Plan Carefully to Maximize your RMDs
Transcript:
Katie Nealis:
I am 71, I’m going to take my required minimum distributions next year. How do they work?
Tom Vaughan:
So this is a very common question. Because the requirement of distributions are a little bit confusing and total. And they’re required. So you turn 72, and you have an IRA or 401k, or a 403, B or 457, any type of retirement plan, you must start taking money out of that retirement plan. And if you don’t, whatever you were supposed to take out, let’s say it was $10,000. And if you didn’t do that, the penalty would be 50% $5,000 penalty. So it’s a, it’s something to be concerned about is something to ask about, something to learn about as far as that goes. But basically, what happens is, let’s say in this particular case, the client was 71. And so at the end of this year, the value is what matters. So the last day of this year, so 2021, whatever the value is that you have in your retirement accounts, that’s the first piece of information. And then next year, you’ll have basically a calculation that says how much you have to take out. And it’s going to be around four and a half percent, give or take, and then that grows. And I won’t get into all the mechanics of how the calculation works, because that’s even more confusing. But let’s just say you have to take that four and a half percent out, you’ll have to take it out next year 2022, in this case, and you could take it at any time, even if your birthdays at a different month. That’s not, that’s not the part that they care about. But you do have to take the money out sometime in 2022, between January 1 of next year and December 31, that money’s got to come out. And then that what happens then is it becomes taxable, right. And that’s what the government wants, they’ve allowed you to grow this tax deferred, without any taxes on this money for the most part for a long time. And now they want to force you to kind of take some income out of that and pay some taxes on it.
And one of the things that you there’s some other key issues to think about. Also, you can withhold tax. And so you know, that’s kind of nice, you can say I want to withhold 20% for the feds and 5% for the state. And that way you don’t end up you know, having to write out a check or some kind of penalty for underpayment or what have you when you do file your tax return. But I do also even have clients who withhold way more basically, because they’ve got other things that they’re not withholding on. And so they use their requirement of distribution. And they’ll basically withhold all of it. And they’re basically just pays their tax when it comes out. As far as that goes. Another consideration is when you take it out. So let’s say you’re supposed to take out 25,000, for example, and you take it out January 1, and let’s just say your accounts make 10%. Next year, you could have made another 20 $500 on that if you took it out at the end of the year. And so a lot of my clients who don’t need the money, wait until really kind of late November, early December to take it out that just allows theoretically, that money to make money for as long as possible now could be a down year, and you could have been better off taking off at the beginning. But overall the stock market goes up. And so if you do that year, after year after year, you’re probably going to make more money, and then you leave that extra money in your account to grow.
So that’s the timing of the requirement of distribution is somewhat important. The last thing to think about for a requirement of distribution is you are allowed to pay part or all of that out to a charity, and then it doesn’t end up on your tax return. And you can only do this with a requirement of distribution. So let’s say for example, you’re already giving 5000 a year to charities, depending on your situation, you may or may not be getting the write off for that, because then the new charity right off rules are a little bit different. And so if you then just give it right out of your required minimum distribution, then that 5000 does not end up on your tax return. So if you needed to take out 25, and you took out five for charity, and the other 20, you took out yourself, only the 20 ends up on your tax return. And so that’s a great way to get the full write off. Very, very popular. The only criteria is that the charity has to cash the money the check before the end of the year, and they need to get the money directly. In other words, you can’t get the 25 come out to you put it in your checking account and then you pay it. It has to go directly from your IRA 401k What have you to that charity, and then they have to cash the check before the end of the year. So one of the ways we do that is give people an checkbook against their IRA. And then they’re writing that check out for 5000 to that charity or group of charities Then if that’s the same thing as to directly going to the charity from your IRA, there’s another way to do it too, where we have a form that gets filled out, and then then the custodian sends it out. But the checkbook works really, really well. So those are some pretty important considerations to take a look at around required minimum distributions. It’s a big tax event and a big event in people’s lives, actually, age 72 is something to think about as far as that goes.
Easan Arulanantham:
Yeah, we can always help you calculate it. And, you know, if you’re donating to charities throughout the year, we can tell you at the end of the year, how much you still are required to take out just to make sure you hit all the numbers for yourself.
Tom Vaughan:
Yeah, it’s important. It’s one of the nice services that we do.