Demystifying Required Minimum Distributions (RMDs)


If you are over the age of 72 or have family members over the age of 72, you may have questions about whether or not withdrawals need to be taken from IRAs, Roth IRAs, or 401(k)s or how much needs to be withdrawn each year. Brendan demystifies the tables for calculating required minimum distributions (RMDs) and answers common questions about retirement account distributions.


Topics Discussed:

  • Required Minimum Distributions (RMDs)

  • Why the IRS taxes retirement accounts

  • Changes to the RMD tables

  • Calculating your RMD

  • Deviations from standard RMD calculations

  • Inherited IRAs


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Transcript:

Welcome to another edition of coffee with Brendon. Today's episode is for folks who are over the age of 70. And or have family members over the age of 70. And do you get the question about whether or not you need to take withdrawals from your IRAs 401 K's Roth IRAs. So we're going to talk to a little bit about a an interesting thing called required minimum distributions or RMDs.


Bottom line is the IRS knows that when it comes to traditional IRAs, traditional 401, K's, SEP IRAs, SIMPLE IRAs, just about any one of those types of non Roth IRAs. They cannot tax you until you take money out of those accounts. And so for some people, you know, they started contributing when they were in their 20s. And now they're in their 70s. And so for literally 50 years, they haven't paid any capital gains taxes, they haven't paid any dividend taxes on dividends, any taxes on interest that have been earned in those accounts. And the IRS in your 70s pretty much says, Okay, now it's time for you to pay some tax on this money. As you're getting closer to the end of your life to be perfectly blunt. And in they require you to take money out mess, why have the RMD, the R is the required. Now the second letter of that acronym is minimum.


So a lot of clients asked me, Can I take out more than my RMD? And the answer is, of course, and the IRS would be thrilled if you did that. Because obviously, if your RMD was only $25,000, and you decide that you're going to take out 50, guess what they get to tax $50,000, and not just the 25, that they require you to take out. So it's exactly what the acronym this, it's a required distribution, that is the minimum amount that you need to actually take out. So hopefully that clears that piece up.


Now, there has been a change to the tables that we use to calculate the required minimum distribution. So this is something that I have, I probably say probably 75% of my clients over the age of 70, do not know how this is actually calculated. So hopefully, this this video will help to demystify this required minimum distribution calculation. So let's start, I'll start sharing my screen. And what this is pretty much saying and this is a busy table, is just simply saying that the tables, as I mentioned, just changed between 2021 and 2022. And it's actually made it for most people a better table and it all comes down to life expectancy, people's life expectancies have gotten longer. And so therefore, the IRS feels like they have a longer time to collect from you. So they've reduced the amount that you actually need to take out.


So the requirements now are when in the year in which you turn 72. So that's the big thing. In the year in which you turn 72, you have to take a distribution out of your IRA. Now, in that first year, you could actually delay it until the following year, up until April of the following year, I typically counseled my clients not to do that, because that would mean that for that for that year, they would take out one prior year distribution and the second current near distribution, which could bump them into a higher tax bracket, which has all sorts of different implications. Like, you know, we're in the middle of or just coming out, I hope of the COVID situation and some of the child tax credits, some of the stimulus payments were dependent on income. And if you've had too much income, because of these required minimum distributions, you may get phased out.


Furthermore, with Medicare, you could be charged a lot surcharge for having too much income. So typically, again, the smart thing to do is to take out the minimum that you have to and take it out each and every year. So with that said, these are the new this is the new uniform table, pretty much the one in green. And these are the factors that you use to calculate it, and they start at age 72. And you'll notice that each and every year, this goes up


so One of the things that a lot of clients ask me is, is my required minimum distribution going to go up or down from the prior year? And typically the answer is up, because there are two factors that influence it, which I'll show you in a moment. One of these things is what's on this table right here. And what this is actually showing is that each and every year, you're required to take out a larger and larger percentage of the amount.


So let's take a look at a hypothetical example. So let's say that you have four different IRAs, two traditional IRAs, a Roth IRA, and a 401k. So I guess I misspoke there, you have four retirement accounts, I'll call for retirement accounts to traditional IRAs, one traditional 401k, and a Roth IRA. So let's just right out of the gates, take care of this, when it comes to your own Roth IRA, you do not need to take required minimum distributions. So it does not even factor into the conversation. So let's even just get that out of there. So now it comes down to your two, IRAs and 401k. Now, there are some rules around the 401k, that could actually allow you to delay taking from your 401k. But let's just assume you're retired from, from your job that you had the 401k. And but you still maintain it, you haven't rolled that 401k into an IRA. So what the IRS requires you to do, as they pretty much say take the end of the year, account value. So you literally take out each of your statements for your IRA, one, your IRA, two in the 401k. Take that 1231 statement, your December 31 statement and add those numbers up in this case, the or total IRA, as are your total IRAs that we use to calculate the required minimum distribution is $425,000. Now, let's say now this is where it gets a little bit tricky. Your Account values are the prior year, however, your age is what your age is going to be at the end of the year. So you can see, the value is 1231 2021. However, your ages, whatever your age is going to be 1231 2022. So let's say that you're 75 years old, okay, we go back to this table that we're just looking at. And the table says that someone who is age 75, right here, go all the way across, and the factor that you use is 24.6. Now I know you could use the percentage, but with most of these tables, the tables have shown as what your life expectancy is, as of age 75. So what the what the IRS is assuming is that you're going to live to age about 100, based on these tables, if you make it to age 75. So we'll take that 24.6 And we plop it into this table 24.6. So we use that for H, your required minimum distribution for each one of these accounts is pretty much 100,000 divided by 14 or 24.6, I'm going to remove this so that we don't get confused.


So 20 400,000 divided by 24.6 gives you $4,000 75,000 divided by 24.6 is 3000. And the 401k 250,000 divided by 24.6 is 10,000. Your total required minimum distribution for this year is $17,276. So with that said, one of my most popular questions that I get is, do I need to take it out 4000 from this account 3000 from this account 10,000 from this account, answer no, you could actually take the entire 17,000 out of your 401k. If you choose to, you could split it between all three of these accounts and take out equal amounts from each, the IRS doesn't care. They want to make sure that by the end of this year you take out 17,000 by however means possible, as long as it's coming from these tax deferred IRAs and 401 K's so they really really don't care. So obviously there's a lot of things to this, but this is the general calculation that most people use for calculating required minimum distributions.


There is a caveat that if your spouse is 10 or more years younger than you then there's a different table to use.


The other thing that kind of trips people up a little bit is inherited IRA so if you inherit an IRA from someone other than your spouse, so let's say it's a brother or a sister and aunt and uncle, you have to take The distributions, the distribution out over a 10 year period yours, let me take that back. Let's say that you inherit a $100,000 account. If you inherit that account, you have to take out that entire $100,000 in 10 years. So what a lot of people do is they split it up 10% 10% 10% or $10,000 $10,000 $10,000 Each and every year to kind of spread the tax implicate, or the tax the tax impact out. However, you know, some people have a couple clients who are still working and have one of these inherited IRAs and know that they're going to retire and let's say five or six years, they may want to not take any distributions out until after they're retired, when hopefully, their income is a little bit lower. In the end, they can take out yes, they have to take out bigger chunks of the IRA, because they delayed five and six years till they were retired, but then they could then they could take it out when they're in a lower tax bracket.


So I think that's all I had for you today. Obviously, as I mentioned, there are quite a few things that come into these required minimum count minimum distribution calculation, but generally this is how, say the vast majority of the required minimum distributions were actually processed. So hopefully that was helpful, and I look forward to our next coffee with Brendan. Thanks bye