Transcript:
Easan Arulanantham:
When do I need to start taking Required Minimum Distributions or RMDs?
Tom Vaughan:
Yeah, this is an interesting question. Lots of people have asked, it used to be 70 and a half. And so some people still think that’s true, it did change to 72. Right. So that’s good to know. So technically, the way it works is that there’s going to be a year where you turn 72. And you have up until April 1 of the following year, essentially, the year you turn 73, to take out that caught that distribution. There’s a calculation, it’s based on the value of the account that you’re looking at, in the prior year, right. So essentially, for me, if I’m, if I’m 72, I will be looking at the end of the year when I was 71, right. And so that value last day, last trading day, there’s a little formula you go, and you can figure out how much you have to withdraw. And I have until I’m April 1 of the year, I’m actually 73. Go ahead.
Easan Arulanantham:
But the one thing you have as a caveat, if you delay that is that you’re going to have kind of that double RMD that you’re required to take, because you also in that following year have to take your RMD for 73.
Tom Vaughan:
Once I turned 73, if I’m taking out my 72 distribution, because it’s one time you can delay it up till April only that one time. And so then when I’m when I’m actually 73, I still have to take out my 73 year old that distribution in that year. So I could end up with double amounts, the only time you’d ever want to do that is if either forgotten messed up. And so you’re scrambling to get it done. And you have a little bit of a leeway there till April first, or you actually have a big amount of income that’s coming in, and you’re 72 years old year, and you want to delay more income until 73, just because it actually works out better tax wise as far as that goes. So there’s a little bit of flexibility there, I get a lot of questions that people think they have to do it by their birthday. And so that’s something clear up here, you actually have to do it. On the normal year, that first year, you have until April 1, but on a normal year, you’ll have until the last day of the year right to take that out. I will say in our experience, these custodians are getting really hammered by these Required Minimum Distribution situations at the end of the year. And boy, I wouldn’t wait until the very end, because some of them don’t even have the labor to get it done. Maybe mid November is a much better time to look at than December 31. Just because you can end up with a scenario where they can’t get the distribution done.
Easan Arulanantham:
There are some issues there as far as that and you don’t want to pay that 50% penalty.
Tom Vaughan:
No, that’s right. That’s the penalty that really does drive this. And Required Minimum Distributions –you have to take them out. They’re taxable. If you if you do a conversion of a Roth IRA, you have to take out the Required Minimum Distribution first, you can gift through what’s called the qualified charitable distribution part or all of your Required Minimum Distribution to charities, that would make it not end up on the tax return. So if you’re already giving money to charities, and let’s say I have to take out 10,000, and I’m already giving money to charities, I could give 5000 to those charities and then only 5000 is up on my tax return. You don’t have to take them evenly out of every single account, you have, as far as the IRAs goes, you can combine those together 401k case have some special rules. So correct. So basically, if you’re still working at 72 or beyond, you don’t have to take Required Minimum Distribution out of the 401k at that job, other 401k that you might have sitting out there, don’t have that special exemption. But for that, for that situation, you can do that. We don’t have a lot of those scenarios, to say, but it’s happened a few times.
Easan Arulanantham:
Yeah. And there’s also you can take RMDs if you have multiple IRAs, let’s say for example, you can take an RMD for all those IRAs from only one of those. So, but that only works for individual retirement accounts and 403 B’s, if you become a 401 K, you have each 401k You have to take an RMD for so separately.
Tom Vaughan:
Exactly. Maybe there’s some opportunity there to make sure that you’ve got all of your things where you want them if you still want them in the 401k for some reason, if not, and they just happens to be sitting out there and you just not really paying attention to it. Maybe it’s a good chance to kind of combine that in with your IRAs. There’s pros and cons to that. One of them is that you got a little bit more flexibility as far as how you handle your RMDs but Essentially, as far as that goes, but it is actually a really big area for tax planning within retirement is understanding Required Minimum Distributions. The more you have in these retirement plans, the more it can make an impact on what is going on for you, tax wise, and there’s a lot of different things you can do all the way through your life, to be honest to try to reduce the impact of these Required Minimum Distributions. We’ve been valuing this for so long, because we really get to see kind of the end result of this. We’re trying to get people to pay attention to this area because I think it’s important.