Planning for RMDs with Will Doty, CFP®
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Planning for RMDs Show Notes
Acronyms can sometimes make things easier to understand or remember, but there are a few of them that relate to your retirement that are very complex. Two of them are RMDs (Required Minimum Distributions) and the SECURE Act (Setting Every Community Up for Retirement Enhancement). The rules for RMDs have changed due to the SECURE Act, and it’s vitally important that you understand them.
In this episode of The Guided Retirement Show, Will Doty joins me to explain RMDs, tax planning opportunities surrounding RMDs, how RMDs factor in when leaving money behind for the next generation, and so much more.
In this podcast interview, you’ll learn:
- How the rules for RMDs changed because of the SECURE Act
- Why the SECURE Act is secure in name only
- When to start thinking about RMDs
- How to plan around taking your RMDs
- “It comes down to your personal situation. Maybe you have an inheritance or something at age 72 that was impacting your taxes that year, so you want to delay. There are a lot of different variables that could come into play.” – Will Doty
- “The moral of the story is when you’re creating a retirement plan, you better understand RMDs. Not only as they apply to you, but you need to understand those RMDs as they apply to your beneficiaries as well.” – Dean Barber
- Creating a Tax-Free Retirement with Ed Slott
- What Is Tax Diversification?
- Maximizing Social Security Benefits
- Tax Planning Strategies with Marty James
- Navigating Health Care Costs in Retirement with Taylor Garner
- Setting Up a Spending Plan for Retirement
- Understanding Sequence of Returns Risk with Bud Kasper
- Ed Slott In-Studio!
- Barber Financial Group Educational Series
- America’s Wealth Management Show
- Our Financial Planning Tool
Interview Transcript – Planning for RMDs
RMDs Are Another Acronym from the Government
[00:00:35] Dean Barber: Welcome to The Guided Retirement Show. I’m your host, Dean Barber. Joining me today is Will Doty. He’s a CERTIFIED FINANCIAL PLANNER™ professional. We are going to talk about something that is going to apply to just about anyone with IRA or 401(k) assets. If you live long enough, you’re going to learn the term RMD. It stands for Required Minimum Distribution. We’re here to discuss the impact on your retirement plan and introduce some very exciting planning strategies that can make a huge difference in your retirement. Please enjoy my conversation with Will Doty, CERTIFIED FINANCIAL PLANNER™ Professional.
[00:01:11] Dean Barber: Before we hop into today’s episode, I want to remind everyone that you can access the same financial planning tool we use for our own clients on your own time from the comfort of your own home. All you need to do is click the “Start Planning” button below. From there, you can start building your retirement plan at no cost or obligation.
[00:01:30] Dean Barber: All right, I’m with Will Doty. He’s a CERTIFIED FINANCIAL PLANNER™ Professional at Barber Financial Group. Will, thanks for being part of The Guided Retirement Show.
[00:01:38] Will Doty: Thanks for having me, Dean.
[00:01:39] Dean Barber: Absolutely. Today, we’re going to talk about something that impacts anybody who lives long enough and has money in some sort of a retirement account—like a 401(k), 403(b), IRA, etc. It’s called an RMD. The government loves to use acronyms, so RMD stands for Required Minimum Distribution.
[00:02:04] Will Doty: Correct.
The Government Wants Its Piece of the Pie
[00:02:05] Dean Barber: It’s the government’s way of saying, “I’m tired of waiting on you to die to start getting my share of your IRA. You need to start taking some money out every year so I can get a little bit.”
[00:02:18] Dean Barber: Let’s first talk about the RMD in terms of how much must come out and when you need to start taking it out.
How the SECURE Act Impacted RMDs
[00:02:27] Will Doty: Prior to the SECURE Act, it was 70 1/2.
Again, our government is to thank for weird, kooky rules. Now it is April 1 of the year following the year your turn 72. And obviously we have the SECURE Act 2.0 is kind of bouncing around in Congress, so that might change again. But that’s the start date as of right now.
[00:02:52] Dean Barber: If you do that, then you must take two RMDs in that calendar year.
[00:03:06] Dean Barber: Depending upon the overall tax status and what the planning looks like, you may want to choose to push that first RMD into that year, following the year that you turned 72, where you need to take that first one by April 1. And then you need to take another one by the end of that year. Here’s what would happen. Your age 72 RMD is 3.65% of the December 31 balance of the prior year.
[00:03:38] Dean Barber: We could calculate that. Let’s just say you had $1 million. Your RMD would be $36,500. But if you elected to push that into April 1 of the following year, you would need to take out $36,500. And then later in the year, you have a 3.77% RMD or $37,700. So, the question is if you push that much income into the next year, is there a good reason to do that? Were you still working at 72, but wouldn’t be at 73? That rule is a quirky one, but I think it’s important for people to understand it.
A Lot of Things Come into Play with RMDs
[00:04:17] Will Doty: I agree. It comes down to your personal situation. Maybe you have an inheritance or something at age 72 that was impacting your taxes that year, so you want to delay. There are a lot of different variables that could come into play.
[00:04:33] Dean Barber: Right. I just don’t want people to fall into the idea of when they’re 72 that they must take an RMD that year. You don’t necessarily have to, but if you don’t do it that year, you must do two the following year.
[00:04:43] Dean Barber: Sometimes that may make sense. I’ve seen it in the past where that was a good planning strategy. It saved some money on taxes, which is kind of the idea.
[00:04:51] Will Doty: Oh yeah. Definitely.
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Learning About RMDs from America’s IRA Expert
[00:04:53] Dean Barber: Way back when, our good friend, Ed Slott, wrote a book called, The Retirement Savings Time Bomb and How to Diffuse It. Ed has been a guest on The Guided Retirement Show multiple times. He has had some very entertaining episodes. Ed is considered to be the leading expert on IRAs in the country. In that book, he talked about the massive amounts of money that were being accumulated in qualified retirement plans that were going to be being forced out at a given age. I don’t think people really understand how much that RMD is going to be.
[00:05:39] Dean Barber: When you’re doing a financial plan as a CERTIFIED FINANCIAL PLANNER™ Professional, that’s one of the first things you look at. How much is in a qualified plan and what are going to be the tax ramifications when we start taking that out?
[00:05:51] Will Doty: That’s right. We want to look at it and understand what those long-term impacts are because of that RMD. Unfortunately, we find a lot of times that the Baby Boomers are kind of lied to. They’re all told, “Just put it tax-deferred today, save your money, and you’re going to be in a lower tax rate when you retire.” That’s not necessarily the case for a lot of people.
[00:06:12] Dean Barber: Right. If you did a good job of saving, you’re not going to be in a lower tax rate.
A Case Study with Sam and Samantha Sample
[00:06:18] Dean Barber: Will put together a case study and hopefully we can do this thing justice without visual prompts. What we’re going to do is talk about a couple that is 62. And by the way, these aren’t real people. This is just kind of indicative of what we see often when people head into retirement. It’s a common scenario.
[00:06:45] Will Doty: We have our sample clients, Sam and Samantha Sample, that are 62 and planning to retire at 65. They’ve already decided to take Social Security at 70. And we had a planning age out to 95.
[00:07:01] Will Doty: That would be a good, long life.
[00:07:04] Dean Barber: Yeah. That would be fun if they stay in good health.
[00:07:06] Will Doty: Yes, health is important. As far as their savings, they have about $1.5 million tax-deferred.
[00:07:15] Dean Barber: That would be like an IRA, 401(k) type.
[00:07:18] Will Doty: Yep. Kind of mix between both spouses. They have about $250,000 after tax money, and just a little bit in Roth already. And they started doing the Roth, which was great. They have no debt, so their expenses aren’t outlandish by any means. They’re spending a little over $60,000, but they will need to account for health care expenses. They’re not having to deal with those yet because they’re coming out of their paychecks.
[00:07:41] Will Doty: They also have a goal to travel a lot and would spend $15,000 per year on traveling until about age 80. They are also charitably inclined, so they’re given away about $10,000 a year.
How to Determine Your Probability of Success
[00:07:52] Will Doty: So, there is a lot to look at for them when we’re looking at those forward-looking projections. The great news is that when we put their plan together, the plan’s probability of success came out at 90%. That’s great. They can go do what they want to do with no worries. But as we’re looking at it, we’re seeing they have that savings time bomb issue coming up in the future.
[00:08:13] Dean Barber: Let’s back up for just a minute. There might be people that aren’t familiar with what you’re saying about having 90% probability of success. Let’s talk about what that means.
[00:08:24] Will Doty: Sure. We use sophisticated planning software. We have a couple of different tools that we utilize. What they’re doing behind the scenes is running what is referred to as a Monte Carlo simulation. That means that it’s just going through and mixing and matching the different sequences of return in a portfolio because that’s one huge variable we can’t control. What is the market going to do? It does this 1,000 different times to get this overall probability. So, when we say 90% probability, that means that in 900 out of the 1,000 trials, the spouses will die and still have money left over.
[00:08:59] Dean Barber: And they could spend the way they wanted to spend and leave the legacy they wanted to leave.
[00:09:04] Dean Barber: And for the other 100 times out of the 1,000, it doesn’t mean that they necessarily run out of money. It just means that they may need to adjust their spending. There could be some trade-offs that might occur in the future.
Planning Around Your RMDs
[00:09:17] Dean Barber: Will and I consider 90% probability of success to be a good plan. You’re good to go. Go retire, have fun, live your life, and do the things you want to do.
[00:09:33] Dean Barber: Will threw in some planning opportunities that surround the RMD. Talk about what you did, Will.
[00:09:41] Will Doty: They do. I ran a couple different probabilities that looked at some different strategies. I looked at things like Roth conversions, donor-advised funds, and Qualified Charitable Distributions.
[00:09:59] Will Doty: When I looked at it, I just kind ran some one-offs. First, I looked at their charitable giving because they are given $10,000 a year to charities. I looked at the donor-advised fund. This is where we take multiple years of charitable giving and put it all into a donor-advised fund in one year so they get a big write-off. Therefore, on the backside, they can do a larger Roth conversion that year.
[00:10:37] Dean Barber: But if you did a bigger donor-advised fund, you could convert a bigger chunk of Roth without having much of a tax implication.
Doing What Makes the Most Sense for You
[00:10:44] Will Doty: Exactly. That’s why we look at it. Obviously, donor-advised funds aren’t for everybody. That’s something you need to talk to your planner about whether it makes sense for you.
[00:10:52] Dean Barber: And let’s talk about what the QCD is really quick.
[00:10:55] Will Doty: A Qualified Charitable Distribution is part of the law. It means that you have the ability from a tax-deferred asset to send money directly to a qualified charity and that doesn’t show up on your income.
[00:11:11] Dean Barber: It’s not a deductible item on the tax return, but it never shows up on the tax return. It’s better than getting the money, deducting it, and giving it to charity.
The QCD Age Rules Are Different Than the RMD Age Rules
[00:11:24] Dean Barber: It’s important that people know that you can still start doing them at 70 1/2. Anybody that is over the 70 1/2 and charitably inclined should look at a QCD. QCDs give the money to charity directly from those IRAs. You can’t give it from a 401(k), but you can give it from IRAs.
[00:11:58] Will Doty: You need to be exactly 70 ½ or older. It’s not just the year that you turn 70 1/2. You need to be exactly 70 1/2 or older. And the money needs to go directly from IRA custodian to the charity. It can’t land in your wallet at any point because that would then be a charitable contribution, not a Qualified Charitable Distribution.
[00:12:24] Dean Barber: And the individual that’s doing that QCD needs to communicate that with their tax preparer. It doesn’t say anywhere on the 1099-R that this money went directly to charity. This money went to you.
[00:12:36] Will Doty: Correct. It’s very important. I tell all my clients to make sure they’re getting the receipt from the charity.
[00:12:41] Dean Barber: That goes to your account. That way, they can say this was a QCD.
Reviewing the Sample Plan
[00:12:45] Dean Barber: So, Will applied donor-advised funds and QCDs to the same scenario. Just to recap, this couple wants to spend a little over $60,000 a year plus health care expenses. They’re wanting to spend about $15,000 on traveling and are giving $10,000 a year to charity. Will didn’t change any of that.
[00:13:05] Will Doty: Nope.
[00:13:05] Dean Barber: Will didn’t change any of the investment mix. All Will did was some QCDs and donor-advised funds when that RMD hits. What did that do to the probability of success in this plan?
A Higher Probability of Success and Some Tax Savings
[00:13:19] Will Doty: It increased it. It took them from 90% to 93%, which was great to see. And it also came with a little bit of tax savings. That’s something else that we’re looking at. Not only does it improve a client’s probability of success, but what does it do on the backend? How does it change the mix of their assets when they pass away?
[00:13:40] Dean Barber: Let’s walk through that really quick. Let’s back up to the current plan without the QCDs and the donor-advised funds. Where did they wind up at the end of the plan?
[00:13:49] Will Doty: Just using average rates of return, they wind up with a little over $1 million after tax, about $2.2 million tax-deferred, and about $370,000 in Roth.
[00:14:02] Will Doty: When I put in the donor-advised fund and the Qualified Charitable Distributions, they wind up with a little bit more after tax. Again, we weren’t giving all this time out of that after-tax bucket. We switched it all over to tax-deferred. They wound up with about another $2.2 million in tax-deferred and $370,000 in Roth. There was no impact based on those moves to the Roth bucket at all.
[00:14:29] Dean Barber: But they end up with $1,000,295. They wind up with an estate that is roughly $300,000 more to their children even after they gave the same amount to charity and spent the same amount through their lifetime.
[00:14:43] Will Doty: It’s a very good planning tool.
Let’s Do Some Conversions
[00:14:44] Dean Barber: Will coupled that in another scenario with converting some of the IRA each year up to the top of the 12% tax bracket. On this one, Will isn’t using QCDs or donor-advised funds. He’s just saying to do some conversions.
[00:15:13] Will Doty: We want to understand the impact. Change one thing and see how it turns out. In the conversions, maxing out to the 12% bracket didn’t have as big of an impact on the probability. But it had a massive impact on how the money was left behind to the children along with a huge tax savings. It bumped them from a 90% to 91% in probability of success. That’s great.
[00:15:40] Dean Barber: Huge improvement.
[00:15:42] Will Doty: The difference is huge. When we look at the projected ending balances, they wind up with nothing after tax. Just barely over $1 million in tax-deferred and $2.6 in Roth.
[00:15:56] Dean Barber: And that $2.6 million in Roth is tax-free when it goes to the next generation.
[00:16:00] Dean Barber: They went from $370,000 in Roth to $2.6 million in Roth. They went from $2.2 million in tax-deferred only down to $1 million, so the kids only need to pay taxes on $1 million. And we’ll get into how the RMDs for beneficiaries play in here. They got $182,000 of tax savings over the life of the plan. That’s a big deal.
[00:16:21] Will Doty: That is. It’s a huge deal.
These Strategies Can Work with Each Other
[00:16:23] Dean Barber: Let’s combine these two things together. This is where your combination of the donor-advised funds, the QCDs, and doing Roth conversions play together.
[00:16:34] Will Doty: It’s a very interesting outcome. It bumps their probability of success from 90% to 93% again. They wind up seeing zero after-tax at the end. Because they were giving from the tax-deferred bucket, the after-tax lasted much longer in that plan. They ended up with $1.4 million tax-deferred and that same $2.6 million in Roth. Again, very powerful. But I think the most powerful part of it is the tax savings.
[00:17:06] Dean Barber: Up to $270,000, almost $275,000.
[00:17:09] Will Doty: Yes, that’s massive.
[00:17:11] Dean Barber: Again, this is not a real couple. But we see this kind of situation almost weekly. We have people come to us that are getting ready to retire and want to get a plan.
Increasing Your Probability of Success Can Translate to the Ability to Spend More Money
[00:17:30] Dean Barber: Imagine the difference. I think this would be a cool scenario to run and get some people excited. If I can take my probability of success from 90% to 93%, does that mean I can spend more money?
[00:17:46] Will Doty: If you want to. That’s something we can talk about.
[00:17:48] Dean Barber: You could. Maybe instead of a little over $60,000 a year, they could spend $70,000-$75,000. Maybe they could spend $80,000 in the first 10 or 15 years of their retirement and then reduce it back. There are all kinds of scenarios you can play around with. These results are fascinating because they have nothing to do with the investing part of the overall plan. You’re assuming the same asset allocation across the board for all three scenarios.
A Plan Is Not One Size Fits All
[00:18:17] Dean Barber: These are just a few different financial planning techniques applied to a normal couple’s situation. The strategies show that they can leave a larger estate or spend more money while they’re here and enjoy themselves.
[00:18:31] Will Doty: Definitely. It was really fascinating as I was building out this sample plan. I kept all the factors the same except I reduced their tax-deferred down to $1 million from the $1.5 million. And guess what? Conversions didn’t make sense. It cost them more as opposed to having big tax savings. A plan is not one size fits all. Just because a conversion works for one person doesn’t mean it works for somebody else.
[00:19:00] Dean Barber: Right. Somebody shouldn’t listen to us and say, “Gosh, I should do a Roth conversion.”
[00:19:04] Will Doty: Exactly. They need to sit down with a planner and understand how it impacts them long term.
[00:19:10] Dean Barber: If you haven’t done that and you’re blindly doing Roth conversions because you believe that over the long period that you’re just going to save a bunch of money in taxes, it’s not always the case.
[00:19:20] Will Doty: It’s definitely not.
[00:19:20] Dean Barber: I’d say it comes into play more than 50% of the time, but definitely not 100%.
[00:19:27] Will Doty: You’re right.
[00:19:29] Dean Barber: All right. Well, nice work on that.
[00:19:31] Will Doty: Thank you.
RMD Percentages by Age
[00:19:31] Dean Barber: Let’s continue with the RMDs and talk a little bit more about them. As we mentioned earlier, you must take your first RMD by April 1 of the year following the year your turn 72. Your RMD that year is going to be 3.65% of the December 31 balance from the year before.
[00:19:47] Dean Barber: By the time you get to 80, it’s 4.95%. By the time you get to 85, it’s 6.25% percent. And by the time you get to 90, it’s 8.2%. The life expectancy tables from the government’s uniform lifetime tables go all the way out to 120. Their goal is to have you get all that money out. And the older you get, the faster they want that money to come out.
What the SECURE Act Has and Hasn’t Changed
[00:20:13] Dean Barber: And prior to the SECURE Act, people used to be able to name their children and their grandchildren as beneficiaries to their IRAs and those children or grandchildren could stretch that IRA out over their lifetime. That was called a Stretch IRA. They didn’t have to take all the money out in a certain period. They need to continue to take RMDs, but it’s not based on the deceased person’s RMD table. There is now a single lifetime table for inherited IRAs. That table hasn’t changed.
[00:20:49] Dean Barber: But what has changed is how people can now inherit IRAs or 401(k)s and how the RMDS are treated for the person who inherits the money.
Another Acronym from the Government
[00:21:03] Dean Barber: Congress called it the SECURE Act. SECURE is an acronym that stands for Setting Every Community Up for Retirement Enhancement.
[00:21:22] Will Doty: Interesting.
[00:21:23] Dean Barber: Ed Slott says, “If it says ‘SECURE,’ you can guarantee that there’s nothing in there that makes your retirement more secure.” It’s just the opposite.
[00:21:33] Will Doty: Agreed.
[00:21:34] Dean Barber: I think of that almost like the Inflation Reduction Act that was recently passed. It has nothing to do with reducing inflation. In fact, it’s probably going to cause more inflation.
The Three Categories for Inherited IRAs
[00:21:44] Dean Barber: Under the SECURE Act, people who are inheriting IRAs fall into one of three categories. You can either be a non-designated beneficiary, non-eligible designated beneficiary, or eligible designated beneficiary. Each one of those three types of beneficiaries has a different rule on the RMDs from the IRAs or 401(k)s that they inherit.
[00:22:20] Will Doty: It’s quite a mess.
[00:22:24] Dean Barber: It’s a huge mess. Let’s start with non-designated beneficiaries. Non-designated beneficiaries are not people. They’re an estate, charity, or non-qualifying trust, which means that they’re a non-look-through trust.
[00:22:40] Dean Barber: If somebody dies before the required beginning date, which is April 1 of the year following the year that you turned 72, all the money needs to come out by the end of the fifth year. And there are no RMDs during the five-year window.
[00:22:59] Dean Barber: But if that owner dies after the required beginning date, then the RMDs must be taken over the deceased remaining single life expectancy table. It’s referred to as the ghost rule. That payout post death can’t exceed 10 years. In other words, it must be completely emptied at the end of a 10-year period. So just on the non-designated beneficiary, you can see that this is complicated.
[00:23:27] Will Doty: Very complicated.
Make Sure You Take Out the Right Amount Or…
[00:23:28] Dean Barber: And guess what? If you don’t take out the right amount, you get imposed a 50% excise tax.
[00:23:36] Dean Barber: So that’s the government work for you. The SECURE Act is the biggest money grab I’ve ever seen.
[00:23:40] Will Doty: Oh yeah, by far.
[00:23:41] Dean Barber: It’s a way for the U.S. government to get more money into the treasury without raising taxes. They just changed some rules on what happens on inherited IRAs, which there’s trillions of dollars in IRAs that are going to pass to the next generation in the coming years.
The SECURE Act Passed with Bipartisan Support
[00:23:55] Dean Barber: This is a way for them to figure out how they can get their hands on more of that money without raising the tax rate.
[00:24:00] Will Doty: Oh yeah, by far.
[00:24:01] Dean Barber: And oddly enough, it was passed with strong bipartisan support.
[00:24:06] Will Doty: I remember that. It was a couple days before Christmas in 2019.
[00:24:10] Dean Barber: There were only a handful of dissenters, which is kind of crazy.
Non-Eligible Designated Beneficiaries
[00:24:15] Dean Barber: All right, let’s move on to non-eligible designated beneficiaries. Non-eligible designated beneficiaries are all designated beneficiaries who do not qualify as an eligible designated beneficiary. Examples of that would be grandchildren, older children, or some look-through trusts.
The 10-Year Rule
[00:24:36] Dean Barber: The easiest way you can think about this is with your children and your grandchildren. When your children and your grandchildren inherit your IRA, they need to completely empty that IRA within a 10-year period. Whether they need to take a RMD during that 10-year period depends on whether the original IRA owner died prior to or after their required beginning date.
[00:25:11] Dean Barber: If they died before the required beginning date, there are no distributions required on an annual basis. It just says that you need to have all the money out before the end of the 10th year.
[00:25:20] Dean Barber: If the person died after their required beginning date, then that non-eligible designated beneficiary needs to take an annual RMD and have the account completely emptied in the end of the 10-year period.
[00:25:32] Will Doty: Yep. That’s correct.
Eligible Designated Beneficiary
[00:25:33] Dean Barber: So, who is an eligible designated beneficiary? A surviving spouse.
[00:25:40] Dean Barber: The surviving spouse can continue to inherit that and continue the RMDs just like they would, but it’ll be under the surviving spouse’s life expectancy as opposed to the deceased spouse. Minor children of the account owner, but only until 21 and not grandchildren. Can you imagine the normal person in their 70s who has a child under 21?
[00:26:03] Will Doty: No.
[00:26:03] Dean Barber: No. This would be for someone who had passed away early.
[00:26:10] Will Doty: Correct.
[00:26:11] Dean Barber: It’s also available for disabled individuals under strict IRS rules. It’s also for chronically ill individuals, and individuals who are not more than 10 years younger than the IRA account owner, plus any designated beneficiary, including qualifying trust who inherited before 2020.
Dean Has Spent A Lot of Time Studying the SECURE Act
[00:26:31] Dean Barber: The list goes on and on. I have an entire manual that’s devoted to the study of the SECURE Act with Ed Slott’s Elite IRA Advisor Group. We spent three days this spring dissecting all the rules under the SECURE Act. We looked at how the RMDs for all these beneficiaries. There are some real gotchas that aren’t included in the basic part of it that I just laid out. It’s terrifying.
[00:27:15] Will Doty: What should be scary for people are these rules— according to IRS—are on them.
There Are Several Traps to Watch Out for
[00:27:22] Dean Barber: That’s right. If anybody needs some light reading, I’ve got this manual here for you. I put some nice colorful language on my post-it notes in it as we’ve been studying this. There are so many traps for the beneficiaries of retirement accounts that can mess things up and cause big distributions.
[00:27:54] Dean Barber: It’s going to cause unwanted penalties and unwanted excise tax. Far more of a person’s money is going to wind up in the hands of the IRS. It will potentially be more than what winds up in the hands of who they wanted to get the money.
[00:28:08] Will Doty: Sadly.
The Main Takeaway About RMDs
[00:28:10] Dean Barber: The moral of the story is when you’re creating a retirement plan, you better understand RMDs. Not only as they apply to you, but you need to understand those RMDs as they apply to your beneficiaries as well.
[00:28:25] Will Doty: That’s a huge deal. Not only from just the pure confusion of the new rules but looking at it from a long-term planning standpoint. What if your kids are doing better than you are?
[00:28:39] Dean Barber: That’s a good point. Will is right. Think about your clients who are inheriting money. They’re in their 50s or their early 60s. They’re in their peak earning years.
[00:28:50] Dean Barber: Their parents are in their 80s and they’re passing away. Now, they have these big IRAs. The IRS is saying, “You need to get all this money out in 10 years.” And then they’re going to stack all that on top of their other income. Now, there’s a good chance that that IRA money comes out at the highest possible tax rate.
[00:29:06] Will Doty: Yep. Where mom and dad may have been down in the 12% or 22% bracket.
Again, These Tax Planning Strategies Can Make a Big Difference
[00:29:10] Dean Barber: That’s why I love what Will did with the Roth conversion and combining that with QCDs and donor-advised funds. What Will did in that example for the next generation was effectively lower that tax bomb to only $1 million of value, increase the tax-free inheritance to $2.6 million from just over $360,000, and save $287,000 throughout the lifetime.
[00:29:38] Will Doty: It’s an amazing tactic. You need to make sure it works for your plan. And at the end of the day, what are your goals? I have a handful of clients that want a 100% of their money to in Roth by the time they pass away. They’re incurring more taxes right now while they’re alive.
The Generational Impact
[00:30:00] Dean Barber: But they’re looking at the longer-term impact. They’re looking at the generational impact, not just the impact on their lifetime.
[00:30:06] Will Doty: Yep.
[00:30:08] Dean Barber: And I think you need to do that. That’s only prudent.
[00:30:10] Will Doty: It is. And something else we need to mention is that the distribution rules for after you pass away also applies to the Roth itself.
[00:30:20] Dean Barber: That’s right. There are RMDs where even though they’re not taxable, you still need to take the money out. They don’t want that Roth getting any bigger than what it already is.
[00:30:28] Will Doty: They don’t want it going in perpetuity.
You Can Diffuse This Retirement Savings Time Bomb
[00:30:30] Dean Barber: If you wind up finding yourself as the beneficiary of a retirement account, you need to understand these rules.
[00:30:38] Dean Barber: If you have IRAs and are planning to leave them to the next generation, you need to understand the planning techniques that are available while you’re alive and the impact they can have on your overall financial success. They can have a big impact on the overall amount of taxes that you pay through your lifetime and what your beneficiaries will ultimately pay in taxes. It really is a retirement savings time bomb.
[00:31:05] Will Doty: Oh yeah, it is.
[00:31:05] Dean Barber: But you can diffuse it. That was the whole point of Ed’s original book. His new book is called, The New Retirement Savings Time Bomb and How to Diffuse It. It’s all about the SECURE Act. We have a great resource in Ed Slott and company and the ability to study with him and learn all these things.
Seeing the Big Picture of Financial Planning
[00:31:27] Dean Barber: I think the most rewarding part for myself, Will, and all our other CERTIFIED FINANCIAL PLANNER™ professionals is the ability to pass that knowledge on to the individual so that they can really start to see what financial planning is all about.
[00:31:42] Dean Barber: We’re fortunate to have CPAs on staff. When we’re running these projections, our CPAs are reviewing them. They may even come up with some other ideas that our CERTIFIED FINANCIAL PLANNER™ professionals haven’t thought of. They might have another technique in mind that could be beneficial to the client. We can model all those out in our financial planning tool to see the best way to do it. And again, the tax rules are going to change. We need to be flexible.
[00:32:09] Will Doty: Oh yeah, they will.
Current Tax Rates vs. Future Tax Rates
[00:32:11] Will Doty: We already know that tax rates are going to change in 2026 unless Congress does something different.
[00:32:15] Dean Barber: Right. Tax rates are going to go up. And for most people, pretty significantly. That’s a good point, Will. People retiring today are looking at the current tax. If they’re not using a good financial planner, they’re projecting what their income is going to look like net of taxes, but aren’t factoring in the huge change that’s coming in 2026. That could be a real wake up call.
[00:32:38] Will Doty: That could be a big problem for a lot of people that aren’t planning appropriately.
When Should You Start Thinking About RMDs?
[00:32:42] Dean Barber: Hopefully this has helped people with RMDs. It’s complicated. It’s critical that you get it right. And it should be looked at prior to retirement. As you’re accumulating money in your 50s, you should be thinking about the RMDs that are going to occur at age 72. It could help you make a better decision on what kind of tax bucket you’re saving into.
[00:33:11] Will Doty: It can. I tell all my clients all the time that they need to be talking to their kids about RMDs and tax diversification. If they can set themselves up when they’re in their 30s or 40s, they’re not going to have this giant nightmare when they get to retirement. As I’m building my net worth, all my money goes in Roth or after-tax. The only part I have going tax-deferred is our company match in my 401(k).
[00:33:36] Will Doty: That way, I’m not getting stuck with this whole RMD mess that I need to worry about. And then on top of that, for my kids, I should be able to unwind all my tax-deferred assets before I die, hopefully, and leave them in a better spot.
[00:33:51] Dean Barber: When are you going to die?
[00:33:52] Will Doty: I don’t know. It’s good question.
Control What You Can Control
[00:33:53] Dean Barber: I always do that to people. You’re going to die; it’s just a matter of when. The point is that there are a lot of unknowns. In the financial planning world, we always talk about controlling the things that you can control. You can’t control Congress, interest rates, the stock market, foreign powers. There’s so much that’s beyond your control. People freeze up and don’t act and understand that financial planning is all about looking at the things that are within your control. You’re using all those tools and tricks to help shape a much brighter financial future.
[00:34:28] Will Doty: It’s important.
[00:34:29] Dean Barber: Thanks for being here, Will.
[00:34:31] Will Doty: I appreciate it.
Start Building Your Financial Plan
[00:34:31] Dean Barber: I certainly appreciate you joining us here for another episode of The Guided Retirement Show. As always, we encourage you to give feedback. If you’re curious about the financial planning tool that Will was talking about, you can access it and start building your plan from the comfort of your own home. You can factor in planning for RMDs and so much more as you’re building your plan by clicking the “Start Planning” button below.
If you have any questions about RMDs or how our financial planning tool works, you can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ professionals should you so choose. We can screen share with you while using the tool so that you can have a clear understanding of the planning that goes into your retirement.
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.