Discover the tips and strategies that will help you achieve your retirement goals. I'm your host, James Conole . And this is the podcast dedicated to helping you retire. Well, it all starts right here. I'm ready for retirement.

Hi everyone. And welcome back to another episode of ready for retirement. I'm your host James conole. Today's episode is all about reducing your required minimum distributions and the strategies that you have access to that can help you to reduce your required minimum distributions. And we're talking about this because a very common question is how do we reduce these RMDs?

The larger my RMD, or the larger, my required distribu. The larger my tax bill is going to be in the future, or maybe even potentially today, if you're already at R MD age. So is there a way to manage this size, that IRA, to effectively manage that required distribution? And that's what we're going to discuss today.

So this episode is based upon a listener question. This question comes from Richard, Richard. Thank you very much for this question. And for everyone else listening, if you have a. Please don't be shy to submit it. I can keep your information anonymous if you would wish. I usually only use first name, but even if you prefer, I can keep that out.

It's really just a chance for you to submit your question for me to go through a framework of the way I would think about it, to give you some specifics, to think about, but also help everyone else. Because what I come to see is the same people face the same issues and the same challenges. And your question isn't just beneficial to you or the answer's not just beneficial to you.

It's beneficial to so many other people. So I really appreciate all of you submitting your questions. This one comes from Richard and Richard says this. He says, hi James, I love your podcasts. I find them informative, easy to understand, and very relevant. You always provide great examples and discuss the topic at hand with simple but effective bullet points.

I've been having my wife listen to some of them, and they've been very helpful to her as well. And she is also enjoying. I have two questions. And by the way, I'm gonna go through part, one of the questions Richard has today, then part two in another episode. But part one of Richard's question is this. He says, what strategies can you recommend to reduce the size of a large traditional IRA that has several million dollars in it before required minimum distributions kick in we're implementing Roth conversions, setting up a donor advised fund deferring social security until 70 implanting to use qualified charitable distributions when the time is right.

Thanks to the information from your other podcast. We can pretty much meet our living expenses from the income from pensions, a small annuity in the dividends and capital gains generated from a brokerage account and traditional IRA accounts. But I'm now running out of strategies to defer or to reduce my required minimum distributions, more Richard.

Well, Richard, thank you very much for this question. And there are several strategies, many of which it looks like you're already applying so good job doing that and we're gonna cover them. Now before I do so. And first things first, not everyone's goal should be to minimize required minimum distributions.

This is really only a serious planning challenge. When required distributions will force you into a higher bracket or force you to take more money than you really want to take. So for example, if you're already planning to take out 20,000 per year from your IRA in retirement and your required minimum distribution starts at maybe 12,000 per.

Well, that's not a serious problem. You're gonna be taking that money out anyways, and it's already part of your plan, but if you only want 20,000 per year to meet your living expenses and your RMD is $200,000. Well, then that becomes a much more serious planning point. It's pushing you into tax brackets that you really probably don't want to be in because of the required distributions you're forced to take out.

I mentioned that because I'll talk a lot about required distributions and Roth conversions and really tax strategies that you can implement on this podcast. And people will reach out and think that they need to implement all.  and after a simple look at their situation, it's very clear that that's not actually that important for them, their IRAs aren't at a balance.

Maybe most of their investments are in brokerage accounts or real estate or Roth IRAs already. Well, if that's the case, you maybe don't need to really seriously prioritize doing things to reduce your RMDs. Your RMDs might be manageable to start with, or maybe there's just not much of a balance in the portfolio.

If that's the case also. Reducing the size of your RMDs is probably one of the least of your concerns. There's probably other planning points that you wanna focus on. So I mentioned that because this isn't one of those topics that applies to everyone. This is typically going to apply to those of you that have significant IRA balances.

And there's not one singular definition of significant, but maybe a better way of putting that is this is going to apply to you. If your required minimum distributions will force you to take more out of your traditional IRA than you otherwise would've as part of your financial. So I wanna start there the second place.

And going back to Richard's question is what's your goal with all this? So before we dive into the specific strategies, let's disregard that for a second. Set the finances aside, what is your goal with this money? And more importantly, what do you want your future to look like? Why do I ask that? Well, a non-financial word of warning is, is this, think about yourself 20 years from today.

If you're listening along, just, just do this. Don't have to be too in depth or don't have to be too specific. But do ask yourself this question, ask yourself, what do you want to have happened 20 years from today for you to feel like you've had a really fulfilling and enjoyable? I'm gonna say retirement, but you could even just translate that to life.

You've had a fulfilling and enjoyable life. Don't go too deep, but just think what's the first thing that comes to mind. When you ask the version of yourself, who's 20 years older than you are today, what happened for you to feel like all the saving and investing and deferred gratification was worth it?

What are the first things that come to mind? Is it time with family? Is it travel and experiences? Is it learning a new hobby is enjoying time with friends. Anytime you want, ask yourself just real quick. What is on that list? What are the priorities? Now ask yourself this. Was reducing the size of your large IRA anywhere near the top of what actually excites you for retirement.

And I don't mean to get preachy. And I absolutely think that you should be implementing all the strategies possible to do the best with this, to reduce the amount of taxes you pay in a legal manner. Absolutely. We should be doing that, but if you have the best financial planning and there's not good life planning go along with.

You're missing the point. And again, this isn't directed at Richard or you it's directed at me oftentimes and all of us, oftentimes it's we have a blank canvas and set aside the value of your IRAs and your Roth IRAs and all the different investment components. Those are only even important in terms of what they can allow us to do with our.

Lives. So if we don't know what that looks like, well, we might be missing the point. If all we're focusing on is the taxes is the investments is everything else. And here's why I say this now, Richard, I don't know anything about your situation. You might be saying, James, I'm way ahead of you, buddy. I've already got that figured out.

We're taking the trips we wanna take or doing the things we wanna do or giving to the causes that excite us. And that mean a lot to us. If that's the case, wonderful. This is more of just broad encouragement. But the reason I ask is cuz part of the question says we can pretty much meet our living expenses from the income from pensions, a small annuity in the dividends and capital gains generated from our brokerage account.

I don't know what that number is, is that number 50,000 per year, is that number 150,000 per year? I would just encourage you to say, is there anything that you're not doing? You know, whatever that income is from pensions, from annuities, from dividends, from capital gains, is there any more you can possibly do?

Do you feel like you're holding back on any area? Is there any area of your life where spending more would add to your quality of life? If so, Then let's just look to increase our income from the IRA, as opposed to looking for every last thing we can do to decrease the taxes, we're gonna pay on it. And another way of looking it as this is what if the IRS called you one day and said, you know what?

That IRA of yours, we're gonna let it keep growing and never force required distribution. So you never have to pay a dollar in taxes if you don't want to. Well, that would be really nice. Would it actually cause you to look back one day and say, wow, what a wonderful retirement that was? I never had to spend my IRA that I worked my whole life to build up.

So again, at risk of becoming preachy here, the value of our investments can easily become an obsession. Saving on taxes can easily become an obsession. Our minds can turn anything into an obsession. So my first piece of advice, maybe we've already done this and if so, wonderful. My first piece of advice is to focus on making a fulfilling retirement, your obsession, and the tax savings and the investment strategies and everything else subservient to that, and really only position to support that.

So what does that mean with what you're doing with your friends and family and experiences and hobbies and health and more. Start there. And then let's go into some of the specifics. Now, Richard, you've kind of done a lot of the hard work for me. You ask what are the things that I can do to manage the balance of our IRA and in do, and so manage the balance of our required distributions?

Well, the first thing that a lot of people look for and that I encourage to look at is Roth conversions. Now, Roth conversions. Again, a lot of people think they have to do this because they think that they have to try to decrease their RMDs in the future. This is only a relevant strategy. If RMDs are going to push you into a tax bracket, you don't want to be in by forcing you to take more income from your IRAs than you actually need to.

So if you are gonna do Roth conversions, make sure that it's appropriate for your plan first. And also if you're doing them, understand that the goal isn't to move everything from your traditional IRA, into your Roth IRA. If we could wave a magic wand to make that happen without any tax implications.

Well then of course, that would be ideal. The reality is every dollar that you convert from your IRA into your Roth, IRA is gonna cost you something in taxes. So the more we convert, the more we pay taxes, the goal isn't to convert everything. The goal is to say, how can we convert enough so that it's not going to cost us way more in taxes in the future?

Then we could pay today through some Roth conversions. Now I did a deep dive on this. If you want to look at that that's episode number 50, how do you use Roth conversions to save huge amounts and taxes? Check out that episode. There's a thorough, deep dive on exactly the logistics of doing this and some examples of how to do it, but make sure that you're not trying to convert everything.

Many people. They make it their whole goal to get their Roth or get their IRA converted to their Roth before 72. That sometimes actually costs them more money in taxes than they would've ended up paying. If they just didn't do anything. Had they been totally unaware of a Roth conversion strategy as a whole?

So Roth conversions are absolutely one way. Now. Richard also mentions deferring social security until age 70 now deferring social security, kind of ironically, this won't help RMDs by itself. It will actually make the RMDs potentially harder because now you have more income coming in from a larger social security benefit.

The real benefit is not just deferring until 70, but it's to make use of those years before 70 to clear out your taxable income as much as possible. So in other words, don't start social security early because that's gonna increase your income and reduce the amount you can convert to your Roth IRA without exceeding certain tax thresholds.

So the real benefit of deferring social security till 70 is the Roth conversions that happen before then, and being able to convert more of your Roth at a lower overall. Bill, because once you turn 70 and beyond, well, that those higher social security benefits actually will make your RMDs more difficult.

So that's why it's important to counteract that by doing the conversions ahead of them, which reduces the size of your IRA, which reduces the size of your RMD, which reduces your tax liability. So if you're deferring social security, absolutely. That's wonderful. But make sure you're pairing that with a Roth conversion, if your goal is to do so and save on your RMDs as a result of that, uh, qualified charitable distributions is another thing that Richard mentioned, what a qualified charitable distribution is, or a QC.

You can gift up to a hundred thousand dollars direct to a charity per person. So per person, meaning if you're married finally and jointly, if you're just married, each of you can do a hundred thousand from your IRA. As soon as you're 70 and a half or older now, 70 and a half used to be the RMD age in the age at which you could implement Q QCD S or give Q CDs.

Now RMD ages are higher, but thankfully you can still do QC DS starting at age 70. And. A common question I get with this is, well, why don't I just take my RMD, take it to my bank account and then gift it to my charity and deduct it. Wouldn't that be the same thing? Well, maybe, but for most people, probably not.

The reason for that is the standard deduction from married couple over 65 and 2022 is $28,700. So unless the total of that gift, plus state and local taxes capped at 10,000 plus mortgage interest. Plus anything else you might add to your itemized deductions, unless you're already exceeding 28,700 on that, you're gonna end up paying more on taxes on the distribution than you could actually use as a write off on your tax return.

So by doing the qualified charitable distribution directly from your IRA to the charity, It's not even touching your personal income, you can gift the entire amount up to a hundred thousand or you gift a partial amount up to a hundred thousand and not have to have that income reported on your tax return.

So, Richard, you already mentioned you're doing those things. Those I would say are probably the biggest, but there are some other things that might apply to you or might apply to other listeners. One is keep working now again, I hesitate to even say this because your goal shouldn't be to keep working, just to avoid R MDs.

That's just another example of the tail. Wagging the dog. Are we doing something to save money on taxes when saving money on taxes? If we really think about it, isn't probably the main goal of why we're here and what we want our retirement to look like as much as a, a supporting thing in whatever manner it makes sense.

But here's why I say this. If you're in a 401k or if you're a saver in a 401k and you continue working past age 72, You can delay distributions from that 401k until you retire. Now, this doesn't work if you own 5% or more of the company, so it's not, you can just go make your own long care company or lemonade stand company or whatever it is and say, great.

I'll just open up a solo 401k. It does have to be a company where you don't own 5% or more of it, but if that's the case, you could consolidate your IRAs into that four. Continue working. And as long as you're working, you don't have to take an RMD. Now, when you do leave, you would take your RMD based upon your age at leaving.

So say you worked until 75. Will you just take your first RMD at the age of 75, based upon the IRS life expectancy tables at that time, but you didn't have to take one at age 72, 73 or 74. So that money just kept compounding. Another consideration that you always wanna make sure you're looking at here is what are the 401k costs?

What's the flexibility of the 401k. You may or may not find that the costs outweigh the benefits of this type of a strategy. Especially when we consider the non-financial cost of don't keep going to work. Don't do something you don't enjoy doing just in order to save taxes, but this is a strategy for those of you that really enjoy doing something.

Maybe you can pick up part-time work at a company that you just totally love and would be part of your retirement plan anyways. And maybe they have a great 401k. Well, could you consolidate your IRAs there? You lose maybe some of the flexibility that Roth conversions or other things with that money, but it pushes the RMD off until you actually.

Another thing you can look at. And, and this is only if you have a much younger spouse and by much younger, I mean, 10 years or more, you could lower your RMDs that way. So if you are married and one spouse is 10 years younger than the other, you can reduce your RMDs. If you make sure that the younger spouse is listed as the sole beneficiary of the IRA, here's how that works.

Most people, when they're calculating their RMD, they use what's called the IRS uniform life expectancy table or lifetime table. If though your sole beneficiaries is a spouse, who's more than 10 years younger than you. You are eligible to use the joint life and less survivor expectancy table. So what this essentially does is the IRS says, okay, if you have a spouse, that's more than 10 years younger than you, we're gonna force you to take out a less amount because we're factoring in your joint life expectancy, not just your singular life expectancy and by the way, life expectancy has nothing to do with you and your health and your family.

It's literally just an IRS table that says, if you're this age, here's your life expectancy. If you're that age, here's your life expectancy. Really just looking at averages. Here's an example of that. I, I just pulled this example right from a Forbes article and read it word for word. It says taking a 75 year old woman with an IRA balance of $500,000 whose new husband is a 50 year old man after naming her younger spouse is a sole beneficiary of the, I.

That allows her to utilize a joint life expectancy table. She would have a life expectancy factor of 34.7 and her RMD would be $14,409. If she kept her younger husband off of her IRA, as the beneficiary, she'd calculate her annual RMD via the uniform lifetime table, which would assign her life expectancy factor of 22.9.

In this case, her RMD would be $21,844. By naming her younger husband as a sole beneficiary, she'd reduce her RMD requirement by over $7,000 that year. So again, I just pulled that example right from a Forbes thing, but is essentially what it's saying is, look, for example, there's a more than 10 year age gap here.

This woman is able to use a life expectancy factor of 34.7. If she uses the joint life expectancy table versus a factor of 22.9, if she uses the uniform lifetime. Now the, the interesting thing to note here is the higher that factor, the lower your RMD, because you're using that in the denominator of the equation of how you calculate this.

You want to have a higher factor. If you have a factor of one, the IRS's way of saying you have one year life expectancy, so divide your IRA balance. 500,000 in this case, by one, that means your RMD is $500,000. Obviously we want to avoid that and that's not gonna be the case here, but the higher, the life expectancy factor, the lower your RMD is going to be.

So if you're listening and there's a significant, so 10 years or greater age gap between spouses, it makes sense for many people to use a joint life expectancy table to keep the RMDs down for the older spouse, another area where you can look to manage your IRA balance is by looking at your asset. Now, this was the theme of last week's episode.

Last week's podcast episodes. If you want to know more about that and the pitfalls they see people making with that, be sure to check out last week's episode. But hypothetically let's say, I don't know Richard's IRA balance is, but let's say 3 million is IRA balance and there's also 3 million in brokerage account and say, a Richard wants a 50 50 asked allocation of 50% stocks and 50% bonds.

Well, because bonds are less tax efficient. Maybe you put those in the IRA and not only are those bonds now gonna pay. After tax interest because it's not being taxed, but also it's in a way limiting the growth of the IRA because the bonds probably aren't gonna grow. Almost certainly won't grow as much as stocks will over time.

This is an example of an area that you need to be careful with. Don't just stick bonds in your IRA. Don't just put your IRA in cash because of the sole reason. If it's now gonna limit the growth of your IRA, going forward, that alone is a, is a bad reason to put bonds or cash in your IRA. But if you start with your asked allocation and you determine what mix of investments make sense for you, and that's the starting point, then you can backfill the more conservative those investments into your IRA, which number one tends to be more tax efficient because more conservative investments tend to pay interest, which is tax to higher rates.

But number two, it's also gonna make sure the balance of your IRA doesn't balloon out of control, which is going to increase your RMDs over. Those are some ways that you can limit your RMD or manage your RMDs. Another thing that you would need to do in the situation, Richard, or for people that have pretty significant IRA balances is consider heirs.

If that's part of your legacy strategy, if that's part of your estate plan, here's why say that your IRA's the millions. We know that we don't know the exact number. Let's assume just to use a round number by the time of your passing. It's grown to five.  so it's probably grown more than that. We've taken some RMDs from it.

Let's just say it's 5 million for simple numbers, and let's just assume you have one single he, so maybe it's you in a spouse, but once you in a spouse pass, you have one child. Well, if that child inherits this IRA, they have to distribute it over 10 years. That's a new way that inherited IRAs work. So that's $500,000 per year, assuming no growth.

And if you assume that over the course of those 10 years, 6% per year is the average growth. That means your child would have to take 680,000 per year in order to be on track to fully distribute that over 10 years, when you take into account to the original 5 million plus the projected growth on it.

Well, if you're receiving 680,000 per year, even if you have zero other income sources that alone would put them, put the child in the top federal tax bracket. If we were to look at today's brackets in today's dollars, that's a challenge because there's no more stretch IRA provision. It used to. If you inherited an IRA, you would start taking RMDs in the same way that you take RMDs at 72 and beyond, but you're able to stretch those out over the course of your lifetime.

So if you inherit an IRA at 40, well, you have your life expectancy to fully distribute that that no longer exists. IRAs must now be fully distributed within 10.  so a planning point for people who have significant IRAs is to look at creating a charitable trust and have that trust become the IRA beneficiary.

And people say, well, wait a minute, like that's, that's great. I do wanna support charity. Maybe that's not bad, but I still want my child or my children to be the beneficiaries. Well, they will. And here's how this works. When the account owner and the spouse pass away, that IRA passes to the charitable trust.

Charitable trust. They don't pay any taxes on that. So if there's $5 million that charitable trust receives a full $5 million that charitable trust then distributes a percentage of income to your beneficiary. For as long as your beneficiary's alive. So let's say your beneficiary gets 5% to start. Well, unlike the new IRA, the, the new inherited IRA rules, where they'd have to take that money out over 10 years and potentially depending on what state they live on, pay up to 50% taxes of the total IRA that they inherit.

This is a way for them to receive a much lower amount, which is gonna put them in this lower tax bracket, but stretch those distributions for a much longer period of time. Those distributions continue until the beneficiary passes. So until until your child or children pass and then a charity receives the remainder of the balance.

So what it is is it's a way of extending the tax benefits. Even after you're gone, it's a way of reducing the amount of distributions that the HES will receive each year. And the beneficiary is a charity. So not a bad thing, but you can also name the charity to receive the remainder of that. Once the original beneficiary of the charitable trust has passed away.

Now, this typically is something that is done. If you have a significant IRA balance, if your beneficiaries are gonna be in a significant tax bracket, and there's some things that come along with it, there's another tax form that you need to file each year. There's some things that you need to do. It would require another estate document.

So it's not like you can just easily name this as the beneficiary on your IRA. But for those of you with significant IRA balances and heirs or children, typically that will be in high income brackets. This could be a good potential solution. So in summary, just looking at all this RMDs required minimum distributions, they are a product of the size of your IRA.

So yes, there's all kinds of strategies to reduce this. And just simply put, you could drive your IRA balanced onto zero, and there'd be no RMD. But we've defeated the purpose. There's no more IRA. So we constantly have to ask ourself what's the real goal here. Start there always start there. The real goal typically has nothing to do with finances.

The real goal has to do with lifestyle, has to do with family, has to do with connection. It has to do with hobbies and activities. Start there understand what level of income is needed to make that happen. Understand the right withdrawal strategy, the right investment strategy, to make that all.  and then go to the tax strategy and say understanding that this is what I want life to look like.

What can I do to minimize taxes with the rest of what I have? So now you can understand what your tax strategy should be looking like or what it should be implemented to most effectively accomplish the real goal. But don't let your tax strategy become the goal. So, Richard, thank you very much for the question.

That was a good thing to flush out. A good thing to, to look at. If you're listening to have a question, you can request it or you could submit it by going to ready for retirement.co. If you're enjoying these episodes, I'd really appreciate it. If you left a review for it and be sure to check out our YouTube channel as well under route financial partners, where you can find more great content to supplement exactly what we're talking about here.

So that is it for today. And I'll see you all next time. Thank you for listening to another episode of the ready for retirement podcast. If you're enjoying the show, please subscribe and let me know by leaving a five star. And as always for a list of the notes and the resources mentioned in today's episode, you can find those at the ready for retirement website, which is ready for retirement.co that's ready for retirement.co.

And if you have a question that you would like for me to answer in a future episode, then you can also go to the ready for retirement website, ready for retirement.co there's a page called submit your question where you can submit a question for me to answer in a future episode. Thanks is as always for listening and I'll see you.

Hey everyone. It's me again for the disclaimer, please be smart about this before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment tax legal or other financial advice. It is for informational purposes only.