Ep. 126 | Decoding Required Minimum Distributions (RMDs)
Download MP3Hey, everybody, and welcome back to the Teaching Tax Flow podcast today, episode 126. We are looking at RMDs. That's right. Another acronym from the Teaching Tax Flow world. But But before we dive into this one, let's take a brief moment as always and thank our episode sponsor.
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John Tripolsky:Hey, everybody. Welcome back to the Teaching Tax Full podcast. Today, as you heard in the intro and hopefully you read in the show notes, we're looking at RMDs. So it's not EFTs, nothing with all these other acronyms that we always bring out, RMDs. So what exactly does that mean?
John Tripolsky:We're gonna get into it. Chris Pacquero, welcome back, sir. How are we doing today?
Chris Picciurro:I'm doing great. How are you doing today?
John Tripolsky:I'm doing good, man. I feel good that we are going to decipher another, acronym here for these Yeah. Because it's almost like when we get caught up with them, and I think I know all of them, it's like, oh, here comes another one. They just, like, fly in, you know, out of the sky and and kinda land on my shoulder. So this is a good one.
John Tripolsky:So let's let's look at these required minimum distributions, and really, obviously, what they are, but who they apply to and, you know, just a full on understanding discussion around this.
Chris Picciurro:Yes. Our required minimum distributions are, per not, you know, we think about them in general, and we're gonna jump into this, is pertaining to people in their seventies. However, they could pertain to people at any age depending on if they're a beneficiary of a retirement account or something like that. So, first, we're gonna talk about the kind of the history of required minimum distributions, and then we're gonna look at the what the current rules are for for 2020, 04/2025, deadlines, you know, the and, and then, you know, John, this teaching tax flow. We're gonna take a couple minutes to provide, people that are tangling with RMDs with some tax planning opportunities, and then just some just some, you know, just some thoughts moving forward.
Chris Picciurro:But, let's let's before we jump into RMDs or remember, required and minimum distributions. What an RMD is is it is it's a requirement for someone that has money in a pretax account. So let's call let's say an IRA, individual retirement account, that you are required to take that money out of the account at some point. Now let's think about this. When the money was put into the IRA, 99% of the time, maybe 99.9% of the time, it is you get a tax deduction for it or it goes into your account pretax.
Chris Picciurro:So, like, a four zero one k plan, you're putting that money in pretax. You're not paying a federal income tax on the money that you put into the retirement account. So ultimately, you get a you either get a deduction for it or it's going in pretax. So there's a big benefit on the front end of these retirement accounts. The money then grows tax deferred, there's a difference between tax deferred and tax free, but as it grows, it grows tax deferred, and then at some point when you take the money out of the account, it's taxable at that time.
Chris Picciurro:So let's say you put a hundred dollars into an IRA, John, the hundred dollars grew to be worth $400. As that growth occurs, you're not paying tax on it. You could even sell mutual funds, bonds, stocks, real estate, whatever within that IRA and not pay any tax on it because it's in the IRA. Now that hundred dollars grew tax deferred to $400. You go take that $400 out, you're gonna pay tax on that $400 of whatever your tax rate is the year you take it out.
Chris Picciurro:So the IRS I mean, that's a huge benefit to get a tax deduction and then that tax deferred treatment. So the IRS says, remember one of our three laws of teaching tax flow, Your tax agencies are your involuntary business partners. So the IRS says, look. You can't just kick the can down the road your entire life here. At some point, someone's gotta pay tax on all this tax deferred growth, all this money that's sitting in these retirement accounts that no one's paid tax on, and someone got a tax benefit.
Chris Picciurro:So this is a good one.
John Tripolsky:Way to say it too because it's it's almost like they're coming up saying, alright. Alright, buddy. You've you've reaped the benefits for so long, but time to take that cash and put it back out into the ecosphere. Like, quit quit ordering that money. At some point.
Chris Picciurro:Go through our tax system again because right now it's on the sidelines of the tax system. So this start I mean, the the original required minimum distributions were, introduced back, John, before you were even born. And I was I was probably in diapers. And you know what? I probably had a I probably had a sweet head of hair at the time, the revenue act of 1978.
Chris Picciurro:Alright? And, you know, and that that was when required minimum distributions were, were were started. We had a big tax reform act in 1986. John, you like to make jokes about my age. I was not practicing, tax in 1986.
Chris Picciurro:I was 11 years old, and I was running a little, baseball card, outfit out of my out of my basement.
Disclaimer:A little a
John Tripolsky:little operation. Right? Were you paying tax on the income from the the baseball card? It was a hobby. Sir?
Disclaimer:Okay.
Chris Picciurro:It was a hobby. Okay? So in 02/2019, the Secure Act raised the required minimum distribution age to 70 from 70 to 72. And in 2022, secure two point o act. Oh, yeah.
Chris Picciurro:Guess what? We have a lot of content on the teaching tax flow, YouTube channel about this stuff. Raise the RMDH to 73, and then eventually 75. What does that mean? It's at that age, if you own an IRA, that you have to begin taking money out of the account.
Chris Picciurro:And there are significant penalties if you fail to make a required minimum distribution. We're gonna touch on that also because the IRS got a little friendlier, a lot a little gentler on those penalties. But I I mean, real story, John, I had someone in the teaching tax law community, a financial advisor, reach out to me and say, I've got a little situation. And we talked to a a taxpayer. They are mature age.
Chris Picciurro:Their spouse passed away, and they were required to make these minimum distributions, and they have not made these minimum distributions for nine years. So that's a sticky, sticky situation. Oh, yeah. So yeah. So all the way
John Tripolsky:coming in and saying, you know what? We require you to take these. If you don't, you're gonna pay us some way or another by way of fines, and rightfully so, I guess. Right?
Chris Picciurro:So in general, anyone 73 or older are required to make take distributions from their tax deferred accounts. Tax deferred four zero one k's, IRAs, four zero three b, etcetera. With a secured two point o act, we no longer have to take RMDs out of Roths. That makes sense. Right?
Chris Picciurro:And that's why we talk about the power of tax free income and growth and why a Roth IRA could be extremely valuable because that can continue to grow without having to take the money out tax free. So your re RMD age ultimately is based on your year of birth, but think about once you get to your mid seventies, you're gonna be required to start taking money out of those retirement accounts.
John Tripolsky:Makes sense. Makes sense.
Disclaimer:And it's good to kinda have that gauge. Right? You just can't throw it in there and say, oh, well, you know, I'll take it when I need it kinda kinda deal. You don't, don't exactly have the
John Tripolsky:full on luxury in this case.
Chris Picciurro:Roy, I mean, obviously, that's that that's a good point. You can always take out more than your required minimum distributions, and you can take distributions out of your retirement accounts before you hit your seventies. You know, it's gonna be taxable, but the thing is this is what a lot of people say, I don't necessarily need this money. I want it to continue to grow tax deferred. So I want that I want that to grow.
John Tripolsky:And, Chris, I'd be very curious too just with, you know, individuals, unless they're told about this. I can see this being one of those things that, you know, people just don't know, really. I mean, you would you would never think, like, oh, they're gonna make me take it out of this, because I've been, you know, adding to it over the years. So I'm glad we're covering this too. And and to be honest, I forgot at what point it was probably you that told me about this.
John Tripolsky:I didn't even know it was a thing. So it's so I'm kinda speaking from the heart here
Chris Picciurro:a little bit. What will
John Tripolsky:happen? It's good we're covering these.
Chris Picciurro:What will happen is once you start getting to that point in your life, whoever the fiduciary is typically for your IRA or your four zero one k or four three is gonna be reaching out and notifying you or your financial adviser. Hey. You've got a required minimum distribution to be taken. Okay? There so you're gonna get notified.
Chris Picciurro:However, what happens is there are many times where you have spouses where one kinda runs the finances, one doesn't deal with the finances, and the one that runs the finances passed away, and the other one has no idea about these RMDs. Or could be a situation where you inherited a retirement account and you weren't you didn't know that you were even the beneficiary, that you were required to make minimum distributions. So this is where, you know, you made a good point. You've you've got to make sure that you're surrounding yourself with your board of directors, and and working with financial advisors or or someone to help you navigate through this. Now a question always comes up.
Chris Picciurro:Well, how in the heck do we figure out what my required minimum distribution is? So it's a there there's a two pronged I look at it as a two pronged calculation. You first look at what your account balances are on December 31 of the previous year. So we are, you know, let's say it's spring of twenty twenty five. Our RMD for 2025 is gonna be based on your your account balances December thirty first of twenty twenty four in those retirement accounts.
Chris Picciurro:And then you look at that and you divide it by a factor in the IRS uniform life expectancy tables. So ultimately, if you're 90 years old, your RMD is gonna be a lot higher than if you're 76 years old with the same account balance. So that's now one thing that one practitioner tip you need to know is that, John, let's say you have three IRAs. Right? And all of them have a hundred thousand dollars in them, and your RMD is $20.
Chris Picciurro:You only have to satisfy that RMD from any any of these these IRAs. You only have to take out $20. You don't have to take out money out of each one, if that makes sense. Because you might
John Tripolsky:have to go with IRS So it's not a cumulative it's a cumulative number, not a one out of each account to Correct.
John Tripolsky:Get up to that sum.
Chris Picciurro:And then people say, well, how next IRS gonna figure this out? Right? Well, they do. And especially with AI and and technology, I think enforcement's gonna be higher and higher. Why?
Chris Picciurro:Well, they have the IRS has your date of birth. They, also know how much money is in your retirement accounts. There's a there's a form I think it's a fifty four ninety eight that's a annual reporting, from each retirement account to the IRS saying this was the balance in the previous year. So there are ways IRS and I again, I think with AI and and computer learning, they're gonna start enforcing this because the next thing we're gonna talk about are the penalties. So the penalty for missing your required minimum distribution, and this is just a federal penalty, right, was 50% of the RMD.
Chris Picciurro:So in my case, $20,000 let's say your RMD was $20, John. You're first of all, you have to take the $20 out and pay tax on it. Second of all, you have to pay 50% of the $20 as a penalty.
John Tripolsky:Oh, that's brutal.
Chris Picciurro:Not a good look. That's So there No. The the security point and all act, my wife said, well, you know, the IRS got kinder and gentler. They did relax that penalty from 50% to 25%. And, actually, if you correct your boo boo quickly, it's called a correction something called a correction window, you can get that penalty down to 10%.
Chris Picciurro:So and and if you're listening to this and you're a little bit confused, take a deep breath. I wanna tell you that, you know, most people that listen to this podcast know I am very humbled and honored to be one of the National Association of Tax Professionals instructors for what we call tax season updates. So I've had the the honor of of being able to teach, three to 400 tax professionals in the in the fall and winter, peer to peer. Now the secret is I will learn way more from them than they learn from me. That being said, we had a significant amount of content this year, and there's a sixteen hour course that these these folks take about secure two point o, required minimum distributions, and this penalty relief.
Chris Picciurro:So so this is something that even tax practitioners like myself are continuously learning about. And and I I think the takeaway would be here. Am I required to do an RMD? There are reasons there are and we're gonna talk about some tax planning strategies. There are reasons that you might wanna start converting, and this is why we talk about Roth conversions when you're in that lower marginal tax rate here, money out of your traditional IRA into the Roth because you already can see the RMD you you know, you you know your RMDs will be less.
Chris Picciurro:Because Mhmm. Think about it like this. We say we say either you pick your tax or the IRS picks your tax. If you do your planning, you're picking the tax. But if you do no planning and you just don't do anything and now you have these RMDs, the IRS picks your tax.
Chris Picciurro:And I've seen cases where these RMDs are significant amount of money. And so fact that one, it triggers your Social Security to be taxed at 85%. Two, it could be so much that it it increases your taxable income so that your Medicare premiums are higher than than others. There's like a a surtax on these Medicare premiums. So again, even if you're in their forties listening to this, driving around, going for a walk, a jog, it's something to start considering of, maybe I should start putting more money in my Roths to avoid the RMD down the road.
John Tripolsky:Right. Great great advice there. And it all comes all comes down to knowledge and planning. Right? If you only have one of those, it's really no good.
John Tripolsky:Right?
Chris Picciurro:Exactly. You've gotta take an action. That's where the, you know, teaching tax law community and defeating taxes private Facebook group come into play. We we filled a lot of questions about this. Let's let's leave some let's leave everyone with a couple of minutes of strategies.
Chris Picciurro:Right? What can we do to manage these RMDs? Again, I wanna make I feel like I have a broken record, John. You've been with me a lot where where people come up to us. You know, people see us in the airport.
Chris Picciurro:No. People don't know the heck we are in the airport. But when we're at a conference or speaking somewhere, yes. Hey. You know, I oh, you know, they this, that, and other thing.
Chris Picciurro:You know, I was thinking about doing this, but I don't wanna pay the tax on it. It'll all go to taxes. No. Your entire RMD is not gonna go to taxes. Right?
Chris Picciurro:It's whatever your marginal tax rate is. However, what we're trying to do is legally and ethically reduce the tax you pay in your lifetime. So what could we do, you know, if you are subject to either avoid RMDs, kinda drive or it's like going driving through Atlanta, John. You know you know there's that bypass so you can kinda go around the city? Do you wanna drive around downtown?
Chris Picciurro:Does it mean to avoid the RMDs? Or if you don't need the money, what should you do? So one of the things when we actually have a podcast episode on the QCDs, qualified charitable distributions. So if you are in that situation where you're required to take money out of your IRAs and you really don't, quote, unquote, need that money and you donate money to a charity or a church anyway, you can take up to a hundred thousand dollars of your required minimum distribution and send it directly to the charity and pay no tax on that money, and you still get to fulfill your your charitable desires. That's called a qualified charitable distribution up to $100,000 per year.
Chris Picciurro:It's a very powerful strategy because what we're seeing is we're seeing people being forced to take let let's look at our example. That $20,000 out of their retirement account, and then we're looking at their tax returns saying, you know, you're donating $15,000 a year to your church. Have you considered just taking the $20 and sending it right to the church to actually reduce your tax, and then get $5,000 more money. So that's one option. The second option might be, as I already mentioned a little bit, start looking at Roth conversions right now for, the future.
Chris Picciurro:Even in you know, you can do a Roth conversion at any age. You'll be 30 years old and do a Roth conversion. You're gonna pay the tax on that conversion in the current year. You're not gonna pay the 10% penalty, but then you never have an RMD. Real story, John.
Chris Picciurro:I'm working on a tax planning case right now in our private practice, and we're gonna be working with this person. They converted $6,000,000 worth of IRA money to a Roth. They accumulated their entire life and said, I'm gonna bite the bullet. I'm gonna convert all of this this year, and I'm never gonna pay tax again. Because now the, you know, they their income's not gonna meet the threshold over the the standard deduction.
Chris Picciurro:Their Social Security won't be taxed for the rest of their life. Now do I recommend someone do that? Not without the careful planning. So what we're gonna do is we're gonna pair that with some tax strategies to offset some of that $6,000,000 or find some tax credits available. So, again, that's where the tax planning comes in.
Chris Picciurro:It's almost like, you know, if you're going into surgery, make sure you have some anesthesia. Right? We have that available now in 2025. So if you're gonna make a big move like that, make sure that you're doing some tax planning and strategy to couple that with a big move. If you're working, you're still working, and, you can still you can delay your RMDs, you know, from a four zero one k plan, as long as you're not a 5% owner of the company.
Chris Picciurro:So that's another strategy for delaying it. And then like I said, managing your tax bracket. John, I'm gonna I'm gonna put you on the spot.
John Tripolsky:Oh, boy. Here we go. Yes.
Chris Picciurro:What's the most important number when it comes tax planning and strategy? What's the number one KPI?
John Tripolsky:The number one. We're gonna say your marginal tax rate.
Chris Picciurro:Nailed it. So
John Tripolsky:Not your tax bracket.
Chris Picciurro:Tax rate. Pardon?
John Tripolsky:Not your tax bracket.
Chris Picciurro:Correct. So manage that marginal tax rate. And in in if there's a year that you have a huge deduction, maybe pair that with some income. It's all about managing it. Because remember, if you do nothing, you're gonna be required to take these distributions out at whatever the government's tax rate is whenever you take it out, which we don't know.
Chris Picciurro:It'd be like, John, you go into a restaurant saying, hey. I'm gonna have a meal. I'm not I'm gonna walk out the door now fat, dumb, and happy. Right? And not that you're dumb or fat, but you're happy.
Chris Picciurro:You know? That's just one of my dad's phrases, fat, dumb, and happy. I go to I get a I walk out and and the restaurant says, don't worry about paying, but in fifteen years, we're gonna send you a bill for whatever the value of that hamburger was. And that's what people do all the time. So it's just something to think about.
Chris Picciurro:So future RMDs. Right? With, like, a about life expectancies getting longer, do we think RMD age will increase? I think with, you know, with Secure two point o act, the RMD age is gonna increase to 75 starting in 2023. That could change with, change with legislation.
Chris Picciurro:Right? We don't know what's gonna happen. There are also, you know, as we wrap this up, one thing something to consider, and I think this might be a good podcast topic in the future. I'm talking about RMDs from perspective of it's my IRA. If you have beneficiaries of the IRA, there are special considerations.
Chris Picciurro:So there are so special considerations for inherited IRAs, there's something you know, if you're a non spouse beneficiary versus spousal beneficiary depending on your age, you know, there's there's there's this concept of a designated beneficiary and a non designated beneficiary. So the point is if you are a beneficiary of an IRA or retirement account, you still could be subject to RMDs that are different than the seventy three year old rule. Definitely talk to us, and I think we might put something together,
John Tripolsky:for that as well. Awesome. Well, it's always good when one good topic comes from another one. Right. And then, so,
John Tripolsky:is is you alluded to this as well too, and, you know, we talked on it. It's it's all about kind of harnessing the knowledge on it. Right? So anybody who's listened to this, if this is your first time listening, if this is your hundred and twenty fifth time listening to it, doesn't matter. Check out YouTube as Chris mentioned there too.
John Tripolsky:Just our channel. We have so much content on there and it's easily digestible is the best way to put it. Short little snippets, some of it's a little longer form. You're in control of what you listen to, what you watch, and and really what you learn. So it's not like you're gonna have to log on and watch a two and a half hour video and and hope you can find what you're interested in.
John Tripolsky:It's cataloged beautifully. So check that out. We're happy happy happy, and I say that too because Chris referred to me as being happier earlier. So here I am, you know, doing the happy dance. We have some of the best content that we can think of and some of the best guests that we could find to talk on certain topics on our radar.
John Tripolsky:So over the next couple of months, we'll be releasing more and more and more of this stuff. As we always say, it's kind of the, the TTF snowball as you will. And by the way, Chris, I feel much more say much more comfortable saying that now being that I'm in Michigan and the snow is melted. I can refer to snowballs as a good thing.
Chris Picciurro:The other thing is, John, and and just I feel like I'd be remiss if you missed your RMD. We actually have some we have some content on that. Take a deep breath. Get with a tax professional as soon as possible. Make sure you take the missed RMD as soon as possible, and then work with a tax professional to remedy it and try to try to find a way to to to not pay the 50% penalty.
Chris Picciurro:Maybe, you know, there there's a special form called the fifty three twenty nine that gets filed, but, again, don't not take it. Get again, take talk to a tax professional. This I mean, we get we get referrals all the time in the teaching tax law community from financial advisors that that stump that run across new clients that didn't know they had to take an RMD. So you're not the only one. Let's get it remedied.
Chris Picciurro:And and, again, I think that, you know, that might be, yeah, that might be a podcast topic in the future, as far as as
John Tripolsky:And I and I see it as a trend. Right? So it's it's almost very similar to a couple episodes that we've done on IRS notices. The worst thing you can do is nothing. So don't sit around if you haven't taken that and say, like, oh, you know, I'll get to it.
John Tripolsky:I already missed the deadline. All you're doing is kind of compounding the, the gut punch when it comes time to to pay the piper. Right?
Chris Picciurro:Absolutely. Awesome. You don't wanna have to be too far behind the piper.
John Tripolsky:Yep. Oh, yeah. Nobody nobody likes a piper that much. But, anyways, well, we will see everybody back here again next week on the Teaching Tax Flow podcast. Same day of the week.
John Tripolsky:Different time, roughly, completely different topic. By the way, I love tweaking this a little a little bit every week. I don't even remember where it started. I don't know. Came up with this little and now outro, whatever it is.
John Tripolsky:But as the case, it always remains true. We'll see everybody back here on the podcast. Have a great week.
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