors, RMD tables, things like that, you’ll still get some pretty high results that are telling you that 70 and a half is when you need to start. So this is why it’s good to pay attention to these kind of things, not just wing it. There’s not always the best information out there. So yeah, moving to 72 from 70 and a half was a change a couple years ago. But in 2022, the IRS, great news, has decided that we’re all going to live longer because the amount of your RMD in a given year is based on your age, and it’s determined based on a general life expectancy. Not your life expectancy, just an average life expectancy. I’m not an actuary. I don’t know how those numbers were determined.

Steven Jarvis: But for 2022, it seems a little ironic after the last couple of years we’ve had in the world with some different events going on, but the IRS has said, “You know what? Everyone’s going to live a little bit longer.” So those factors all got adjusted. And when I talk about factors, that’s the number that the IRS is going to use to say how much do you need to distribute every year to meet your RMD? Because the IRS is only so patient. They gave us lots of opportunities to defer taxes in our working years, and now the IRS has come calling. And so we got to make sure that we are meeting that RMD each year after we turn 72 because the IRS has very nicely saved their biggest penalties for retirees. Not sure who made that choice, but missing an RMD can incur penalties at 50%. So this is something we want to make sure we’re paying attention to.

Benjamin Brandt: There’s nothing that’ll make you set up and pay attention like hearing 50% penalty.

Steven Jarvis: Yeah. It’s wild. The good news is that although the factors changed, really, they changed in our favor not only in that since the IRS thinks we were going to live a little bit longer, the RMD each year went down just a little bit, but since it went down, that means even if we ignore the fact that there was a change and still used the old tables, if anything, we’re going to have distributed a little bit too much, and so we’re not going to be at risk of having a penalty. But just want to make sure that everyone is aware that there is an updated table for 2022 moving forward. And so whenever we can, we want to make sure we’re using the most up-to-date and accurate information.

Benjamin Brandt: And the most impactful word in that RMD is the one that can get overlooked, is the required minimum distribution. We’re always able to take out more. In fact, we often take out more intentionally, like with a Roth IRA conversion is one of the most popular things we talk about. We’re intentionally taking out a whole bunch more than the minimum, and even at a date that’s chronologically before, we need to take out the minimum. And our listener question might allude to this later, but don’t think that you have to wait until 72 to start distributing. We would really strongly encourage you to lean on clients on a daily basis to spend this now. Your portfolio represents untapped retirement potential. We want to help you learn the lessons to help tap that full potential. So while it’s the minimum distribution, don’t think that you shouldn’t take out more, or you should wait that long to take it out at all.

Steven Jarvis: Yeah. Before we hit record, Ben, you were talking about some of the most impactful moments you’ve had with clients is when you’re able to have this conversation of, “Great. You’ve worked hard your whole life to accumulate this wealth. And that’s fantastic. But now it’s time to shift the mindset from defer, defer, defer, to how do I make the most out of this life while I have it?”

Benjamin Brandt: And that’s a tricky conversation to have. Sometimes as advisors, we really want to focus on the tangibles. “I saved you this much in taxes. Your portfolio went up by that much. Your spending went up by that much.” But sometimes it’s the intangibles that can be really impactful, like the same synapses that connect in our brain that make us save up a few million dollars over the course of our lives are the same synapses that tell us not to spend that money. We saved it up for a reason. Now we’re at the reason, but we still don’t want to spend it because we connected those wires in our 20s and they’re hard to rewire or disconnect. So then I get to have really… And there’s there’s boundaries at play. Not everybody wants to hear this conversation. So I’m very dogged about it.

Benjamin Brandt: Alluding to our prerecorded conversation, sometimes I have to lean on clients to say, “Yes, take your daughter to New York for that trip. I want you to live large. I want you to get a nice hotel. I want you to fly first class. These times are fleeting. You might only get a half of a handful of times to make these kind of memories. I want you to really go for it.” So I know it goes against every fiber of your being to check a bag at the airport or to hire an Uber to get there, let alone pay twice or three times the price for first class. But it’s part of my job to lean on you. And maybe you don’t do first class, maybe just do economy, but I’m pushing you outside of your comfort zone to make these memories. It’s easy to forget that that’s what we saved up this money for in the first place. So back to what we first talked about, yes, it’s required. Yes, it’s minimum distribution, but we really want to encourage you to spend as much as you safely can and not get killed in taxes.

Steven Jarvis: Yeah. Like everything we talk about on this show, you need to start with what your goals are, what your needs are. And then the tax planning just becomes a piece of accomplishing that. Taxes are never the primary reason we do something. But Ben, you make a really good point. This is a huge mindset shift not just on taking the trip to New York, but just in general, how we think about our money, our savings, our taxes, when we get to retirement versus during our earning years. And for a lot of people, hopefully for many of our listeners, there is a gap between when we retire and when RMDs start taking effect at 72. I hope for many of you, that’s the case.

Steven Jarvis: But we have to have this mindset shift from defer, defer, defer to, okay, now, not only is it time to enjoy this wealth that we’ve created, but from a tax planning standpoint, we are going to start doing ourselves harm if we just let the default happen, if we just wait until RMD age and then just do whatever the IRS tells us. We have an opportunity in those gap years to be proactive, to be intentional, and to not just let this happen to us.

Benjamin Brandt: Yeah. We can get a lot further in life being proactive rather than reactive. I forgot when I was telling you my first class story, the phrase that reminded me to have this conversation with the client. And it was someone that told me this. And forgive me if I’ve said it on the show before, but it was so impactful it stuck with me, that, “Steven, if you don’t fly first class, your kids will.” If we’re depriving ourselves in retirement of making some of these memories, we’re just saving this up for the people behind us that are going to use it, and they’re not going to look at it the same way that we did because we saved it up and they didn’t. So that always stuck with me. If you don’t fly first class, your heirs will. So I’m re-tangenting my tangent, but I’ll try to get back on track. So what was the question?

Steven Jarvis: I think that was the question is whose kids fly first class? My kids do not fly first class. Not yet. So there’s a couple of things we want to make sure that we’re keeping in mind when we think about RMDs. And to this point, there might be a gap when you retire and when these RMDs kick in. It’s important to remember that these are easy to forget. If you retire at 50, 58, 60, 65, I mean something short of 72, when you first retire, “Oh, that’s going to come someday. Of course I’ll remember it. Of course, I’ll have this in place.” But like what you talked about, there are huge penalties for missing this. And if we’re just, “I’ll get to that someday,” that is not an intentional plan. And so we want to make sure that not only do we have a plan as we’re approaching RMD age, but then when we hit RMD age, that we have a plan every year for making sure this happens, and really to take some of the stress out of it.

Steven Jarvis: I like to be looking at this early in the year and then making sure it’s resolved well before December 31st, which is the deadline at the end of the year. But there’s nothing that says we have to make that distribution on December 31st. I work with a variety of financial advisors. Some of them will institute internal deadlines for their clients to say, “Hey, we’re going to have this done by November 15th so that we don’t run into any issues at the end of the year.” Those of course are arbitrary, but they’re helpful to say, “Let’s make sure we had a plan. We execute it and no one’s got to worry at the end of the year.”

Benjamin Brandt: Yeah. I preach to my clients the perfect RMD plan is a plan that where we never have to think about RMDs. The perfect RMD is $1 underneath what you were going to spend anyway based on your written financial plan. So maybe we do the perfect forecast using the perfect software, which of course doesn’t exist. It’s all made up. And as soon as you hit print on the plan, life changes. So we’re trying to operate within general guidelines. But let’s say we think your RMD is going to be $96,000. You’re 60 today. When you’re 72, $96,000 your first year. So what we could build a plan, the perfect plan would be, you’re already going to take out $100,000 that year because we’ve recorded specifically, explicitly what you’re going to do with that money. You’re going to give some of it away. You’re going to make memories with some of it. You’re going to do whatever that might be. The perfect RMD happens already behind the scenes.

Benjamin Brandt: Now we can also build a plan based on the opposite of that. The opposite of that would be, “My RMD is $100,000 first year, but my plan, I only need to spend 60,000 for my plan.” Well, now we know that we’re going to artificially spike our income and thus artificially spike our income taxes where we could have otherwise avoided it almost entirely. So that’s why I want to think in the context of RMDs is how can I build a plan so that they automatically happen behind the scenes without us even really needing to think about it? So then it wouldn’t matter if it paid out in December or January or when. Because we’re taking out monthly and we’re doing it in a really intentional way, the RMDs self-satisfy.

Steven Jarvis: Yeah. Love it when a plan’s that easy to follow. Now, when we talk about RMDs, quite often, the conversation will focus around, “What’s the amount? And did I distribute that much?” That’s really important. We want to make sure that we’re not getting hit that 50% penalty.

Steven Jarvis: There can be some nuances that get missed, though. And again, they’re very painful if they do. And so we want to cover a couple of things we got to keep in mind when we’re putting that plan in place for how we’re going to take care of our RMDs. The first thing to keep in mind is that just like IRAs or individual accounts, RMDs are something we have to consider per person for a married couple. So if we have Bob and Sue and Bob turned 72 first, and so we’ve been taking money from his account, and then Sue turned 72, we can’t say, “Oh, well, we took 50,000 from Bob’s account. So Sue’s covered as well.” These are individual accounts. So we have to consider it for each person and make sure that we are taking the distribution from each person’s respective accounts.

Benjamin Brandt: Yep. That’s an easy thing to forget about when we’re talking about retirement distributions. When we think about the plan, it’s two spouses oftentimes. Let’s say it’s $1 million. And based on all of the Roth IRAs, joint accounts, IRAs, everything together, $1 million, they’re taking income, filing taxes jointly. We think of it together, even though it’s individual. As we get closer to that RMD age, we’ve got to reverse course and think about it individual again. So one way to anticipate that is maybe there’s $1 million in household assets, but 700,000 is from Spouse A and 300,000 is from Spouse B. So what we can actually do is let’s say we’re taking out 10,000 a month just for easy math. What we should really do is take 7,000 from the $700,000 account and 3,000 from the $300,000 account, because that’s going to keep both of them on that same trajectory of growth. And that’s going to make sure we don’t run into any difficulties when it comes to RMD age.

Benjamin Brandt: To make this an extreme example, let’s say it was $1 million in household assets, 900,000 Spouse A, $100,000 Spouse B. It would be really easy just for simplicity’s sake, and maybe just laziness, to say, “We’re just going to take all of our distributions out of the 900,000. That’s the lion’s share of our savings. We’re just going to take it all out of here. I don’t want to deal with 10% of my money coming from the smaller account and 90% coming from… Just take it all.” Now what’s going to happen is you’re going to forget about it because that’s what happens in life. If something is able to be forgotten, we forget it because we focus on what’s the task at hand.

Benjamin Brandt: What’s going to happen now is when you get to 72, you’re going to have… What was the number, Steven? Was it $3,600? Something like that? That we’re going to have to take out of that smaller IRA that we could have been taking out as we went. And now that $100,000 IRA is larger. The RMD is larger. We’ve maybe overspent the bigger IRA. It helps to go through that extra step even though it’s two amounts coming into your checking account every month instead of one. Take we would call a pro rata share out of each one, and that’ll help us head off some of these potential pitfalls as we go.

Steven Jarvis: Yeah. So we definitely have to look at this for each spouse. And then in a lot of situations, there’s going to be another level of complexity. And that is what type of accounts are we taking the RMD out of? The simplest situation, it’s going to be Spouse A has one IRA, Spouse B has one IRA. And so they’re each going to take an RMD from their account. But as we start layering on different types of accounts, the rules aren’t even consistent. For example, if Spouse A has three different IRAs, we can aggregate those and we could take all of the distribution out of one of them to cover all three of them. And so if they’re just IRAs and in all in the same person’s name, that’s fine. We can aggregate them, take it out of one account.

Steven Jarvis: But if Spouse A has three IRAs and a 401k, we can still aggregate the three IRAs, but the 401k can’t get lumped in there together. So again, it’s not just about what’s the total dollar amount. It’s are they getting taken from the right places as well. And so to make this even just a little bit more complicated, it’s not the, “Hey, we can aggregate the IRAs, but what if they have multiple 401ks? Can we aggregate those?” Nope. Since the IRS wants us to make sure we’re thinking really hard, IRAs can be aggregated for an individual. 401ks cannot. So if you have two 401ks under the same person’s name, you have to take a separate RMD from each one.

Steven Jarvis: And so this is where, especially for our DIYers listening, as you get to RMD age, maybe this is a good prompt for saying, “Hey, this year, maybe I talk to a professional, get someone else involved so we make sure we get set up and on the right track.” Because again, these penalties are not insignificant if we’re missing these things. And those are especially unfortunate when we missed the RMD because we took it from the wrong account, because we’ve still distributed the money we thought we needed, and now we’re going to go have to go back and take an extra distribution and potentially pay a penalty to make sure that we’ve got everything covered.

Benjamin Brandt: Yeah. Not that I want to take the wind out of the sales of DIY investors, but, but of the DIY investors I’ve worked with, what’s most common is to have several different IRAs, however you got there, different employers, things like that. So when you think about my required minimum distribution, most people think I need to take 4% out of each portfolio. But in reality, what I’ve seen is maybe one of our IRAs is at E-Trade or something, and I’ve got significant stock losses in a position that I been holding onto forever. And I actually don’t want to sell those at a loss.

Benjamin Brandt: Well, I can actually reach over into my other IRAs and make that good in another way. Or maybe there’s some sort of a nuance in a retirement plan that you want to preserve those assets, or there’s a guaranteed investment return, or there’s some sort of nuance that’s interesting to that account that you want to preserve. I’m thinking of in the TSP or something where they have a guaranteed minimum rate of return or something like that. Every plan has different nuance. But for the DIY investors, it’s something to investigate if you have multiple different IRAs. Do you want to take 4% across the board, whatever your RMD is that year, or do you want to double up or triple up with one or the other? So something I think about when I think about people that might have many different IRAs and what the uses of each one are.

Benjamin Brandt: Or could be a reason to consolidate as you approach 72. It’s just one less thing to worry about. If you’ve got the same Vanguard total stock market index fund at four different IRAs, and you’ve never consolidated just because it’s a hassle to do, well, if you’re getting closer to 72, maybe that’s the nudge you need to simplify your life a little.

Steven Jarvis: Yeah. Lot of points in life where we can make these decisions. That’s a good prompt for saying, “Okay, can we simplify this a little bit more?” Because again, I mean, to your point earlier, Ben, when we get to that retirement age, we want to spend as much time as possible just enjoying life and not having this headache we got to come back to of, “Well, did I get my six different RMDs taken care of?” Let’s roll it into a one account and be done with it.

Benjamin Brandt: And not to mention, you are getting older if we’re talking about RMDs. In most marriages, there is one spouse that is offense and one spouse that is defense. If you’re the spouse listening to this, you’re probably the offense spouse. There’s a really good chance your spouse has no interest in offense whatsoever. They’re fully in the defensive zone. So while you might enjoy your Excel spreadsheets with your 29 different IRAs, there’s a really good chance that they don’t. So we need to think about, “If I’m going to outlive that person or not, maybe I need to make their life a little simpler as well.” And so if this is you, this resonates with you, you know that I’m talking to you. I’m thinking of a couple of clients in mind. Think about whoever you’re going to leave this money to, make their life simpler as well. Thinking about last week’s episode.

Steven Jarvis: All right. We want to transition to listener questions. So just a reminder for everyone that you can submit your own listener questions. We’d love to highlight them on the show. If you go to retirementtaxpodcast.com/questions, you can email us a question. You can send us an audio question. We love hearing from our listeners. So go out and submit to your question. We’re happy to talk about it. So this week’s listener question says, “For RMDs, is it okay to write one check per year in the November-December timeframe, or do I have to pay throughout the year?”

Benjamin Brandt: Yeah. So you do not have to pay throughout the year. You can just do one time. If we do our withholdings properly, I think we’ve talked about in previous episodes, the IRS loves withholdings because they look at it as equally distributed throughout the year. So if we take our required minimum distribution from our IRA, we’ve got the withholding dialed in correctly, we just have to take that once throughout the year. If you want to let it grow as long as possible, you could do it in December. I think there’s different logic to that. I wouldn’t have it pay out the last day of the year because if something gets messed up there’s that potential 50% penalty we’re talking about. For my clients, I’m encouraging them to spend more than the RMD, but on the odd case that they’re not, I want them to treat their RMD like an income tax refund.

Benjamin Brandt: So you get a lump sum of cash at a certain period of time throughout the year. What month in the calendar would you like to have an extra X thousands of dollars? Maybe it’s when your property tax is due. Maybe it’s when that insurance policy, your homeowners or your long-term care insurance is due. Maybe it’s your birth month. Maybe it’s your kid’s birth month. What time of the year would you love just an intentional, unavoidable cash infusion to help make your life a little bit better that month? So think about your year. “My birthday’s in September. I’d love to have an extra X thousand dollars,” or, “We always go on a trip in June. Wouldn’t it be great to just have an automatic X thousand dollars show up so that helps me spend it?”

Benjamin Brandt: Think about your year as a series of 12 months. Which month would you like a little extra cash? So think about it when you’re younger, your tax refund, how you’d pre-spend that money in your mind. Your RMD is now that. Treat it accordingly.

Steven Jarvis: Perfect. Yeah. The deadline is the very end of the year. You can take it whenever you want to. The goal really should be, “Do I have an intentional plan?” So love that recommendation.

Benjamin Brandt: Yeah. We’ve had friends in the past or clients in the past that say, “I know that this time of the year in the church year, they’re always fundraising for some musical project or something.” Whatever speaks to you, then you wish you had a little bit more money that time of the year, that’s what you should line your RMD up with.

Steven Jarvis: Perfect.

Benjamin Brandt: Well, so that’s all we’ve got prepared for you for this episode of the Retirement Tax Podcast. I had a blast as always, Steven. I hope you did well as well. And until next time, remember not to let the tax man hit you where the good Lord split you.