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5 Strategies To Lower Your Required Minimum Distributions (RMDs) · Retirement Answers

• Hey friends. And welcome back to another episode of retirement answers. My name is Jacob Duke. I am your host as always. This week on the show, we're talking about five ways that you can reduce your required minimum distributions or RMDs for short. Maybe you've heard of these required distributions that you might have to take at some point later in life, whether it be 73 or 75, depending on your year of birth, but what you've got is if you have a tax deferred account, such as an IRA, a 401k, a 4 0 3 B a TSP, any sort of money that you have not paid taxes on yet in a retirement account, you will be forced to take that money out at some point in the future, depending on when you were born. So those RMDs, they can create some tax issues if you're unaware of how that works or even that, that will be happening. So, what I want to do is give you some ways to help reduce that potential tax burden in the future by being proactive now. So these five strategies may not all work at the same time, but some of them do work together and I'll make the connection here as we go. Uh, but before we jump into what these five ways that you can reduce your RMDs are, I wanted to say, thank you for tuning into the show. If you are enjoying it, I'd love for you to share it with a friend so that they can also benefit for some of these same different ideas and strategies or things that we're talking about here. And also too, if you are enjoying, I'd love for you to give it a rating or review there on apple podcasts or Spotify, it helps people just like you find the show and benefit from it as well. All right. The first strategy to help lower your future RMDs is to do Roth conversions or move money from a tax deferred account to a tax free account. If you've paid any attention to retirement planning, or maybe you've been listening to my podcast for some time, uh, you probably heard of Roth conversions and you probably heard some of the potential outcomes or benefits of doing those conversions and lowering your RMDs is one of the primary reasons to do a Roth conversion in the first place. You're trying to essentially take money out of my tax deferred account. Now pay the tax right now, today in this tax year. Move that to a tax-free account. Being the Roth IRA. So that my RMDs in the future would be lowered now, one of the things that I come across a lot with Roth conversions is that everyone is trying to do them. And so what I want you to hear is that these are not correct or right. For everybody out there. Typically, if you fall into a couple different categories, Roth conversions might make sense for you. So here's what I'll say. If you're 60 or older and you've got a million dollars or more in a tax deferred account, or a combination of your tax vert accounts. You might want to consider doing Roth conversions, because what you're going to have is once you get to 73 or 75, 10, 15 years down the road, that account likely will have grown. So if you're investing that account, it's growing over time, you could perhaps double the account value by that point, which means your RMDs would be higher because it'll be based on a higher account balance. So, if you do a Roth conversion, you'd be moving money out of that tax deferred account. Again, to that Roth IRA. And then your balance when you get to 73 or 75, that would be lower at that point, which means your RMDs would be lower because it's based on that account balance at that time. So that's one of the reasons why now if you fall under a million dollars, if you're in, let's say 500,000 to a million dollars in that range, You may or may not be a good candidate for Roth conversions. A few other things are going to be at play here. One of them being a potential, you know, a pension that you might have, what your social security benefits would be, or any other sources of income, maybe you've got rental properties that you use. Any other sources of income that you could have in the future. That might play into whether or not you need to do Roth conversions or not. If you only have 500 to a million dollars. And I say only a as in like, you don't have any other sources of income or tax deferred money that could be there in the future. Not that 500 to a million dollars is not a lot of money because it absolutely is. But if you only have that source of money, you might not need to do any Roth conversions because you could be spending down those balances a little bit. Before you get to that age, which is going to tie in directly to the second point I'm going to make here in just a moment. But if you're under that $500,000 balance, in tax-deferred accounts, you likely shouldn't be doing Roth conversion simply because it's never going to be so great. Your armies are never going to be so great in the future that it would be a burden to you in most scenarios. Again, you can go ahead and evaluate it, check it out, see if it would be helpful, kind of do some planning and projections to look forward. But those are kind of the categories in the, how I like to break it down in terms of who should or shouldn't do a Roth conversion. But by doing a Roth conversion, you can lower your future required distributions and, and, and essentially pay a lower tax rate today, as opposed to what you could be paying in the future. All right, the second way that you can lower your future RMDs ties directly into the first one, but it's to reduce your account balances before our MDs begin. And number two might work in tandem with number one. So for example, if you're trying to do Roth conversions, you might not be able to spend down your IRAs as aggressively because your tax brackets are going to get filled up by doing the Roth conversion rather than the spin down. So it's kind of like one or the other in most cases. So if you don't need to do a Roth conversion, you might just be spending money out of that account. To live on in the early stages of retirement. And what that'll do is that all effectively lower your overall balance in the years leading up to 73 or 75 before those RMDs begin. So I like to call this a spend down strategy, meaning you are intentionally. Taking money out of your IRAs in hopes of number one, living off of that money. That's the first thing. But number two, actually lowering your RMDs. , in the future by doing so. So what this is doing is, is it's not moving money from one account to another. You're actually taking money out of the account and spending it as opposed to the Roth conversion, which was the first one is you're taking money out of the account, but you're also moving it into another account type, being that Roth IRA. So that money stays invested in the first option I told you, but this one here is you're just taking this out for your retirement income withdrawals. So the spin down strategy will reduce your balance over time, which will be beneficial towards your goal of lowering your RMDs in the future. But I want to encourage you not to reduce your IRA balances all the way down to zero, especially if you're charitably inclined and here's why it's number three, because whenever you get to R M D age, you can do, what's called a qualified charitable distribution or a QCD for short. So kind of keep this straight in your mind. We've got our MDs for required minimum distributions, and we have QCDR for qualified charitable distribution. So what these do is these two work together. And so you can actually, uh, do a QCD at age 70 and a half. It might not be the most beneficial thing because you're not. Being forced to take money out of your IRA, but what effectively is going to happen here? When you do a QCD is you are going to, in place of your RMD, you're going to give to your favorite church or charity or whatever it might be that you like to give to. And by doing this, as you are fulfilling your RMD obligation, and you're also feeling your desire to give. And this is a powerful strategy, especially for those who are charitable, because you're, you're going to take the money out of the account. And you're also going to give might as well do it in this tax efficient way so that your QCD offsets your RMD. Now, if you think back to what I just mentioned a moment ago about not lowering your IRA or your tax deferred balances all the way down to zero. The reason I say that is because if you don't leave some money in that account and you're charitably inclined. What you would do is as you would have no money to do a QCD with, because there's no money in your IRA. So if you are charitably inclined and you want to give to some charity for the rest of your life. Leave some money in your tax deferred account, make sure that you have some there so that your RMDs come up and let's say it's called a $10,000 RMD one day. And then you want to also give $10,000 to a charity. Well, you can offset that RMD with that $10,000 QCD. So that's one kind of next level tip for you is a lot of people want all Roth, everything, a hundred percent Roth all the time, and that's great, but also if you have to do a conversion to get all Roth money, you could be doing some, some things tax inefficiently by getting your IRA balance all the way down to zero, because you wouldn't have the opportunity to do a qualified charitable distribution in that scenario. So that's number three, you can make qualified charitable distributions, which lowers your RMDs in the years in which you have those required distributions. The fourth way that you can lower your future RMDs again, ties into the first couple is by delaying your social security benefits. Now, Jacob, how would the Lang my social security benefits reduce my IRA withdrawals that I have to take. Here's how if you don't take your social security benefits, what you're doing is you will be forced to take money from somewhere else. Right? If you have money in an IRA, it goes back to number two, which is the spend down strategy. What you can do is instead of taking your benefits at 62 or even 65, or even 67, you can spend money out of your tax deferred sources like your IRAs or your 401ks. You can spin that out of that account to, to lower that balance in the first three to five to seven years of your retirement. And then you can flip your social security benefits on a, at some point there in the future. And what you've effectively done is you've used your IRA for your living expenses, which has lowered your balance, and you've increased your social security benefits. In fact, if you delay from 67, which is most people's full retirement ages now until 70, what you're going to have is, is you're going to have a 32% increase in your social security benefits, which is really big. And that's locked in for the rest. Of your life. So you're increasing your benefits, your fixed income in the future. And you're also reducing your required distributions in the future by spending down. That IRA. Now what this also helps with is it also gives you the opportunity to do number one, which is Roth conversions. Because whenever you're not taking your social security benefits, that amount of money is not going to be filling up tax brackets. Which would cause you to have to convert less than you otherwise would like to in these what we call gap years, this opportunity to do Roth conversions. So by delaying your social security benefits, you immediately are able to do either a spend down strategy or the Roth conversion strategies we talked about. But also listen to this by doing that, you're able to reduce your future RMDs later. Uh, once you turn 73 or 75, and let's say you've turned on your social security benefits at 70. What, when you get there, your social security benefits are large. Obviously they're large. They could be, if you wait until 70 to take them. But your RMDs are lower. And what that does is that helps you pay less tax, if any. On your social security benefits, because what most people don't know is that if your only source of income is social security, You will pay no tax on that money. As it stands today in 2024, at some point, this will change unless the legislation has changed before then. But right now today, if your only source of income is social security, you will not pay tax on that money. Now, if you have other sources of income on top of that via a Roth conversion, which gets added to your taxable income or via a spend down strategy from your IRA. And you've got your social security going at the same time. Depending on how much income you're creating or income tax liability. You're creating by doing those two things, you could be paying taxes on at least part of your social security benefits right now as you take them. So by delaying them, you're actually going to give yourself more of a benefit in the future because you're going to pay less tax on your social security benefits. If you have minimal other income from your RMDs. And the fifth and final way that you can lower your future RMDs is by using asset location strategically. So here's what I mean by asset location. Let's say you've got a Roth IRA, a traditional IRA, and a joint brokerage account. Let's say you're married. And what you've got is three different account types. Each of those different accounts are taxed differently. So a Roth IRA, as we know is a tax-free account, which means once the account has been opened for five years and we're 59 and a half, you can take any dollars out of that account tax, a penalty free. Okay. So it's a tax-free account upon distribution. And traditional IRA is taxable upon distribution because you deducted or deferred the taxes. Originally, whenever you put the money in the account. Now the third account type is that brokerage account. This is technically what I call a taxable account because the money is taxed every single year. So it's after tax money when it went in and then technically it's no tax whenever you withdraw the money in the future, but every single year, you're going to be taxed on any realized gains that come up, but also any interest or dividends that come into the account from your investment holdings. So it's taxed annually. That's why I like to call a taxable account, but it is advantageous because. It could receive what's called long-term capital gain treatment, which has beneficial because it's a lower tax rate than your normal income tax rate. So let's say we've got those three different accounts, Roth traditional, and then a taxable account. And we've got a million dollars and let's say 60%. Of that million dollars is in your IRA. Another 200,000 is in your Roth. And then another 200,000 as in a brokerage account, that'd be a good mix in my opinion. So in that scenario, if we needed a 70% stock, 30% bond cash allocation. We wouldn't want to hold 70, 30 in each account type. We wouldn't want to hold 30% bonds and cash in the Roth because that account, again, it grows tax-free we want that one to grow as much as possible because of the tax favorable treatment it's going to receive. Ultimately, whenever you take money out, Additionally, we wouldn't want your brokerage account to have cash or bonds or fixed income in it. If we can avoid it. Because again, that is going to be taxed every single year. That account type will be taxed every year. And those types of holding specifically being fixed income or money market or cash. Those will be taxed at short term capital gain rates, which is the same as your normal income tax rate. So it's kind of tax inefficient to hold. Fixed income there. If you can avoid it. And then finally in the traditional IRA, again, every dollar that comes out of that account site will be taxed as normal income regardless of how the account is invested. So you would want to have super high growth investments in that account type, because you're building up essentially a larger tax bill for yourself in the future. So to use asset location in this scenario, I've just described to you. What she'd probably end up doing is you'd probably take your Roth IRA, make that a hundred percent stock. You'd probably take, if you can, you'd probably make your brokerage account a hundred percent stock. And then your traditional IRA would probably come out to, I don't know, 30% stocks, 70% bond cash, or, um, you know, uh, four 40% stock and 60% bonds and cash. Basically you take the investment types and align them with your account type. So that's one way to help. Number one, lower your annual taxes by putting things in your brokerage account that are going to receive more favorable tax treatment, such as a longterm capital gain, but you're also going to lower your future taxes because you're limiting the amount of growth that is going to happen in your traditional IRA, which in effect will lower your RMDs because the balance will not be as high in the future because you're investing that money less aggressively. So that's one way to be strategic with your asset location. And ultimately that helps you lower your future RMDs. And once you combine all of these different strategies into one. Cohesive and synchronize plan. That's where the magic really happens. That's where you really start to see things kind of coming together and it kind of clicks in your mind. Hey, I can't just do one of these things on their own. I've got to kind of put them all together to really get the most benefit I can out of these strategies. So. Hopefully, this gives you a good idea of different ways. You can lower your RMDs. And, as someone who works with retirees every single day, and I own my own financial planning firm, if you need help with this, or you want a second look or just kind of to get my opinion on different things, then reach out. There should be a link down in the description where you can schedule a time on my calendar. We can have an intro conversation, just get to know each other. I can hear your, your story, kinda hear where you're at and some of the concerns you know, that you might have. And then from there we can decide, Hey, what can I do to help if there's anything at all? It's completely free. So feel free to take me up on that if you'd like, but other than that, thank you for tuning into this week's episode. I hope it was helpful if it was again, share it with a friend and we will see you next week.  Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at Jacob at retirement answers. net. And I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.