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5 Ways to Reduce Your RMDs (& SAVE BIG) · Retirement Answers

• 0:02
  Jacob: Every time that money is distributed out of that account, that is a taxable event, and the amount of tax that you would be paying on these forced distributions, that's really what we're focusing on and trying to minimize. So there there've been a few changes here to RMDs in the last couple of years, the biggest of which is the age in which you must start taking them. So that's also referred to as your required beginning date. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place.
• 0:34
  Hey there. My name is Jacob Duke, and each week, I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Are you worried about having huge RMDs or required minimum distributions in the future and potentially that big tax bill that could come with them? Well, I want to share with you five ways that you can reduce your RMDs to help save big on taxes.
• 0:59
  And be sure to stay to the end because the fifth way that I want to share with you is one that anyone can do right now. Hey there, my name is Jacob Duke. I'm a certified financial planner and the founder of River Tree Wealth, and I'm here to help you retire with confidence. If you're enjoying the show, I hope you are benefiting from it and it's been valuable to you on your retirement planning journey. And if you are benefiting from the show and you do enjoy it, I'd love if you could give me a rating and review there on Apple Podcasts or Spotify, because that helps other people just like you find the show and learn from these same tips and strategies.
• 1:28
  So before we jump into these five ways, we first have to understand the potential negative impact of large unwanted RMDs. Now RMDs are not always a problem. And in fact, there's a potentially a reason to have RMDs in the future. We're gonna talk through that here in just a little bit, but they could cause you to pay more in taxes than you would like to. They could also cause more of your social security to become taxable.
• 1:51
  They might create IRMA surcharges related to your Medicare premiums based on your income limits being too high, and they could cause your heirs to pay higher taxes on their inheritance in the future. These required minimum distributions are a way to basically force you to distribute money from your tax deferred accounts, such as a tax deferred four zero one ks or a four zero three B or a TSP or a traditional IRA. And every time that money is distributed out of that account, that is a taxable event and the amount of tax that you would be paying on these forced distributions, that's really what we're focusing on and trying to minimize. So there've been a few changes here to RMDs in the last couple of years, the biggest of which is the age in which you must start taking them. So that's also referred to as your required beginning date.
• 2:33
  And previous to 2020, that age was 70.5 for everyone. So you can start taking money from a tax deferred account or a qualified account at 59.5, but you must have begun started taking money from your account via RMDs at 7.5. Now that's what it was before 2020. Now, at the end of 2020, that was actually increased to 72 for everyone. And that was due to the Secure Act that was passed in late twenty twenty.
• 2:59
  And then they increased the age again under Secure Act 2.0 to be either 73 or 75, depending on what year you were born in. So if you were born from 1951 until 1959, your RMD age is 73. If you were born 1960 or later, your RMD age will be 75. So with that in mind, let's take a look at these five ways that you can reduce your RMDs in the future. The first two ways I want to talk about are really centered around reducing your tax deferred account balances, because that's really the problem at play here.
• 3:30
  Let's say you have a million dollars in a tax deferred account and you're age 60 right now. Well, on how much you take from that account over the first, you know, ten to fifteen years of your retirement, that will be a big part of how much you will have in RMDs in the future. Therefore, how much you will pay on taxes in those RMDs in the future. So the first way that you can lower your future RMDs is by intentionally spending down your tax deferred accounts. So the key here is you have to be intentional about it.
• 3:55
  Now, why will we do this? Why would we spend our accounts down? Well, you wouldn't probably spend them all the way zero. What you'd probably do is you'd say, again, if we have a million dollars in that tax deferred account, how can we get that to $500,000 before we get to RMDH? So you have to think about this in a particular way.
• 4:11
  Let's say you've got a traditional IRA with a million dollars, a Roth IRA with 250,000, and then you have a brokerage account with another 100,000 in it. Well, terms of being intentional about where you're gonna be spending money from, in terms of your overall strategy to reduce your future RMDs, it might make sense to take all of the income you need in retirement from that IRA, which is tax deferred compared to taking it from your Roth or your brokerage account. And the reason for that again is number one here, we want to spend down that tax deferred account balance on purpose. We're trying to spend that particular account rather than these other ones. And now what this is gonna do is it's gonna increase your taxes in the years in which you're taking money from that IRA.
• 4:49
  But the goal here is to reduce your future taxes, which would be larger or greater if that account balance grows and tax rates potentially increase, and you have other income such as social security or a pension or something else coming in as well that could push the RMDs that you're gonna be receiving into higher tax brackets whenever you could have actually realized those taxes at a lower bracket today. And what this also does is it allows you to have your Roth or tax free money growing longer. Therefore, you're gonna have more tax free money in the future. Also too, your taxable account is a great account to pull on whenever you would like to just take a little bit of money out. If you've got some capital gains, you might be able to realize those gains at a 0% long term capital gain rate.
• 5:28
  Or if you don't ever need that money, you could leave that to the next generation tax free because of the step up in basis. So these IRAs, these tax deferred accounts, those are the ones we really have to focus on. And by spending those down earlier on in retirement, you can create a little more flexibility in the later years for yourself or for anyone who might be after you. Now to really get the full benefit of spending down your tax deferred accounts first, it makes sense to delay your social security while doing this. Now, what does this do?
• 5:56
  Well, whenever you're taking your social security, a portion of that, a maximum of 85% of your social security benefits, whatever be taxable, and that income will fill up the lower tax brackets at least to a point. So that social security income could likely fill up the 10% bracket, but also parts of the 12% bracket, which means anytime you're taking money out of a traditional IRA on top of that, it's gonna make your social security at least partly taxable, but then also it's gonna make those distributions be at a higher tax rate potentially as well. And so instead of taking your social security potentially right at 62, can you think of it this way, you can delay your benefits, which is gonna increase your benefits whenever you do start taking them, but you're also going to spend down that tax deferred account balance, which is what we're trying to do here at least in point number one, you can spend that down faster by not taking money from social security. Therefore, can take more money out of your tax deferred account to meet your income needs, and that will spend it down faster. And so you can maybe see that a lot of this has to work together, but that's the first way that I wanna share with you that you could reduce your RMDs.
• 6:52
  You can use an intentional spend down strategy by not taking income from other sources early on in retirement, you can take that from only your IRA or your tax deferred IRA, and you can spend that down faster. Therefore, your RMDs would be lower in the future. The second way that you can reduce your future RMDs is by doing Roth conversions. Now, this is a pretty popular tax planning strategy and it's one that a lot of people talk about and I often find that many people do them whenever they shouldn't be. So just know that I'm not necessarily endorsing these if they don't necessarily make sense for your situation.
• 7:23
  But if you do have a decent sum of money in a tax deferred account, a Roth conversion could be a great way of reducing your future tax liability, but it means that you will pay those taxes now. So what is a Roth conversion really? What it really is, is if you have a tax deferred IRA, what can you do is you can open up a Roth IRA if you don't have one open already, and you can decide to move money from a traditional IRA to a Roth. So what you are essentially doing there is you're going from tax deferred to after tax or tax free in that Roth account. And so to do that, you have to pay the income taxes whenever you move that money over.
• 7:55
  So what you're really doing is you're deciding to pay taxes before you ever have to, to get that money into a tax free account and reduce how much your tax liability would be in the future. So that's really what a Roth conversion is. Now, why would you do this? Well, the only reason that you would ever do a Roth conversion is if your tax rate is lower now than it would be in the future. And you're like, Jacob, well, if I'm still working?
• 8:16
  Would it make sense to do a Roth conversion? Depends on your income, but most likely the answer is no, it might not be the best thing for you to a Roth conversion because you have a earned income that your Roth conversion amounts would go on top of, which means you're gonna have a higher tax rate on the conversion amount. So if you're still working, a Roth conversion may or may not be beneficial, but the odds are it's probably not gonna be helpful because your tax rate will likely go down in the first few years of retirement because you won't be having that salary or whatever income you have coming in from your job. Now, if you are retired already, let's say that you're 60 and you just retired. Well, you might be in what's called gap years, meaning your income tax rate is going be lower right now compared to what it was before you retire, but also is going to be higher in the future because of these RMDs, social security pensions, any sorts of income you might have coming in in the future that haven't started yet.
• 9:03
  So if you're 60, your social security has not started yet. But also you might have a pension that kicks on at 65. So this is what we call our gap years, meaning you have a lower income period, meaning fixed income, you don't have a fixed income per se at that point, which means your forced income taxes are gonna be at the lowest point they could ever be at. So this presents a really good opportunity to do some Roth conversions during this period at a low tax rate. So at least the first two tax brackets, the 1012%, because once those fixed income sources such as social security or a pension or anything else start flipping on later in your retirement, so 65 and after, let's say, that means that you will have at least a base of income that you will have.
• 9:42
  Let's say $60,000 that you will no matter what get coming in between social security and a pension, that means any Roth conversions you do in the future would start at 60,000 and go up from there depending on what tax brackets we have. So, what you could do is you could pay taxes now by doing the conversion and you could do that at the lowest rates possible before these other sources of income get turned on. Now, I've talked about this before in other episodes, but the best way to do a Roth conversion is to pay the taxes with outside dollars, so money that's not included in the IRA already, so that'll be cash or money in a brokerage account. So if you have cash on the sidelines that you could pay the taxes with, what this will do is let's say you've got a million dollars in an IRA and you wanna move a $100,000, you know, to your Roth. But you have a couple different options there whenever you're doing that $100,000 conversion.
• 10:28
  You could withhold the taxes from the conversion amount. Let's say it's a 20% rate that you wanna withhold. So you could withhold 20,000 out of the 100, that means only 80 is gonna be going into the Roth IRA. So you kinda have a little bit of a hole to claw out of from an investment return standpoint. Or the better option here to get the most benefit of this is to pay that $20,000 of taxes with cash that you have at the bank or something out of our brokerage account.
• 10:52
  And instead of having $80,000 being in the Roth IRA because you withheld 20, what you can do is you can have a $100,000 in the Roth IRA immediately, which means you have more investing power already working for you, therefore more growth that's gonna be tax free in the future. So if the best way to do it is gonna be to pay taxes with outside cash, but if you don't have that option because you just simply don't have enough cash to do it, that's totally fine. Doing Roth conversions and withholding the taxes are still beneficial, it's just that they won't be as beneficial as if you had the cash. So just don't think that you can't do them if you don't have the cash available to pay the taxes, just know that that is the best way to do it you can make that happen. So Roth conversions are the second way that you could help lower your future RMDs, and this is a lot like number one, which is really just we're trying to lower how much money you have in those tax deferred accounts so that you don't have RMDs or if you do, they won't be very large because your Roth IRA does not have a required minimum distribution on it in your lifetime.
• 11:44
  So you probably just need to evaluate this for yourself. And like I said earlier on, it's not the right strategy for everyone, but if you have a large tax deferred account such as a million dollars or more, what you're gonna do is you're gonna build up a larger tax deferred account because it's gonna grow over the next ten to fifteen years before you get to RMD age and you're not taking as much money out of that account as you otherwise could be. So what you're doing is you're really just building up a larger tax bill for yourself at that point, either for you, your spouse, or perhaps even your kids or grandkids, whoever would be receiving that account in the future, you're just building up a larger tax bill for whoever it might be in the future. So a thoughtful kind of intentional approach around this would be something you need to evaluate for yourself. And like I said, not everyone can benefit from it, but you should at least evaluate and see, can I benefit from a Roth conversion?
• 12:28
  Is it something I should consider? And perhaps bring in some professional advice to help you along the way. The third way that you can reduce your future RMDs is through what's called a qualified charitable distribution or QCD for short. And I know what you're thinking, Jacob, there's a lot of acronyms flowing around here. We've got RMDs and QCDs.
• 12:46
  And you're definitely right. There's a lot to know here and a lot of different confusing terminology. But just know that the RMD, the Required Minimum Distribution, and the QCD, the Qualified Charitable Distribution, those two are very closely tied together. And the reason for that is if you are charitable and you do have RMDs, let's say that you're 73 and you're making your RMD payments out of your tax deferred accounts because you're being forced to do so, but let's say that you're also charitable, you give to a church or a charity on an annual basis. Well, instead of doing the RMD, you could do what's called a QCD, a qualified charitable distribution, in place of that RMD.
• 13:23
  So for example, let's say that you have a $50,000 a year RMD that you have to take from your IRA or your four one ks, whatever it might be, and you want to give $20,000 to the charity there locally. What you could do is you could do a $20,000 QCD every single year, and you could take that and send a check directly from your IRA or your four zero one ks to the charity of your choice, and then now you have the remaining R and D to do, dollars 30,000 out of the 50 that we still have left over, and that's how much you would technically pay tax on. So you reduced your tax bill, you fulfilled your charitable obligations or whatever you desired to do, and you're paying less taxes yourself and the charities receiving money tax free. So what this does is kind of like a win win all the way around. And if you are charitable, you probably should not convert all of your tax deferred accounts to Roth immediately, all the way down to zero in a tax deferred balance because you would be giving up the opportunity to use QCDs to your advantage if you are charitable.
• 14:23
  So, if you have a million dollars in a tax deferred account and you're like, I'm gonna convert this thing all at once down to a Roth, which means I'm gonna have no money in tax deferred, but I also give 15 or $20,000 a year to a church. Well, means that you're gonna pay more tax on the Roth conversion than you needed to pay because you could have left money in there to have RMDs in the future, which means that your QCDs could meet that RMD requirement, but then also you're able to give to that church as you desire to. So, just know that there's a lot of thought and planning that has to go into all these strategies in general, but these are things that you have to think about. And just know that the annual max per person for a QCD is $105,000 Meaning, let's say your RMD was $200,000 and you wanted to do a QCD, well, max QCD amount that could you do is $105,000 which means 95,000 would be left over. That's how much you actually have to do as an RMD to yourself and pay income taxes on.
• 15:13
  So there is an annual limit on QCDs, but not many people really reach that. The fourth way that you could reduce your RMDs is by checking your beneficiaries and here's why. Whenever you're doing an RMD that's based on your life expectancy or the single life table. So it's based on your age at that time. But if you're married and your spouse is ten years or more younger than you, and they're the sole beneficiary named on your account, what you can do is you can use the joint life and last survivor expectancy table rather than the single life expectancy table which you're currently using.
• 15:44
  So if you have a spouse that is ten years younger than you or more, and they're the sole beneficiary named on the account, what you can do is you can reduce your RMDs because now the average age between you two is going to be lower, which means the calculation or the formula is going to be more beneficial because your RMDs will be reduced by doing that. So that might not apply to the majority of the population, but there are many people who are married and have a spouse that's ten years younger than them or more. And what you can do is you can have them as a sole beneficiary and then you can use the joint life table for the RMD calculations rather than the single life table, which would immediately reduce the RMDs that you have to take because it's technically tied to both of you, not just you as the older spouse or the account owner itself. So just something to check out there if that does apply to you, look into that and you could reduce your RMDs immediately by doing so. All right, the fifth way that you can reduce your future RMDs, and like I said, this is one that anyone can do immediately right now today, is do what's called asset location.
• 16:43
  Meaning we are trying to manage the type of investments in the account type correctly. So asset location, what is it? Well, it's intentionally trying to make sure we invest certain investment holdings such as a stock, bond, cash, money market, whatever you have in the correct account types. So we wanna use the tax type of the account, whether the account's tax deferred, tax free, or taxable, wanna use that to our advantage as much as we can. So for example, if you do have assets kind of across the board, and let's say you've got an IRA, you've got a Roth IRA and you have a brokerage account, they all have money in them.
• 17:19
  You wouldn't wanna hold your CDs or your corporate bonds in your brokerage account because all the interest that's coming off of that is gonna be taxable as normal income. Instead, you'd probably wanna hold those in your traditional IRA because that is tax sheltered, meaning the interest and dividends, they're not gonna be taxed annually. They're only taxed whenever you distribute money out of the account. And regardless of the underlying investments inside of the account, every dollar that you take from an IRA that's tax deferred is going to be taxed as normal income. Now back to the brokerage account, which is taxable on an annual basis, the tax rate that you are paying on your interest, dividends or capital gains is dependent on a few different factors, such as the investment type, whether it be a stock or a bond, how long you held the investment before selling it, less than a year or more than a year.
• 18:04
  And so you can manage the tax rate on these different potential taxable sources of income because you might wanna hold your investment longer than a year so you get a long term capital gain rate, which is gonna always be lower than a normal income tax rate. Or you could own only stocks in that brokerage account, which the dividends are gonna be for the most part gonna be qualified, meaning they're gonna receive a long term capital gain treatment for a qualified dividend, which is again, lower than a normal income tax treatment. And that's compared to a bond, which is always gonna have normal income tax because it's gonna be a non qualified dividend or interest, which is always gonna be normal income tax rate. So the type of investments in the account matter. And then finally that Roth account, you probably wouldn't wanna hold cash where you don't wanna hold bonds or anything that doesn't grow a whole lot.
• 18:47
  You don't wanna hold that in a Roth because again, the benefit of that Roth IRA is that it grows tax free. So you would want to use that potential tax free growth opportunity to your advantage and have the most aggressive type investments in there. And so this means that if you have a 70% stock, 30% bond portfolio for all of your assets combined between these different accounts, that should mean that you will not have a seventythirty portfolio in each account type. You're gonna have a seventythirty overall, but your Roth IRA should most likely be around 100% stock and your brokerage account arguably could be the same, which means you're gonna have a higher bond or cash allocation in your IRA. But this brings you to a seventythirty overall.
• 19:25
  And so you're using the taxability of each account type to your advantage as much as you can. So if we bring this back to RMDs and how this could benefit you is, is if we have your more conservative investments in your IRAs, that IRA will not grow as much over the next five, ten, fifteen years, which means your RMDs would subsequently be lower than they otherwise could have been had you invested really aggressively in it. Again, this all plays together with all of the different things that we mentioned, but really the main goal is how can we almost suppress or reduce the amount of money you have in a tax deferred balance? And if you can get that to that Roth or a tax free balance. And so that's asset allocation using the tax types of the accounts to your advantage to make sure that you aren't paying more taxes on an annual basis than you have to, but also looking forward into the future and saying, I'd rather this account grow being my Roth instead of that tax deferred account because I know there's gonna be RMDs on it in the future.
• 20:16
  So hopefully that's helpful and a good explanation of what asset location is and you can benefit by doing that again. You can do that today so you can go make some changes yourself right now. All right, so those are the five ways that you can reduce your future RMDs. The first one is to intentionally spend down your accounts before turning on other sources of income. The second one is Roth conversions.
• 20:36
  Again, check this out for yourself. Don't do it just because everybody says to do it. Evaluate it, make sure it's valuable or beneficial for you. The third way is QCDs or qualified charitable distributions. So if you are charitable, go ahead and think about using those to your advantage during your RMD years and meet both your charitable obligations and fulfill that, but then also reduce your tax bill by doing so.
• 20:58
  Number four, check your beneficiaries. If you do have a spouse that's ten years or more younger than you, and they're named as a sole beneficiary, you can use that joint life and last survivor expectancy table instead of the single life table for those RMDs. And then finally, asset location. Again, this is something anyone can do right now and anyone should do regardless of them wanting to reduce their RMDs, but it does help you do that because you would have more conservative investments in your IRAs. All right, that's it for this week.
• 21:27
  If you have questions or anything that I might be able to help you with, feel free to shoot me an email. It should be listed down below in the description. Or if you just want to learn more about how I work with my clients and what I do for them and you want to talk more about that, then you can also shoot me an email. Other than that, I hope you have a wonderful rest of your week and we will talk to you again very soon. Hey, it's Jacob again, and I wanted to extend a quick offer to you.
• 21:50
  If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, 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.
• 22:11
  I look forward to talking with you again next week.