RMDs & The Age Increase: What This Means For Your Portfolio (Ep.125)
With the emergence of the new SECURE (Setting Every Community Up For Retirement Enhancement) Act 2.0, there are upwards of 100 different changes made that will affect the onset and process of your retirement. The one in the hot seat today is the RMD (Required Minimum Distribution) age change.
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In this episode, Larry Heller, CFP®, discusses one of the most important changes for those nearing RMD age and explains how this change might impact your investment strategy moving forward, as well as ways to implement tax savings strategies.
- How your investment strategy might change with the requirement age of RMDs being pushed back
- How you can juggle different accounts in this process with a longer time horizon
- The increased time you have to pull out your RMDs and how this may impact your portfolio and retirement
- The importance of tax planning for your IRA
- And more
Connect with Larry Heller:
Welcome to the Life Unlimited Podcast with Larry Heller. You deserve complete financial advice so you can confidently live your life your way for life. Now let’s get into this week’s podcast episode.
Aric: Hello and welcome to Life Unlimited with Larry Heller from Hello Wealth Management. Larry, what’s going?
Larry: Oh, another day in Paradise. Aric, how about you? Oh, I’m fantastic.
Aric: Normally you have a guest in this seat, but uh, I get to hang out with you today. Yeah. You’ve got a topic we’re gonna cover and I get to ask you some questions about it so that the audience can learn and myself, cuz there’s a lot to unpack here, it sounds like.
Larry: Yeah, we’re gonna be a little educational today a break from the life unlimited kind of, uh, kind of scenario, but it’s, this is, important information and it could change a lot of what you do. Okay, so what are we covering? So we’re gonna re, we’re gonna cover required minimum distributions [00:01:00] or MRDs for sure, or RMDs for short
RMDs. , thank you for that. Correction. Something right on this , right. Required minimum distributions. So it’s early. I usually record later in the day, Aric. That’s right. . I know. So, so what happened recently A lot of you may have heard of the Secure Act and now we’ve got the Secure Act 2.0 which changes a lot of things on the tax law.
I think there are a hundred and something changes. We’re only gonna focus on one today and that’s moving the RMD back. Mm-hmm. . So, I dunno if you remember. Where will we on the r and ds a few years ago? Aric, do you remember?
Aric: Was it 72 and a half or 72?
Larry: Nope, it was a few years ago. It was 70. 70 and a half. Oh, that’s right.
70 and a half. Yeah. Right. And secure Act 1.0 is like to call it changed it to 72. Mm. Now if you turn 72 after January 1st of this year, [00:02:00] 2023, your RMD is pushed back to 73, and if you are born after January 1st, 1960, your acquired a minimum distribution is pushed back to age 75. Really? So, yeah, really? So well that’s me.
There you go. So now you can learn some stuff today, Aric. So extra attention today. That’s right. I learned something every day. I’m with you, Larry, so that’s good. But yeah, so that means I, cuz I was born in 74, so I don’t have to take RMD till 75 until they change it again. Well, maybe, I don’t think they’ll move it up.
Maybe they’ll move it back again, but I don’t know. It’s, you know, it’s pretty, it’s pretty far back. So by now moving, we’ve now moved it back five years. So, so what does that do and what did moving it back for either even to 73, from 70 a few years ago mm-hmm. , but now even moving back to 75, what are some of the things that you should [00:03:00] think about?
With this changes. So, uh, so let’s jump into it. So the first thing is what we’re talking about is your investment strategy. So why may your investment strategy change by pushing it back, Aric?
Aric: Well, I mean, obviously if you don’t have to take the minimum distributions or you, you’re not forced to take money outta your accounts, you can juggle from.
Different accounts because like you’ve said in the past, you have different silos or different buckets or however you wanna phrase it. A lot of different places you can draw money from, and if you don’t have to pull from these accounts, then that gives more opportunity for growth.
Larry: Absolutely. You’ve been listening to our podcast.
Yes. So now you have a longer, what I call, a longer time horizon. So now if you have a longer time horizon, you could be a little bit more aggressive if you wanted. Think about this because if you don’t need the money in the short term and you don’t need it for the long term, and we’ve talked about the stock market and investing in the market should be for the [00:04:00] longer term, you can live with some of these fluctuations ups and down because you have further uh, a longer time to pull it out.
So even if you are. 60, 65, and you are closing in on age 70. Now you’ve pushed this back five years, so now you’ve got longer timeframe. So it’s 60 now we’re, we’re 15 years away rather than 10 years away. And then if you’re in your Forties. Now you’re, you’re close to 35 years away before having to pull this money out.
Now, maybe that wasn’t that much of a different time horizon, but if you’re, uh, if you are closer now, we’ve extended that time horizon before you have to take money out. Mm-hmm. . So, so one thing then is to look at your asset allocations and see if maybe now the asset allocation should be changed.
So, so that’s really the first thing, uh, is really the asset allocation. And then the next one I’m calling the, the tax impact. What do I mean by the tax impact of this? [00:05:00] So the longer that you have money in your traditional IRA, your traditional 401k, as we all have learned before, Aric, have we paid taxes on the money in there?
Aric: No, and the taxes are growing in there.
Larry: So, so the account is growing. So now the required minimum distribution is based upon your life expectancy and how it’s calculated and how you have to take that out. So now, if you’ve pushed your re your required minimum distribution back to age 75, you have five more years of growth.
So now your account can grow even more. You know, just talking about the rule of 72. So if you make. 7.2% on your money over long-term timeframes, it’ll double over 10 years. So now by moving this timeframe back, you can in theory have a larger. Um, IRA, a 401k making your required minimum distribution higher, and if your required [00:06:00] minimum distribution is higher, maybe you’re gonna be in a higher tax bracket later on.
Mm-hmm. So now, okay, now we gotta start thinking about some of the things that maybe we should, we should do. So the first thing is, When you’re contributing, while you are working and you’re contributing, should you be contributing to a traditional pre-tax 401 or should you be you contributing to an after-tax Roth, either 401k or ira, whatever your company has or whatever you’re eligible.
And the rule of thumb is that if you’re gonna be in a lower tax bracket now and a higher tax bracket later on, you’d want. Do more into a Roth. If you’re in a higher tax bracket now and a lower tax bracket later on, you’d want to do more of your traditional. So maybe now by pushing this back, that changes some of your thinking.
So deciding what you should [00:07:00] put in, whether it’s uh, after tax Roth or a pre-tax traditional is another, another impact of this. And you wanna think of?
Aric: Okay, hang on, Larry. So let me ask you this, because you’ve spoken about what happens to widows in, in, in situations like this, or I should say widows in the future where they are now suddenly single, if you will, and so they’re in a higher tax bracket because they’re single because of the accounts that they have.
So would you Say that it’s maybe a good strategy for women who live longer to maybe put into a Roth 401k if a, if the husband’s putting into a traditional or does that matter? I mean, I, I, I’m just thinking of like my wife. I’m gonna kick it before she does. Let’s just be honest. And so if, if she has.
Our both of our 401ks to be pulling out of, and she hits that RMD age, is that gonna really put her in a bad position because she’s single if she hasn’t remarried, single and having to draw out that much money?
Larry: No, that, that’s really not gonna have that much of a factor on this, okay? Unless [00:08:00] she’s much younger, than much younger than you are.
But here’s what could factor. So if you go by your theory and you’re gonna pass away first, hopefully you live much longer than 75, but if you die before a 75 and you’re married, guess what? She can roll your her, your. IRA into hers and doesn’t have to take the distribution until she’s 75. So if your spouse is much younger than you now you’re not just looking on yours, but you’re looking on your spouse.
But hopefully life expectancy is longer than 75. So you’re not really, you know, you’re not really, worrying about that as, as, as much, but if you do predeceased your wife earlier than they’ll have longer periods of time, later on. Gotcha. So it’s real. Sometime it’s, it’s, again, it’s by the time horizon.
So I mean that’s, you know, that’s one, that’s one tax impact of it. The other one is, [00:09:00] now that we pushed back to 75, does it mean we have to wait until it’s 75 to take it out? Well, if, if by pushing it back five years it starts to kick you up into a higher bracket, then maybe you wanna take it out earlier than 75.
Sometimes you may just say, well, why am I taking it out earlier? Because I’m paying taxes earlier than the on that. But you have to look at your tax brackets and see what you’re gonna be in. Mm-hmm. . And maybe it does make sense to pull some out before your required minimum distribution. So that’s another tax, tax impact.
And my favorite one now is it gives people more years to really do and consider a Roth conversion. So why does it give you more years to consider a Roth conversion?
Aric: Are you asking me, Larry? I’m asking you that , this feels more like stump Aric than, [00:10:00] than Life Unlimited, Larry. Well, I don’t have a guest today, so I gotta, you know, throw it at you.
Got it. Otherwise, it’d be boring just for people to listen to me talk all day. Yeah. So I mean, so here’s the thing is that Every it, it’s like pulling cash out, right? It’s like pulling money outta that investment. If you can see, okay, I’ve got $25,000 until I hit that next tax bracket, you can do that Roth conversion for $25,000, or maybe it’s $50,000 before you hit the next tax bracket.
You convert it then at the lower tax rate, so then, then it grows tax free and you don’t have to worry about the impact of taxes once you pull it out of a Roth, whereas, Now the, it’ll lower the amount in the traditional IRA to when you hit 75 and have to take RMDs. You don’t have as much in there and the percentage won’t necessarily kick you to the higher tax bracket.
Larry: Right. That’s about that. Absolutely. That’s absolutely correct and one of the reasons why you wanna do the Roth, but that’s kind of not what I was getting at close. So, so the reason is, if you’re beforehand, if you’re 72. And you wanted to do Roth [00:11:00] conversions, but you’re 72 and you had to take a required minimum distribution.
So the amount of your required minimum distribution adds to your taxable income, which already starts kicking you up into the next bracket. Mm-hmm. , now you have three more years if you’re your age to, or one more year if you’re o o over 70. If if you’re not born after 1960, so you have one or three more years where you could do Roth conversions.
Adding the required minimum distribution into your taxable calculation. Got it. Well, that’s what I got it.
Okay. So that’s, so that’s another reason here to, to, to do that. And of course the Roth conversions now are another factor in, because there’s. A couple reasons to do Roth conversions. One, you’re doing it at a age where you think you’re in a lower bracket, so you’re gonna take some money out.
That money will then grow for you tax free in a Roth. [00:12:00] So then when you wanna take the money out down the road, you’re now don’t have to pay any taxes. Mm-hmm. . So that’s a Roth conversion that I say kind of for yourself or your spouse. Security Secure Act 1.0 changed the inherited rules. Big, big change in the inherited IRAs.
Prior to secure act, you were able to take a distribution out based upon your life expectancy. Mm-hmm. . So if you were giving it to the child, they can really stretch out the required minimum distribution or to a grandchild, really stretch that out and defer a lot of taxes over numerous years. Government finally said, Nope, end of that game.
we have within 10 years, you have to take your money out of a inherited IRA. Mm-hmm. . So now again, without. It becomes another reason why a Roth conversion may be [00:13:00] more beneficial to your children and to your grandchildren. So now if you’re waiting and you think, well, I may use the money, I may not use the money, it gives you some more years to say, you know, I’m a little bit older.
I really could make these Roth conversions for the benefit of my children or my grandchildren, and gives you a few more years to actually do some of these Roth conversions.
Aric: So I know that the Roth is not taxable to the grandchildren or the children. Correct? Yeah. So, so it doesn’t, sorry, go ahead.
Yeah, no, go ahead. I was gonna say, so it’s not, it’s not considered taxable income. They’re not gonna get taxable when they take money outta the Roth, but they can also take it over. Past 10 years. They don’t have to take it within 10 years, do they? No, they have to take it within 10 years, even Roth. So they have to take it within 10, but it’s not taxable
Larry: Correct. So it doesn’t really make a difference when you take it. You can take a little here a little later. So what happens is a lot of times the child is inheriting this money when they’re in there. Peak earnings. Yeah. And now they’ve gotta really figure out. , [00:14:00] do I pay for it? Do I take a little bit in each year?
Do I wait and take more later on? Where if you’re paying the tax for them is kind of a little gift to them. And then the remaining grows tax free. But when they inherit it, they don’t have to worry about that. Mm-hmm. . So again, some of these calculations get a little. Complicated, and you really have to kind of go through it all and see what makes sense.
And of course, it’s not an all or nothing, you can do a little bit and part of it. So it’s important to really, you know, work with somebody and go through those numbers to see what it is. But a lot of people don’t even think about these Roth conversions and it’s just left to grow. And then when either.
You have to take your requirement distribution or your children have to take big numbers cuz the, the IRA has grown even bigger now cuz you know the five years, uh, now there’s, you’re in a much higher tax bracket, your children are in a much higher tax bracket. Mm-hmm cuz they aren’t have to take this inherited money out and they’re [00:15:00] still are and they’re still working.
So, gives you more time to really do some Roth conversions. So anyone has not really looked at Roth conversions and we look at these. As soon as you’re in a low income year, whether you are retired and you haven’t taken your social security yet, whether you have a a a down year because you took a year off or your business was out.
So each year you really wanna be looking at this. So at the end of each year, November, we, we get all the tax. Information. We run our calculations, see what tax bracket you’re gonna, and have conversations on how much, if any, should go into a Roth conversion. So now we’ve got more years to do that. So that’s, that’s fantastic.
A, a real great advantage a real great advantage of this.
Yeah. So l let’s switch gears and talk about one other. Advantage. This really wasn’t a change in the law, but, and I’m not gonna go into it really. We can talk about this May, maybe a future podcast. We’ll talk about AQCD, Aric. [00:16:00] You’ve talked about that before. Not, I don’t know about in depth, but I know I learned it from you. Yes. We’ve mentioned it before. So it’s called, I won’t put you on the spot, A qualified charitable deduction from your From your IRA. So if you’re 70 and a half and you are able, and you now 70 and a half was the old rules when you took money out of your you took your required minimum distribution out of your qualified accounts.
Now they pushed back the required minimum distribution to 72, 3 or five. But they’ve left the qualified child deduction at 70 and a half. So now if you’re making. Uh, deductions to charity. Does it make sense to make it with after tax dollars or does it make sense to maybe use your IRA to make some of these deductions and therefore now you’re reducing your IRA account, which would then reduce your required minimum distribution as you are.
When you’re older and therefore reduce your taxes on that side. [00:17:00] So you’ve got another little factor here from a tax implication to really consider.
Aric: Can you do it to multiple charities, Larry? Oh, abso a, a.
Larry: Absolutely. I mean, okay, in a, you can do multiple qualified travel deductions. I mean, there are o other things such as called the donor advised fund.
So there are plenty of other things to do. This is just one, one factor.
Aric: So, well, I was just saying in this specifically, because you don’t have to take your RMD in one lump sum, right? I mean, as far as if you were to do a QCD, so let’s say as an example, somebody goes to church and they want to give to their church.
So they think about, okay, how much would I give over the year? I’m gonna give this amount. Maybe they have another charity that they really love you know, dogs, puppies, kittens, whatever. And they want to give to that and they can do the same thing. Can they do two different QCDs?
Larry: They can do different QCs. There are limits and things which are not coincided today, but there are, you can do multiple QCDs that, that’s awesome. If you’re gonna give the money anyway. I mean, do it this way. And it’s a huge tax benefit right now of course, if you are giving. , you also get a tax [00:18:00] reduction if you were doing it pre-tax.
So you wanna look at, both sides. And remember, you can’t do these QCDS until you’re 70 and a half. So, uh, so, so, so you have to factor, factor that in. Mm-hmm. . So, uh, but again, if you wanna reduce your required minimum distribution, or you may not. based upon where you are, these deductions pre-tax may not be that great for you now, but by reducing the RMD, it’s really lowering your taxes later on.
Mm-hmm. . So there’s a lot of different factors and we use some computer programs that show the differences in the advantages and where the break even points are to really determine the tax impact of making some of these decisions. Yeah.
Aric: Bottom line is it complicated and they need to do it right. So they need to reach out to you.
Larry: Yeah, they need to do it right, and they need to do some planning. Listen, I mean, accountants do a great job. A lot of accountants that, uh, a lot of great accountants out there, but they’re not really getting involved in a lot of this [00:19:00] planning. Most of them are not getting involved in this planning when it comes to the Roth conversions and the cash withdrawal strategies.
And obviously the the investment strategies that go along with this. We work very closely with the accounts to, to get their blessing and to really show the mm-hmm. the client together, why it would make sense for them.
Aric: Yeah, absolutely. that’s why you have the network that you do, is that you work with these professionals, that they handle that side of it and you handle the planning side of it and come together and it makes a great team.
Larry: Yeah. Absolutely.
Aric: All right. What else do we need to cover today?
Larry: I think we’ve covered, I think we’ve covered it all today. So, uh, so just to recap what you know, we’re looking at, secure 2.0, moving the required minimum distribution back looking at your investment strategy, your asset allocation, really honing in on the tax impact, whether you’re younger or older, what the tax impact could be.
Looking at the cash withdrawal strategies, if you’re at that point where you’re gonna start. Getting close to take money out of that. And really phoning, [00:20:00] focusing in also on the Roth conversions is one of your tax consequences. So those are the areas that that this new secure Act 2.0 should be looked at and looked at every year.
Cause it can change each year. You’ve gotta constantly look at it and constantly make decisions based upon your situation at that time.
Aric: All right, my last question for you, Larry. Scale of one to 10, how’d I do today?
Larry: Y uh, your was a 10 in my books, Aric .
Aric: Thanks, Larry. I’ll see you later, . I appreciate that.
Now, my real last question is how do they reach you? How, how do people get ahold of you if they wanna talk to you?
Larry: Yeah, so the easiest way to get ahold of me is go to our website, hello wealth management.com, and you can go right into Contact us and click on there to schedule free diagnostic or just a, any.
Questions you want to ask a 20 minute call and and we can.
Aric: All right, Larry, thank you so much for your time. It was a fun podcast. I know I wasn’t the greatest guest, but I know next time you’re coming back with a great guest, . You’re all, you’re, I like talking [00:21:00] to you so . I appreciate it, Larry. So we gotta mi we gotta mix, we gotta mix them.
I think we laugh. Shake it up a little bit. We laugh a little bit more is the two of us. Yeah. Well that’s good. That’s a good thing. Gets our week started off right?
Larry: All right, one more thing actually, I didn’t give you the phone number in case you wanna just call us. Feel free to call us at six three one two four eight thirty six.
Aric: All right. Thanks again, Larry, and of course, our last thank you always goes to the listing audience, thank you so much for tuning in and listening to the Life Unlimited podcast with Larry Heller. If you have not subscribed to the podcast yet, please click the subscribe now button below. This way When Larry comes out with a new podcast, it’ll show up directly on your listening device.
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