Transcript:
Easan Arulanantham:
How do the new R or Required Minimum Distribution tables affect my retirement? Um, I know that the first of this year, there’s new tables.
Tom Vaughan:
Yeah, so what ASINs referring to, there’s the, you know, if you have a retirement plan, a 401k, or an IRA, especially traditional ones, this does not apply to Roth accounts Roth are tax free, there is no requirement distribution. So when you turn 72, you have to start taking money out of those accounts. And so the IRS has a table, they call it a life expectancy table, and you take your age 70 to 75, whatever it is, you go to that table, you find this number, and then you take that number, you divide it into the value of your account, at the end of the last year. So if you’re taking, if you’re 72, this year, in 2021, you’re sorry, 22, you’re looking at the end of 2021 value for your IRA. And so it’s been a real problem, actually, because you know, people are living longer, and they haven’t adjusted the table. And so we’ve got people that are taking a tremendous amount of money out of these accounts. So the IRS did make an adjustment to the table. And so you’ll be able to take out have to be required to take out less, not tremendous amounts less, but still less. I think he’s and you were telling me the other day, it’s roughly 5% Less, which you know, is good, that’s a big deal, it’ll add up. If you need more, you take more, that’s fine. You know, that’s part of your living expense. But it’s awful nice to have the ability to take less if you don’t need it, because it is a taxable event, it can create all kinds of problems that can push you into a higher tax bracket, it can make you have to pay more for Medicare if you’re retired, which probably will be by 72.
And so you know, having that be moderated is actually a fairly big deal. I think you can do a lot other things to try to deal with RMDs with looking at Roth conversions and different things that we’ve talked about many times on this show, that I think are really important, but they don’t apply to everybody. And not everybody can do that effectively. So it is nice when they reduced the table. I think they needed to get more aggressive personally, with the table to reduce it because people have so much more money in retirement plans. And I also think they needed to deal with a single person, because I really don’t feel like it’s fair, when a couple was working together putting their money, you know, in their own 401k Ks. And then one of them passes away, and all of a sudden one person has 200 half million in IRAs. Now it’s a single filer, single filer tax rates, single filer in terms of Medicare, and even though two people generated that one person might not have generated two and a half million in 401k, two people did it. But now one person is paying the tax as if they generated, they did not deal with that problem. I think that’s an issue. And so you know, that’s just something I don’t think they completely understand what’s happening there. And I got some clients stuck in that situation where they’re having to pay, you know, a lot of money out for taxes, very high rates, plus, you know, higher Medicare costs, and have no way around it, and no way to get out of that. So anyway, I still think it’s a good thing. It’s better, even those clients will pay less, but it would have been nice to have some type of a carve out. So that there was some way to keep kind of those accounts separated from the calculation. For tax purposes and Medicare, it’s not happening. So it’s like a penalty for having your spouse pass away, which is not good.
Easan Arulanantham:
Yeah, and I’ve seen some different ways to combat that is they have like a life insurance policy solely for the purpose of if they have one of them passes that the other one can just convert the money become a Roth to then control like the RMDs.
Tom Vaughan:
Yeah, that’s, that’s, that’s worth repeating. Because what happens there is so in that situation where there was a couple, building up these 2401 K’s you have a life insurance policy, sitting there for the sole purpose of dealing with the problem. So one of you passes away, the other one has this doubling in the single tax rates and all those that you have a policy 500,000 A million dollar policy that kicks in, when that person passes away, then you can convert that thing over to Roth IRA, pay the taxes with the tax free money you get from the insurance policy, and be able to then not have the problem I just described. And so you know, that cost something for the policy. Right. But a budget cut? Well, I don’t know about this, for sure. But it’s possible that there’s some offsetting, you know, gains by not having to pay the higher taxes and the you know, the higher Medicare. Yeah, that’s, I think that’s a strategy that nobody talks about, and it’s really worth looking at and there’s A lot of uses for life insurance that people don’t don’t really get