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Law and Financial Order
This podcast investigates and decodes topics related to financial planning, estate planning, and trusts. Hosted by financial planner, Robyn Wolcott and attorney, Erin Duques.
Law and Financial Order
The RMD BLT
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This episode of Law and Financial Order is focused on RMDs. They are a required part of retirement—but they don't have to catch you by surprise. The right strategy can help you manage taxes, support charitable goals, and make the most of your retirement assets.
I'm Financial Advisor Robin Woolcott. And I'm Attorney Aaron Duques. In our podcast, we're here to talk about your finances and your legal needs without the technical jargon. In each episode, we're going to tackle a frequently asked question that we hear from our clients.
SPEAKER_03No question is too simple. Too many people wait way too long to handle these things just because they don't understand them or they're embarrassed about how long they've waited.
SPEAKER_00Welcome to Law and Financial Order. In this courtroom, your wallet has the right to remain informed.
SPEAKER_03Hello and welcome to today's episode of Law and Financial Order. I am Robin Woolcott, and I am a financial advisor with Warrior Wealth. And I am here with my friend, colleague, and attorney, Aaron Duques.
SPEAKER_02Hi, everyone. I'm Aaron Duquez, estate planning and elder law attorney with Daily Perry, Arnold, and Kaneerum.
SPEAKER_03Perfect. Thank you. Thanks for being here and co-hosting as usual. So the topic today is the RMD. And I'm calling it the BLT of the finance world because you know I love an acronym and a BLT can be kind of messy when you eat it. So that's why we're uh Just like the RD. Yeah, just like the RMD, exactly. So we're gonna talk a little bit about what RMDs are, when they hit, and ways to reduce them. So jumping right in, let's say you brought home the bacon, which is part of that BLT, and the IRS wants a bite. So we're gonna get in, we're gonna dissect the sandwich.
SPEAKER_02Yeah. So Robin, let's dissect the sandwich. Tell us what the RMD, what does it stand for? How does it work?
SPEAKER_03Absolutely. So RMD just stands for required minimum distribution. So realistically, it's just the least amount that you have to take out of your tax deferred accounts, like your 401k or your IRA. That amount is calculated based on your life expectancy. And essentially, it's the IRS waiting for their tax cut of your tax deferred stuff. So your IRAs, your 401ks, 403Bs, a slew of other random IRS numbers. So we'll start there.
SPEAKER_02Okay. And so when do people typically have to start taking the RMD?
SPEAKER_03Yeah. So it used to be 70 and a half or 72. So if you were born in 1950 or earlier, it was one of those ages. So you should already be take, already be taking them if you were born in 1950 or earlier. But going forward, from people for people born 1951 to 1959, it's age 73, is when you're supposed to start. For anybody beyond that, born 1960 or later, we're looking at age 75 right now. The IRS can change those numbers though. So just a heads up. But as of right now, at least for you and me, it's 75.
SPEAKER_02Okay. And is that because people are living longer? I would assume.
SPEAKER_03I would guess so. I think, yeah, I guess I haven't really looked that up to be honest with you, but I'm assuming that it's because the IRS wants your money to last as long as you do. So the longer they can give you to kind of start doing that, that probably helps with that cost. Yeah.
SPEAKER_02So are there any other so we have the basic age when you have to start and the amount they have to take is based on the life expectancy. And they that's just a calculation, which actually people can do themselves, right? They could just go online and based on the amount, the full amount of the account, right? And then their life expectancy, they can figure out what the the RMD would be.
SPEAKER_03Exactly. There's yeah, if you work with an advisor, they have we have calculators and you can find them online, like you said too. But it essentially you need your the balance of the account as of last December 31st, and that's the snapshot that you take, and then that's what's calculated for the following year for the RB you have to take. So if you plug in that number plus your birthday, it'll essentially spit out what you're supposed to take.
SPEAKER_02I have some practical question. So is it the responsibility of the account owner to take the RD? It is. How does it work, practically speaking?
SPEAKER_03Yeah, it is the account holder's responsibility. There typically are gonna be some sort of a notification or a letter or something like that from the broker dealer that's holding that R that IRA or that 401k. So let's say you have it with LPL, like where we are, or if you have it at um Fidelity or something like that, you are most likely gonna get some kind of letter that's saying that there's something being triggered or that you need to consider. But I wouldn't rely on it, honestly. I think we are unfortunately responsible for what we have to pay. The other spot that you might find that somebody would tell you it might be your accountant or your CPA at tax time.
SPEAKER_02Right. But not everyone has one, right? Right, right. And then sometimes if someone dies, then whoever's administering their estate or whatever may have to, or if they have a trust, they may have to get that, get the RMD. Right, right. Whatever for the portion of the the year that happened. Now, do you know what happens if someone does not take it?
SPEAKER_03If you don't take it, there is a penalty. I'm gonna have to look up again what that is, because it was at one point 50% of whatever you didn't take, which was crazy. I think it got reduced to about 25%, but I'll look that up while talking and I'll revisit that.
SPEAKER_02Sorry, I didn't mean to stump you. No, but I think there's also like an opportunity to correct it or something. There is there is absolutely yeah. So any special rules with taking your first RMD?
SPEAKER_03Yeah. So the first one, you are allowed. So the in the year that you turn 73, that's when you're obligated to start it. But you have until April 1st of the following year. So if you turn 73 this year, or you know, if you were born before between 1951 and 1959, if you turn 73 this year and you decide you want to wait until you can go as late as April 1st of next year to take it. But we often don't recommend doing that because then what happens is you have to take that first one during 2027, since right now we're in 2026 as of this recording. So you would take your first one, let's say you took it like March 15th of 2027. You still have to take your next one during 2027. So now you're gonna take two in the same year. And since these RMDs are all pre-tax, it means all of that's gonna add into ordinary income and potentially bump up your tax bracket. So we really recommend just do it in the year that you turn 73 and try not to defer it unless you have a really specific circumstance to do that. Right.
SPEAKER_02LA just look up. Oh, sorry, go ahead. What? Like if you're if you know you're retiring, maybe. Yeah, if you know your income, you know your income is going to be reduced.
SPEAKER_03Yeah, that could be a good case. And because especially if your IRA is the main place you're gonna pull your future income from after you retire, then yeah, if you're gonna use it anyway, then sure, maybe that would be a good example. That's great. And I did look up quickly what you were asking prior. So I was right. So that the penalty is generally 25% of the amount you you didn't withdraw. It was reduced from a previous 50% penalty, which was so mean. So it's like people aren't usually doing this intentionally. And then um, if you do correct the mistake promptly, a lot of times they will reduce that penalty to 10% of the of the sort. So yeah, good question. I should have had that. I I knew at least I knew the rules, so that's good. Right. Yeah. Luckily, we try not to run into that too often because our clients try to get their RMDs done on time. So that's probably why it's not top of mind. Well, you know what?
SPEAKER_02The only the reason I thought of it was because I had a situation I I wasn't serving as a trustee, but um I was advising someone else who came to me, you know, late and um they actually no, they were a beneficiary and the trustee hadn't taken the RMD for the decedent. So you take the RMD, people should realize that it's going to be added to your ordinary income, which is all taxable. And so I mean, because it seems like more people now are working some people are working longer, yeah, because they're healthy and they want to. So then they're in a situation where they're working and they have to take their RMDs, they don't have a choice.
SPEAKER_03Yeah.
SPEAKER_02Right. And so that can, you know, the impact it can have is it can really bump up their their tax bracket. Which might, which might convince them to retire sooner.
SPEAKER_03It might. Or, but if they want to keep working, yeah, it's just being aware that it's gonna jump up your income. So a lot of times if you're still working, I guess the only counter to that is if you have reduced your 401k contributions and you could actually keep those going, you could kind of offset some of that because you're still allowed to put money into the 401k, even if you're at RMD age, which I know is kind of wild to think about. But that is something you could potentially do. But either way, yeah, it's gonna if you're just kind of if you've already maxed out your 401k and you're making you know good money, and then you end up having a nice big IRA or 401k that you have to pull money from, not the 401k, so to speak, the IRA at that point if you're working, you would just have to pull from IRAs. But the reality is if it's big enough, it could jump up your tax bracket. Yeah. But yeah, the big thing people always ask me is like, well, why, you know, why do we have to take it? You know, what's the what's the point of this thing? And honestly, it's kind of what I said at the beginning. The IRS is waiting for their cut. They did technically allow us to defer that income for all for decades, you know. So they do that because they want our our nation to be able to continue working, you know, doing well in retirement and being able to support themselves because really pensions are you know not a not a normal thing anymore, really. And they know that even if you have a pension, it may not be enough to cover your retirement needs. So this was kind of their way to say, okay, we'll kick the tax can for you, but at some point we want our peace, and that's where that's where we are.
SPEAKER_02This is probably similar to the Secure Act, which then required that inherited our IRAs be paid out in many in many cases, not all, within 10 years. Yeah. Because the IRS or the government wants their money.
SPEAKER_03Yeah, exactly. That's exactly right. And they don't want us to keep deferring it for like future generations to come. They don't want this like tax-free wealth building.
SPEAKER_02So coinciding with the uh $15 million estate tax exemption.
SPEAKER_03Right. Exactly. Yeah.
SPEAKER_02We gotta pay for it somehow. We do, we have to.
SPEAKER_03Well, and the upside to these, honestly, like it's you know, I don't want to say make it sound like RMDs are a bad thing because I like a BLT, you know. So it is, but the reality is the upside is that usually when you do retire and you're kind of forced to take these RMDs at that point, you're usually in a lower tax bracket. And that's not always the case. We know there's tons of people that end up needing more when they're retired to live on than they even had while they were working or just prefer to. So it's not always the case. But if you want to be, you can usually figure out a way to be in a lower tax bracket when you retire. So when you do that, then you're actually paying a lower tax on that RB because you're paying the ordinary income tax on really just that amount.
SPEAKER_02Right. Well, it seems like the typical retirement account works really well for people who, you know, they're counting on it for to supplement their social security after they retire. Um I where it sometimes backfires where I see it backfire with clients is you know, clients where they're retiring with, you know, multi-million dollars, uh, you know, retirement accounts that have one million, two million dollars in them. And it's like, okay, maybe they don't need the money, or maybe they are there's no way they're gonna use it. Uh so then it becomes and then it be could become a tax issue. Right. Um, so maybe you can talk about some workarounds or things for for uh to to help mitigate the taxes on yeah, yeah.
SPEAKER_03I think the biggest thing, I mean, there's a couple really easy thing, uh things to do. One is I think you know, you and I prior to getting on here, we were talking a little bit about QCDs and not to throw another acronym in the mix, but here we are. So qualified charitable distributions. Those are a way that if you're charitably inclined and or you have, you know, you don't have people that you want to necessarily leave all of this money to, but you want to maybe put some to some charitable use, you can donate to a charity right from your IRA. So you can either your 401k or IRA. So you can literally have a distribution cut from the account directly to a qualified charity. And then if that happens, you don't have to pay any taxes on that piece that you've donated, and neither does the charity because they're a tax entity. So it's a really nice way to pass on some of the assets if that's something is is important to you. You probably have some clients do that.
SPEAKER_02Yes. I mean, I don't have a lot. I mean, so some of my estate planning clients, yeah, where they're in the situation where they don't necessarily need, they don't, they're not relying on the RMD. Um, and they would rather put it towards something like that. And then along the same lines, uh from an estate planning perspective or context, you know, if if I have clients who you know, their beneficiaries are going to be subject to the 10-year rule and they do, they're coming into their planning knowing that they want to make some charitable gifts. Um, so then we might talk about, well, do it, do it out of your retirement accounts rather than making the gift, you know, from your estate, either your probate estate or your trust estate. Yeah. Right. Because if they do it a certain portion from the retirement, then the charity doesn't have to pay the tax. Whereas your beneficiary will have to pay the tax.
SPEAKER_03Right. Exactly. And there's other things you could do for from a charity perspective if you want. Like there's there, and I we won't go into all of them because they're so specific to scenarios where people really want this, but there's things like a charitable remainder trust or things like that where you could have a certain amount of income coming out of an IRA for you during your lifetime, but then have the remainder go to a charity, and then that avoids tax again at that point. So that can be an estate planning tool. And there's a lot of other versions of that that you've, I'm sure, seen as well. But then, you know, that's so that's kind of good from like a from the charity perspective. There's definitely a few aspects or a few angles and ways that you can kind of get your RMDs reduced and also help a good cause if that's in important to you. The other thing I would say, the thing that we do the most out of uh all of our clients for a reduction strategy for their RMDs is Roth IRA conversions. So when you retire, like I said, typically you jump, you know, drop into a lower tax bracket. So what we do is if people retire, let's say you retire at 65 and you don't have to take your RMDs till 75. If that's the case, we've got a nice 10-year window where we can actually take the IRA, take money out of it at that point, right after you retire and your income has dropped. So let's say you were making 150,000 before as a household or something before you retire, and then you both retire on the same day or the same year. So now you're 150 of income, maybe it goes to zero, right? Because you're not taking any actual earned income at that point, then you could potentially take money out of the IRA, equivalent or lower than what your income was potentially, or even higher than, but that would be higher tax bracket, most likely. But basically you take a portion of the IRA out and use that to convert it to Roth, then just leave it in the Roth account and it's now tax-free for the rest of your life. And it just helps to chip away at the IRA. So if you have like a big IRA, like you said before, like a million, two million, whatever, you could start doing 100,000, 200,000, whatever the number that's comfortable for your tax situation is, and take that convert to Roth. And then you're paying the taxes on the smaller portion than what it could potentially become 10 years from now. Because if you have a $2 million IRA when you're 65 and you leave it and you wait until you're 75, there's a really strong chance that's gonna double or more before the time it gets there. So now you're dealing with a $4 million IRA that you have to take even more out of every year. And that's where it kind of has a sweet spot. I know for us, like we have um systems that'll show you what the Roth conversion does for you, not only for a growth perspective, but from a tax reduction perspective. So if you're a client, we can show you on screen, like, hey, if we do a 150 reduction or Roth conversion, this is what it's gonna do. Yeah.
SPEAKER_02And it gives you a that's a great, that's a great tool because uh if I, you know, I've had estate planning clients where they ask me about Roths and should I do a Roth or not, which I don't advise on because I'm not a financial advisor. But to be able to model that, I think it would be really helpful tool uh for people.
SPEAKER_03Yeah, it's awesome. I mean, I've seen it work in so many different scenarios, but definitely in some cases it doesn't work, and the system will show us that too. But the reality is most, I would say, not only save you money and taxes, but grow your assets because as long as you are gonna live past their sort of like a breakeven point, which is usually Yeah.
SPEAKER_02Well, so tell us when it doesn't work. Well, you just said there's sometimes it doesn't work. Yeah. I mean, well, what are some examples of that?
SPEAKER_03Realistically, it's sometimes if people are still taking, like if they get a pension or if they started their social security, other income streams are coming in. So the time it moved in the orc is if they already have other sort of quote unquote income that it's gonna be calculated with. So that's probably the the most um likely scenario. Also, if there was like a bigger concern that they were gonna die earlier, which I know sounds, you know, morbid, but if there maybe there's a illness or something like that, then stuff like that doesn't make sense. You need sort of need like a at least an eight-year window, if not more, usually to have a Roth conversion actually keep up with itself.
SPEAKER_02Hey, it to pay off, basically.
SPEAKER_03Right, to make it worth it. Yeah. To basically cover the taxes you paid to do it and recover with the interest. Yeah.
SPEAKER_02Okay. So you don't want to wait too long.
SPEAKER_03Right. Exactly. It's really best, honestly, like the if you retired on you know, December 31st, January 1, is a great time to just start looking at that. I mean, look at it prior, but you know, yeah.
SPEAKER_02Yeah.
SPEAKER_03Yeah.
SPEAKER_02Anything else for tax reduction strategies? We talked about charitable remainder trusts, Roth conversions, those are all.
SPEAKER_03I think that's I think that really does it, honestly. I mean, we don't have to make it too crazy. Everybody's situation is so different. So I would just say these are some good guidelines for kind of how to think about these things. And no, you're gonna have to take it. No, the IRS isn't really trying to punish you, but they do want their cut. So, you know, it's just sort of um a matter of doing it the best way you can. And for us, I always say we're gonna try to have you pay as least in taxes as we can and do it all by the book. So that's what's most important to me. So I would say everyone's cases center is really different and specific spam, but you know, just like every case you come across for a law, it's like, you know, what somebody wants for their situation is very different from everybody else. It was a delicious BLT, Rowan. Thank you for breaking it down very simply. Well, I'm sorry it wasn't the California version. I know you want the BLAT. I do want the avocado, but that's okay. Awesome. As long as the bacon's crispy. Yeah, definitely gotta have a crispy bacon for sure.
SPEAKER_02Yeah, yeah. All right. Well, thanks for joining us, everyone. Hopefully you took away a couple of good tidbits here, and we will see you next time.
SPEAKER_03See you next time. Have you ever wondered how much money you need to retire? What happens to your assets if you don't get around to making a will, if you should pay your mortgage ahead of schedule? Ultimately, we're just here to make the complicated topics less complicated. No further questions, Your Honor.
SPEAKER_02This podcast is intended for educational purposes only. It does not constitute legal advice. For specific legal advice that is specific to your situation, it's important to consult with an attorney.
SPEAKER_01The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Warner Wealth and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA Civic. Aaron Duquez is not affiliated with Warner Wealth or LPL Financial.