Defusing the RMD Tax Bomb

Have you ever seen the TV show MacGyver? Well, it was on in the 80s, early 90s or so, and I happened to stumble upon it a couple of weeks back. If you’ve never seen the show, it’s about a guy who I think he works for some secret government organization, and they send him in in these tense situations, and he doesn’t use any weapons or anything like that. He just uses his brilliant mind, Swiss Army knife in his pocket and kind of whatever is laying around. And so the episode that I caught, he was defusing a bomb, and I think he only had, like, a paper clip and some bubble gum, and he made it work. Okay. And I know you’re going to laugh at me for this, but as I’m watching the show, as he’s defusing this bomb, I’m thinking about financial planning and how I often, equate RMDs to a ticking time bomb. And so that’s what I want to talk with you about today. I want to talk with you about how to defuse the ticking time bomb that is RMDs and kind of how I’m, in a way, like MacGyver helping you through that. So first off, what is an RMD? Well, RMD stands for required minimum distributions. And it’s basically the IRS saying, hey, we want our money okay. And it only applies to those pretax accounts that you have. So it’d be your 401(k)s, 403(b)s, IRAs, things like that, where you have never paid tax on that money. And Uncle Sam, he wants his cut, right. So at age 73, our government says you need to start paying tax on that money. And so they force you to take some money out. Well, how is this, like a ticking time bomb, right? Well, for a couple different reasons. One being the bigger or larger your pretax balance is, the larger your required minimum distribution is going to be when you get to that magical age of 73. So this can really impact, your whole retirement plan in multiple different ways. The first way is, you know, if you take out more income that you didn’t know you needed to or didn’t want. Well guess what? That can push you into a different tax bracket. So if you’re in the 12% tax bracket now you take out that RMD puts you on the 22% tax bracket. That’s just one way on the tax side. Health insurance. It can affect that as well. You know, at that point in time you’re on Medicare. You’d be subject to IRMAA or income related monthly adjustment amount. So if you show too much income, your Medicare Part B premium would also increase. Hey, you don’t want that. And then thirdly, you take out or show more income that could make more of your Social Security become taxable. And nobody wants to pay more in taxes. So what do we do about that? What is your financial advisor, MacGyver? What do we do about that? Well, we’ve got our Swiss army knife. We’ve got tools that we can use to plan ahead to hopefully minimize those RMDs and help you retire well, okay, so one of the tools that we’re going to use is we’re going to use early distributions. Okay. So let’s say you retire a number of years under the age of 73. Let’s say you’re at 65 okay. And you have a Roth and an IRA account. Well, we’re not going to touch the Roth account first. Most likely everybody’s situation is a little bit different. We’re going to touch the pretax or IRA account to satisfy your income needs first because we know, hey, later down the road we’re going to be forced to take money out of that account anyway. Another strategy. So what’s called a Roth conversion. Hey, we’ll maximize your tax bracket where you’re at today. Let’s say it’s a 12%. Maybe you got some wiggle room in there. We’ll take money out of the pretax IRA accounts. Pay the tax on it. Now. Get it into the Roth so it grows tax free for the rest of your life. Now their strategy is QCDs. Okay. It stands for qualified charitable distributions. It allows us to direct money from your IRA to a charity. And you avoid the tax implications with that. And then finally, how about some diversification? Maybe when you’re getting closer to retirement or as you’re working towards retirement, have different types of investment accounts, not just an IRA or 401(k), but a Roth account and maybe a brokerage account as well that allows you to pull income, from different situations or different tax buckets of money. So, you know, just like MacGyver, he doesn’t go into a situation without a plan, right? He doesn’t just clip all the different wires on that bomb and hope it doesn’t go off. He knows what he’s doing, and he has a plan, and he puts it in a place to get out of those tough situations. So let us be MacGyver in your retirement plan and help you plan to retire well.