Navigating the Waters of Required Minimum Distributions (RMDs) with Dylan Stewart (Ep. 24)

wealth management is not just for the wealthy everyone is entitled to their best retirement possible welcome to the retirement engineer with Jim Cruzan your path to a bigger Bolder retirement brought to you by Kaden wealth management a firm that specializes in serving the mobility technology industry in this podcast we help you maximize your resources and engineer your best retirement through a process-driven approach so you can get the little things right drawing from years of expertise Jim and his guests will simplify complex wealth management strategies and explore actionable ideas to help you protect your hard-earned wealth and take control of your future now on to the show welcome back to the retirement engineer I'm Patrice sakur joined by your host Jim kisan today we have a special guest with us Dylan Stewart he's from the Kaden wealth management team Dylan is an essential part of the Caden wealth advisory team as a certified financial planner and certified public accountant Dylan is going to help us unravel the complexities of required minimum distributions or rmds now whether you're nearing retirement age or planning well in advance understanding rmds is crucial to avoid unnecessary taxes or penalties and optimize your retirement savings so let's get started and navigate these Waters together Jim well thanks Patrice and we're so happy to welcome Dylan as someone with extensive tax experience as well as a highly regarded member of the team I thought there's nobody better here at Kaden to kind of talk a bit about the intricacies of retirement planning as it relates to minimum required distributions it is the backbone to a lot of the cash flow that our clients deal with in retirement so I thought I would throw it to Dylan first to kind of talk a little bit about unpacking these basics of required minimum distributions and their their significance as it relates to cash flow planning and retirement so Dylan take it away thank you so much Jim I appreciate being a part of this podcast as well as part of your advisory firm I definitely feel like I found home here working with you and alongside your team so essentially with required minimum distributions the government more or less for a lot of your pre-tax retirement accounts essentially as said you know over the years you've accumulated all these assets Within These accounts and at a certain point we need to turn on the spigot of sorts where you have to take these distributions at least a minimum distribution in order to ensure that the federal and depending on your state the state get some tax revenues so in terms of required minimum distributions it's very important that we understand kind of when that spigot is being turned on so that we can do a lot of planning kind of before it's turned on as well as while it's turned on because because we've had a lot of success stories with clients over the years whereby taking a look and seeing where their future income projects to be while Social Security and required minimum distributions are turned on and by kind of planning for the future to see where they're at it makes decisions today much easier to make uh for example uh we often have clients that will be in kind of higher marginal tax brackets and by seeing that noticing that as a future outcome that is likely to proliferate by taking advantage of even before required minimum distributions are turned on we can normally get some money via Roth conversions over into an after tax bucket and compounding so that later on when required minimum distributions start they aren't having to take as much they're not at as high of a marginal tax bracket and it certainly helps with winning the tax game if you will so in terms of some other situations we've had some good ones and then we've heard of some uh not so great ones out there whereby clients have an old 401k and they're rolling it into to an IRA um they're supposed to be taking their their rmd but there's a bit of a shuffling of accounts so usually any of the calculations for rmds kind of start off the previous year's ending balance but when you're adding additional monies into retirement accounts you got to also consider those new monies coming in so there's ways to get around any penalties of Mis required distributions you generally want to do it within two years but certainly the idea is to make sure they all get distributed on time and kind of have your tax planning situation in order just to add to some of these other mistakes the IDE is we want the best possible outcome with all of our clients and sometimes as we're talking to new clients those that are new to the firm and kind of looking what they've done over the past especially if they're kind of beyond that required minimum distribution age uh we sometimes see issues and errors and as you said there's a kind of a window of opportunity to kind of go back and fix those but not every situation is perfect there are issues that we notied things that happen that probably could have been avoided Beyond just simply forgetting about taking a required minimum distribution can you think of other kind of problems mistakes From The Trenches so to speak yeah there's a few I that definitely come to mind one of which is firstly when they start and a lot of clients they've heard over the years that it starts at 70 and a half that was since moved up to 72 and then even more recently moved to kind of 73 if you're born between 1951 and 1959 and then kind of 1960 or later it's essentially 75 so one of the big things that we've seen is a lot of clients kind of being in this situation what's called a social security tax torpedo whereby if we're taking required minimum distributions now not only is that going to be taxable but there's potentially a chance whereby they'll also now have very little or previously had very little Social Security being taxed but now that's being taxed as as well so it almost feels like this required minimum distribution is being double tax so there's some ways around that the first year when you take your required minimum distribution you're normally able to delay it essentially into the first quarter of the following year so kind of doubling up in the second year of required minimum distributions is something that we've seen that has created pretty good outcomes for clients and then another one is where our firm is able to help a ton with tax Prof foras to kind of see where your income will be but those nasty Firma income related monthly adjustment amounts basically you'll have to pay more for the same Medicare as everybody else if you kind of trip these wires if you're $1 over certain income thresholds it'll make it so that you owe a whole lot more for Medicare so by doing a bit of tax planning understanding what your required minimum distributions are where your other income sources are coming from We're uh better able to ensure that you know we're either taking those required minimum distributions thoughtfully or we're doing other things that allow the required minimum distribution amount to go down to keep your income down so we're not bumping you up into higher Irma brackets as it relates to Medicare let's continue on the subject of things that might go wrong we talked about not taking into consideration things like Irma things like the Social Security torpedo all these things are things that require planning it requires cash flow management it requires literally projecting out kind of what the situation will look like down the road make some projections on taxes and then make some adjustments it's truly eye openening when we can show clients where we have the ability to potentially reduce tax liability in the Aggregate and certainly Down the Road avoiding some of these stumbling blocks by planning ahead and taking decisive action now which might be many many years away from the rmd but there are other things that trip people up as well and I just want to focus on two quick examples they almost as if they're the opposite side of the coin the first problem that we see sometimes with people who are currently at the age of required minimum distribution is they don't understand or they've heard that well as long as I'm working I don't need to take my required minimum distribution that's partially true if you're currently working and you're over the age of required minimum distribution let's use this year as an example and that would be 73 and you're working for an employer full-time and he's providing a 401k to which you are participating you can delay the required minimum distribution off of that that said you cannot delay the required minimum distribution on any of the IAS that you have nor can you delay the minimum required distribution on any dormant 401ks you might have out there as well so it's also important as we're planning and we're moving closer to the required minimum distribution age we may want to look at doing some consolidation we may want to look at moving some of these assets to provide better flexibility as an example if I have a client who has a few the Minimus IAS bulk of their retirement is in a 401K with the same employer he's had throughout still working still participating with no desire to retire anytime soon so this is somebody who's still fully engaged at 73 it may very well make sense depending on how those IAS were structured whether they were roll outs or rollovers from other 401ks we might want to roll those back in to the employers 401K that way he has no IAS he's still working and he can then delay taking required minimum distribution so there's a lot of fuzziness in what you can and can't do there the other issue has to do with aggregation and what that's all about is if you are taking required minimum distribution and you have a whole bunch of individual IAS out there you don't have to take the required minimum distribution from each and every Ira you can simply total up the ending balance as of last year figure out what the required minimum distribution is and you can assign that to any one of or many of those IAS you could take it out of one Ira as opposed to half a dozen the trip up is you can't do that with 401ks so if you have multiple 401ks that are sitting out there even though you can aggregate the totals in the ira you can't do that with 401k and each and every 401k will need to process their own rmd this is a huge trip up we find this to be a mistake and often when we're aware of it it's a new client who's made that same mistake year in and year out so it's something to consider as well Dylan did you want to add something to that no actually exactly your second point was exactly what I was going to say about how the 401ks there definitely isn't as much flexibility but with the IRAs there is but to your point potentially if they're still working getting everything back to a 401k or a 403b can minimize the amount of required minimum distributions while their income is still so high from their employment but similarly with the IRAs the fact that there may be multiple out there but we only need to take from one account the IAS are a bit more flexible in that sense so so yeah it's definitely very dependent on the client situation what is best for their family themselves their financial future so so yeah thank you so much much for sharing that Jim absolutely so now that we've talked about some of the things that can truly go wrong and certainly impact not only retirement plan cash flow but tax liability let's spend a little bit more time and I know Dylan you've touched on this already how proper planning planning ahead can really make a huge difference both in terms of tax liability avoiding these Irma Limits The Social Security bullet Etc before I ask you for a couple more examples of that just to be clear this the Social Security torpedo what is this thing that we're talking about social security is a really weird animal in that the way it's taxed and how we calculate the tax on that is unlike anything else it's not as simple as what earnings I have or what amount of money I've received it doesn't even have to do with your tax bracket it's kind of a madeup number and depending on where you are with respect to that number you either pay nothing for Social Security or you include Half of the proceeds as taxable income or you include 85% of what you receive as taxable income and this torpedo thing that we're talking about is if you're oblivious to this depending on the amount of income you're taking in any one given year not only are we dealing with a higher tax bracket potentially because now you have more income and you're paying more in taxes but now you're also including an even greater amount of Social Security which can dramatically tip this thing in favor of the IRS so we want to avoid that all all together so Dylan uh let me just ask for a couple couple other examples of cash flow planning gone right yeah to your point Jim generally it's not the best time to start considering how to best manage required minimum distributions when you're about to start them it's usually upon retirement getting a plan in place understanding where future income projects to be and where you're at today in addition to your lifestyle and spending needs to determine kind of a plan from there to to Really execute over let's say for example a client retiring at maybe 60 we know somewhere Social Security is going to get turned on 62 if they're not in the best of health or there's a major market downturn and we're trying to take some stress off the portfolio 67 for a lot of folks full retirement age the amount at which they're able to they have a spouse kind of protect the amount that's going to them if they were to predecease a spouse and then ultimately 70 if you're still in pretty good health the account's holding up well all that type of stuff so we know Social Security is going to get turned on and then some point thereafter with required minimum distributions at 73 or 75 well you've got a lot of these very fixed income items that are going to be coming down the pipeline so by us going in determining how much you need to spend figuring out where to best spend those money's from determining where a future expected kind of tax rate is and then comparing that to today we can get some better Solutions as to you know should you be spending from your IRA or from your brokerage account should you be doing WTH conversions will you be at a much higher tax rate down the road and the one big thing with that is is sadly as advisers and it would make my job a whole lot easier Jim if I had a crystal ball if I knew where tax rates were going to be tomorrow so in many ways you can kind of compare to the current tax tables to previous tax tables and kind of get a good idea but for a lot of folks the fact that Social Security is getting turned on required minimum distributions are getting turned on chances are they're going to be at a much higher tax rate marginal tax rate in the future so definitely trying to possibly spread out some of those incomes spread out some of those monies those taxable dollars over the course of their kind of 60s well before required minimum distribution start because at that point there is still some planning that can be done with qualified charitable distributions when do we take your first required minimum distribution but for the most part the best planning will be done before they start not when they start very good thank you let's get into maybe the weeds a little bit you know we talked a moment ago about delaying or not delaying minimum required distribution I suppose there are some advantages to delaying especially if that first year there might be a huge increase in taxable income and you're doing everything you can to delay or reduce that taxable income maybe you sold a business maybe there was a huge capital gain maybe you retired the year before and you got this huge pay out in a non-qualified Deferred Comp or executive compensation situation where you're looking at finding ways of just tossing income to another year what we have to also remember though for most of us if we don't take it the first year and we accept the delay which is oh we can pay the first R&D by April 1 the following year well guess what You' got to take two of those distributions that year and for most folk those who are kind of middle class having two large distributions from the IRA in a single year might do all those nasty things that we're trying to avoid a torpedo social security and at the same time kind of blow through some of the Irma limits where now unbeknownst to you you're going to be paying more more for the Medicare that you enjoy beyond that let me take just a moment and talk a little bit about the kind of the nitty-gritty so okay we're at that age we're going to take a distribution what does that mean well for most of us we deal with the IRS there's a distribution table there really two tables that we work with there's a joint and Survivor table and then there's a unified table for most IRA rmd distributions it's going to be the unified table on rare occasion if a spouse were to inherit an IRA from their spouse and there was a huge age Gap there may or may not be a reason for the spouse to then start taking distribution and they probably more than likely would use this joint table we're not going to get into the Weeds on that that's a very special situation for most we're on the unified table and unfortunately the way this works is the older you get year by year the factor decreases which means that the amount as a percentage you have to pull out increases but just understand the first distribution you take from a percentage basis is the smallest distribution you're typically going to take and it really starts to ramp up let me just give everybody an example of what that looks like and then maybe we could talk a little bit about what can be done with these rmds from the standpoint of okay we got to take them does that mean we necessarily have to spend them so just to give everybody an idea that first year when you're 73 the factor is 26.5 so 1 divided by 26.5 is about 3.77% that's the percent you got to take out of your account if you've got a million dollars you're going to have to take $ 37,700 you can see why pushing two distributions in a single year might be a big tax issue but just to give you an idea how quickly this ramps up by the time we're age 80 that factor drops to 20.2 which is 4.95% just a hair under 5% I was just talking to a client yesterday he's in great shape he's been a client for 35 years he's turning 87 and his factor is 14.4 which means he's going to have to take just a hair under 7% out of the account so you can see the problem this creates right the older we are the more we have to take out so at some point if the account is being managed somewhat conservatively because we don't have a whole lot of time to dig out of big drops we're now taking out as a percentage probably more than the portfolio has the ability to grow to so this portfolio starts to diminish so the issue then becomes well what do we do with this stuff and there's some really cool things that be done if we're not spending it for legacy for charity for all kinds of things so Dylan let me just throw it back to you for a quick second and let's talk about what some of those other things that could be done things that we've had our clients do with some of this money Beyond just well it's I've got to take it out I might as well spend it yeah thank you Jim and that's a question I get all the time from wonderful clients and essentially there's a few main options that I often see clients kind of take with that first one definitely the most common one is taking that money essentially the client saying I'm not needing it this is a much larger amount required minimum distribution amount that's needed for any of my LIF lifestyle spending many clients you know have pensions have Social Security even cash on the sidelines whereby they're not needing those monies and the big first one the taxable kind of brokerage account essentially an account that's very good to receive assets especially later on in life as there's compounding in that account when received by an heir getting a stepped up basis so they're receiving it essentially tax-free you're able to invest in this account slightly different it's definitely a different tax nature from uh an IRA you can buy sell Buy sell buy sell and there's no tax ramifications until the money comes out of the account whereby with the brokerage account it's much different you're really kind of nickel and dimed along the way but still it has some of its own merits and benefits for example one that I always use with clients let's say hypothetically you bought $100 worth of Apple stock and in let's say a year and a half from now you go to sell it it's worth $200 well that $100 of gain is is considered taxable income you held it for over a year so it gets a little bit more favorable of a tax rate than likely where you're at with your required minimum distributions your income out of an IRA but in addition to that if you sold it you owe some taxes if you didn't you don't but you also have to pay taxes on any dividends uh if you were to buy a bond fund a loan to company fund essentially any interest payments also taxable so again kind of getting nickel and dimed along the way with that account but it's a very good count to have increased liquidity and for possibly future years where maybe an emergency happens you have a larger expense you want to get a new deck you want to buy a boat you want to get a new car and that brokerage account really allows for a lot of additional tax planning down the road where we can still try to keep you at a low marginal tax rate but then go into the brokerage account kind of determine what to buy and sell uh to make sure we can get those monies that liquidity to you at a very cheap tax rate so that's the big first one definitely a good account to continue to invest in another one qualified charitable distributions if you're talking with your advisor and things are looking really great you're spending noticeably less than what's I guess I guess a Tipping Point for your account whereby you know we see your account growing for many years into the Future these qualified charitable distributions that we had talked about a really good opportunity for giving to Charities now there are some considerations with qualified charitable distributions uh you generally can't do it yourself you normally have to kind of contact the our team and we're able to kind of send your payments directly from your IRA to them it can't hit your bank account you can't be for example at church and kind of put money in the basket you got to go about it a slightly different way but you can generally distribute up to 100,000 directly from a traditional IRA to qualified charities each year and that can definitely go against required minimum distribution to kind of keep your taxable income lower so you know instead of giving with dollars out of your bank account after tax dollars we can do it with pre-tax dollars directly from your IRA and then a third big one definitely as required minimum distributions are turned on a lot of folks will have had children and therefore possibly grandchildren and with those grandchildren often come especially nowadays with the just the exorbitant prices of Education possibly taking those monies and putting them towards a 529 college education Savings Plan you save a little bit of state taxes if you're in a state where there are state taxes Michigan for example four and a quarter percent and by putting those monies in there you can definitely kind of gear the conversation with grandchildren to kind of if you want them to go to college or a vocational or trade school have some money set aside uh whereby it'll be paying for that on kind of a pre-tax basis and an account that can grow without taxes for any education those are the big three gym that I often see on very uh rare occasions there is one more account that I often see is for possibly for any children or grandchildren that are still working if they're not fully funding their retirement and you've more than fully funded your retirement uh kind of contributing towards possibly IRAs or Roth IRAs for the Next Generation assuming that they have some earned income so so the brokerage account qualified charitable distribution 529 education plans and occasionally IAS and Roth IRAs are kind of the big four that I've usually seen with clients on taking any of those rmds that aren't necessary and getting them to work somewhere else for yourself or future Heirs of your money that's terrific yeah thanks those would be exactly the big three or four that I would say we we use often again folks remember the vast majority of clients are factoring in their required minimum distribution as in cash flow this this is part of what they're planning on using to support lifestyle but in in quite a few instances we have clients who have less of a need for this and there are some really cool things that can be done let me just touch on a couple of those that you mentioned the qcd qualified charitable distribution hugely impactful couple things about that is you can actually start that at 70 and a half regardless of when you're taking required minimum distribution so if you're taking it at 73 you can actually use some of this account for charitable intent even before you're required to take money out and the other thing that trips some people up is everybody thinks that regarding qcd you can only distribute to the extent of your rmd that's not true you can actually distribute up to a 100,000 I think from a charity so if in the case of that that million-dollar example where somebody has to take a 3.7% distribution which is 37,000 if they had more charitable intent than that or as an example they had a big income Year from a distribution or whatever taxable they may want to take a much larger distribution out that particular Year from the IRA that'll save a whole lot of tax dollars down the road and they can certainly exceed the amount of their rmd with Legacy and planning for the Next Generation 529 certainly makes good sense we would highly recommend that as you mentioned our as we mentioned on a prior episode the other cool thing is some of that residual money in those 529s that aren't necessarily used for Education can be converted to a Roth IRA giving that next Generation a bucket of money that can then grow for many decades also tax-free hugely impactful another thing that can be done with r&d's as it relates to Legacy for some individuals there's a lot of moving Parts here and it's it's not the right answer for everybody but as an example you could and this is going to sound a little wonky you could establish an irrevocable trust you could fund it with life insurance you could use the distributions from the rmd to make those premium payments and depending on if everything worked out according to the plan there would be some leverage or increase potentially in the amount of what that gift would would be over and above the distributions themselves for the right client depending on the the right amount of assets if there was a whole lot of illiquid assets that are being inherited to be able to use this to fund something that would create liquidity to provide additional tax payment opportunity certainly makes some degree of sense so there's a lot of really interesting things that can be done with regard to with regard to to that beyond beyond that save it reinvest it use it enjoy it you spent a lifetime accumulating this money and when you get into your 70s it's time to you know smell the roses one last thing I'll share and it really has more to do with that next Generation as well the rule of thumb generally is the older you are the less volatility you want because you simply don't have the time to ride this thing down and ride it back up and that's truly the case but if the intent is hey this is money that we're never really going to ever spend ourselves having the ability to move it out of the IRA either through conversion or otherwise and get it into let's say a Roth but then manage that Roth not like we're managing it for a 70 or 80-year-old individual but we're managing it like we're managing it for their 40 some year old children that account can grow significantly greater over your remaining years providing an even bigger inheritance on a tax preferred basis as well so I think I don't want to speak for you Dylan but bottom line it's important to engage with a professional and sort these things out well in advance because depending on your interest your goals your aspirations there are some incredibly powerful things that can be created that would achieve those goals in space so with that let me turn it over to you Dylan final words before we wrap up today's episode yeah to that point it's very impactful in regards to your situation having a conversation with an adviser to make sure that what your goals are where your resources are that your situation is being affected as best as possible with that it's very important that clients you know with these different buckets kind of what Jim had mentioned you know with the Roth IRAs being managed more aggressively with possibly other accounts being a bit more conservative just having kind of an overall plan for every single dollar that you have because at the end of the day our job as fiduciaries for clients is to make sure that you and your family hold on to your money as best as possible and not give it to the federal and state government so that's really where an adviser comes in and make sure that you are winning the game you are winning the tax planning you are winning the investing and making sure that your uh self and your heirs are going to be best off and one more kind of parting thought something more likely for a future podcast required minimum beneficiary distributions so for most folks you've saved over the years in a 401k or 403b or have monies in an IRA and that's kind of treated based on you whereby a an inherited IRA also known as a beneficiary Ira it has slightly different required minimum distribution kind of timeline essentially with the required minimum distribution for your own monies those can be essentially spread across your entire lifetime but there's a much more finite usually 10-year period again there's a lot of more Nuance to that but usually about a 10-year period whereby you'll have to be taking those monies out kind of calling in the need for even more tax planning to make sure that you're you're meeting any minimums that are required you're taking it based out on your goals and as well as your future kind of marginal tax rate so again conversation for another day so thank you so much Jim I really enjoyed being a part of this this podcast and having this terrific required minimum distribution conversation with you and all the different considerations that our clients need to need to think about to make sure that their plan is kind of in order while talking with their adviser thanks so much Dylan all right gentlemen before we go and that was a fantastic discussion how can people reach you if they've got questions well they can reach us on our website Kaden wealth.com they can call us on our 800 number 800 638 6900 they can there will be contact information in the the header notes at the bottom of this this podcast as well there are plenty of opportunities to get a hold of us fantastic and thanks so as we wrap up our discussion of rmds we hope the tips and stories shared here today will be useful for your retirement planning preparing for rmds as you've heard is key to optimizing your savings and managing taxes effectively and Dylan thank you your insights have been incredibly valuable and we're already looking forward to having you back to explore even more aspects of retirement planning thank you so much for being with us today and listeners please be sure to subscribe to the retirement engineer podcast so you don't miss future episodes and follow at Caden wealth on social let us know what you think in the comments and of course please share topics you'd like us to discuss in future episodes following and sharing this podcast helps our small show make a larger impact thank you for listening to the retirement engineer with Jim crisan Click the follow button to be notified when new episodes become available visit our website at www. Caden wealth.com or give us a call at 800 6386964 [Music] the content is not intended to be a substitute for professional investing advice always seek the advice of your financial adviser or other qualified financial service provider with any questions you may have regarding your investment planning