Ready For Retirement
Everything You Need to Know About RMDs (Required Minimum Distributions)
Required Minimum Distributions work differently depending on the type of account. How can you most effectively plan for them?
Today we're talking through everything you need to know about RMDs so you can understand their nuances and create a plan to best address them.
Questions Answered:
At what age do you need to take an RMD?
What accounts do you have to take an RMD on?
Timestamps:
0:00 Intro
2:59 At what age do you need to take out an RMD?
4:19 How much is the RMD going to be?
7:40 What accounts do you have to take an RMD on?
9:25 Basic rules
11:26 Spouse and non-spouse inherited IRAs
16:11 Extra benefit
20:07 Exceptions to the rules
23:54 Keep this in mind
25:55 Example
32:26 Outro
Create Your Custom Strategy ⬇️
Required Minimum Distributions work differently depending on the type of account. How can you most effectively plan for them?
Today we're talking through everything you need to know about RMDs so you can understand their nuances and create a plan to best address them.
Questions Answered:
At what age do you need to take an RMD?
What accounts do you have to take an RMD on?
Timestamps:
0:00 Intro
2:59 At what age do you need to take out an RMD?
4:19 How much is the RMD going to be?
7:40 What accounts do you have to take an RMD on?
9:25 Basic rules
11:26 Spouse and non-spouse inherited IRAs
16:11 Extra benefit
20:07 Exceptions to the rules
23:54 Keep this in mind
25:55 Example
32:26 Outro
Create Your Custom Strategy ⬇️
Do you know exactly how required minimum distributions work on different types of accounts and how you can most effectively plan for them? Most people they have some idea of how these required minimum distributions, or RMDs, for short, work, but it's not until you understand all the different nuances of these RMDs that you can create a plan to best address them. So in today's episode we're going to talk through everything you need to know about RMDs so you can know what's best for your specific situation. This is another episode of Ready for Retirement. I'm your host, james Kanol, and I'm here to teach you how to get the most out of life with your money. And now on to the episode.
Speaker 1:Today's episode is based on a question that we received, and this comes from Kimberly. Kimberly says this She says I'm a relatively new listener, but I'm working through all your podcasts and I appreciate your perspective on the various topics of finance. Maybe I missed it, but I would love an education on RMDs. So required minimum distributions and the potential tax implications they pose, for example, taxes leaving money to charity or to heirs, and other considerations like what percent of my retirement percent should be in IRAs versus an investment account and where to start drawing down first, i don't believe all IRAs have the same required start date. For example, doesn't a beneficiary IRA need to be depleted within 10 years of the inheritance, regardless of age? Are there any other zingers to be aware of, and who notifies you of them? If you could provide a framework or considerations regarding RMDs, that would be great. Thank you, kimberly. Well, kimberly, you are very welcome. We'll be happy to do this and I think this is a good topic because you're right When it comes to required minimum distributions, and from here on out, i'll just be referring to those as RMDs. So I want to make sure you understand what that abbreviation means. To answer one of your questions directly of who notifies you of them, the answer is nobody, unless there's an advisor you're working with or the institution you're working with somehow has notifications in place. This is on you. The crazy thing is, up until recently, if you miss an RMD, the IRS would impose a 50% penalty on any RMD that was not distributed. Now that's since dropped down a little bit, just at the beginning of 2023. But what you can see here is there's pretty significant penalties to not taking your RMD in a timely manner. So who notifies you? No one, but I'm glad you're listening to this podcast, because this podcast, hopefully, will notify you and, depending on what type of an account you have, or how it's inherited, or what your age is, there's different rules regarding this.
Speaker 1:So let's jump right in to see all that you need to know about RMDs so that you can make sure, number one, you're aware what's out there and you don't miss anything and get penalized. But then, number two, the more you know, the more effectively you can prepare, and there are some great strategies to minimize the impact of RMDs and potentially save a whole lot of money in taxes. So let's start with this At what age do you need to take a required minimum distribution? Well, this goes back to. It depends as well. Here's the answer of is this your own account that you have been saving and growing, or is this an account that you inherited? So we'll look at each of those.
Speaker 1:If it's your own account, then you need to start taking RMDs at one of the following ages, depending upon what year you were born in. If you were born in 1950 or earlier, you're taking your required distribution starting at age 72. Now, technically, a lot of those people actually started at age 70 and a half, but for those people, they're already taking the RMDs, so that's a thing that's already happening. If you were born between 1951 and 1959, your required minimum distribution age is age 73. Now, prior to 2023, this was actually age 72, but these were bumped a year. So between 1951 and 1959, so if your birth year is any of those years, then your RMD starts at age 73. And if you were born on January 1st of 1960 or later, then your RMD begins at age 75. Again, prior to 2023, that was also age 72, but those ages have since been pushed. So, 1960 and beyond, your RMD is age 75.
Speaker 1:Now the next question is how much is the RMD going to be? You know, i have a general sense of when it's going to begin, but how on earth do I determine what that amount is going to be that I'm required to take? Well, it depends, and it depends upon two things. Number one, what's the value of your account that's subject to an RMD? And then, number two, how old are you? So, for each age, the IRS has a life expectancy factor. For example, if you were born on January 1st of 1950, or really any date in 1950, as of this recording, you'd be 73 years old. Your life expectancy using the IRS life expectancy tables would be 26 and a half years. So what the IRS would want you to do is they'd want to take your IRA or your pre-tax account balance as of 1231, so as of December 31st of the previous year, which, in this example, would be 2022, and then divide that by 26.5. Effectively, it comes out to taking out about 3.8% of your IRA or your pre-tax retirement account balance this year. So, for example, if your IRA balance was $1 million as of December 31st 2022, and in 2023, you are taking your first RMD, or just you're taking an RMD your RMD would come out to $37,736. You could take more if you wanted to, but you cannot take less without paying a penalty. Now what if you had that same IRA balance so say, a million dollars, but your birthday was in 1940 instead? Well, in that case, as of this recording, you'd be 83 years old And, even though your account balance is the same as a prior example, you're now 10 years older.
Speaker 1:In the IRS, they say that your life expectancy at age 83 years old is 17.7. Now, the first thing that you might be thinking is wait a minute. If you're 83 and the IRS is assuming a life expectancy of 17.7, they're assuming you live past the age of 100. So it's important to note these aren't based exactly on mortality tables. It's more a life expectancy factor that helps them or not help. Some is what helps you determine how much your required distribution is going to be. So don't take this as your exact life expectancy based on mortality tables. Thankfully, actually, they're assuming a longer life expectancy and the longer that life expectancy, the less your required withdrawal, if that makes sense. But anyways, for an 83 year old this year the life expectancy is 17.7. So you divide that million dollars that we use in our example by 17.7. What that determines, or what that comes out to, is about $56,500. That would be your RMD for the year, so about a 5.65% withdrawal rate. So what you can see when you determine how much is your RMD, it's based on those two factors What's the size of your balance, your retirement account balance and specifically the pre-tax retirement account balance as of December 31st of last year. And then, how old are you? The older you get, the greater the amount that you have to take out of your accounts. And the larger your account balance, the larger your actual RMD, even though the percentage will stay the same when you look at the life expectancy factor. So that is how much you have to take.
Speaker 1:Now, what accounts do you have to take an RMD on? Well, think of it as any pre-tax retirement accounts. So this could be a 401k, a traditional 401k. This could be a traditional IRA, this could be a traditional 403b. Effectively, it's any account that you put money into that you received tax deduction for.
Speaker 1:Now, quick qualifier for that health savings accounts, which are accounts that you put money into pre-tax. Those aren't subject to RMDs. Those aren't technically a retired or qualified retirement account. So you don't have to take an RMD on those. But for your standard 401k, ira, 403b, other account types like that then you have to take an RMD on those. Now, if you are still working after your RMD age, which could be anywhere between 72 to 75 depending on your birth year, then you don't actually have to take an RMD from your workplace retirement plan.
Speaker 1:Now, side note, if you own 5% or more of the company, then this rule does not apply. So for those of you who are thinking three steps ahead of saying, wait a minute, if I'm working, what if I just set up my own side hustle and set up a retirement plan for that company. Could I technically just move all of my pre-tax accounts into that company's quote unquote retirement plan and not have to take RMDs? Well, no, because you would own 5% or more of that company. So the IRS does have rules in place to prevent things like that. But if you're legitimately working at a company that you are not 5% or more of any 401k balance or retirement balance within that company's plan, you don't have to take an RMD on.
Speaker 1:Here's an important thing to note, though. Let's say you are past your RMD age. Let's say you're 75 years old and you are still working. Well, you have money in your company's plan. Let's assume that, and let's also assume you have an IRA from previous company. 401k is that you've since ruled over. Well, you're 75 years old and you're still working at a company that you don't own 5% or more of. So the IRS is going to say you don't have to take an RMD based upon the balance in your company's 401k. However, for any outside assets, like those traditional IRAs that you have, you are still required to take a distribution from those. So be very careful of this.
Speaker 1:So just because you're working and you're over your RMD age doesn't mean you don't have to take any RMDs. It means you don't have to take an RMD on the amount of the balance in your plan. So you can. So you could do some good strategic planning and think about consolidating accounts to minimize the impact of RMDs. But make sure that you're aware of that so that you're not unknowingly missing RMDs, which, again, are subject to pretty steep penalties.
Speaker 1:Now, anything that you have in a Roth IRA or Roth 401k or Roth 403b, those are not subject to RMDs. Inherited Roth IRAs are, which we'll discuss later, but your own Roth IRA or Roth 401k or Roth 403b, at least as of this recording, it is not subject to an RMD. So those are the basic rules for your own retirement accounts and required distributions that you have to take from them. Where things get confusing is there's an entirely different set of rules for inherited IRAs. So if you are inheriting an IRA from, maybe, a parent or someone else, you want to be mindful of what are the RMD rules. And also, if you intend to leave your retirement plans to children or to other heirs, you want to be mindful of how RMD rules will impact them, because there is a good amount of planning that you can do.
Speaker 1:Hey, everyone. It's me again for The Disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only.
Speaker 1:So let's take a look at this, and now, real quick. There's a difference between spouse and non-spouse inherited IRAs. So let's start with spousal IRAs and we'll talk about non-spousal IRAs after. Let's assume your spouse passes away. What happens to their IRA, assuming you are the 100% beneficiary? Well, there's two options. Number one is you could roll that account over into your own IRA, and this is the most common. Although option number two, there are some unique cases for it. So your spouse has a traditional IRA or a Roth IRA, whatever it is. If they pass away, you can simply take their balance and move it into your own traditional IRA or your own Roth IRA. So if you have existing accounts, move that into your existing accounts. If they pass and maybe you don't have a traditional IRA or don't have a Roth IRA, you would open one up and then move those balances into it. So that's option number one.
Speaker 1:Option number two is you could keep their IRA or Roth IRA as an inherited IRA, that is then subject to required minimum distribution rules. Now more on that later and I'll get into the specifics. But those required minimum distribution rules essentially state that you have to distribute that balance over some period of time, depending on the year in which they passed. So you either need to take that full balance over the course of 10 years or you need to take that full balance distributed over the course of your lifetime, based upon a different IRS life expectancy table. So I'll get into this more in the future, and by the future I mean a couple of minutes from now. But for now, let's just suffice it to say that your other option is to keep your spouse's IRA as an inherited IRA that you then need to take distributions from Now.
Speaker 1:Like I said, it makes or it almost always makes sense to roll their account over into your own IRA. Now the benefits are just simplicity. You don't have any RMDs on that account until your required begin date, so either 73 or 75, depending on how old you are. This potentially defers when RMDs would be gone. So, for example, maybe you're 60 and your spouse is 72, and they have a million dollars in their IRA when they die. Well, that million dollars would have been subject to RMDs starting next year had they still been living Well. Instead, if you roll that account into your own IRA and then base the RMDs on your own RMD ages, which don't start until age 75, that buys you 14 additional years of not having to take an RMD from that account. Now you certainly could take it if you wanted to, because you'd be at the age where there's no penalty to do so, but in most cases this is why, even if there's no age gap, but in most cases, it does make sense to take that money and just move it into your own account your own IRA or Roth IRA, depending on what type of an account your spouse had when they passed Now you could also take that account.
Speaker 1:This is option number two. You could take your spouse's IRA as an inherited IRA that is subject to required distribution rules. Here's an example of a particular case where we've actually used this example or used this method for a client for a strategic planning opportunity. So a client's husband passed away and all of their assets were in his IRA. Now she was only 50 years old, so she ruled his IRA into her IRA. She wouldn't be able to access it penalty free until she turned 59 and a half Now when he passed. She was not working at the time And instead of having to go back to work right away in the midst of a morning process and the grieving process and try to figure out what's next, we said, let's buy some time here.
Speaker 1:How can we use this IRA and actually live on part of it, giving you time to figure out next steps? So what we did is we elected to take his traditional IRA as an inherited IRA instead of moving it into a normal IRA. For her, the benefit of this is now that account was actually subject to RMDs. So this was a few years back, when RMDs were a thing on inherited IRAs and again more on this in just a bit. But this is an important distinction. Because of this, if you're not 59 and a half, you can't take money out of your own IRA with a few exceptions and not pay a 10% penalty, so that money you're going to be penalized for taking it. If you have an inherited IRA, regardless of your age, you can always take a distribution from that and it's not subject to that same 10% early withdrawal penalty.
Speaker 1:So for this particular client, we elected this option because she was under 59 and a half. So by taking required distributions from her spouse's IRA that had passed away, she still paid taxes on those but was not subject to the extra 10% penalty. Now here's the extra benefit If you elect this option, you can later move that spousal inherited IRA into your own regular IRA. So for this particular client, what we did was her spouse passed away. The IRA balance was in his name. She elected to take that as an inherited IRA so that she could access funds penalty free for some time while she figured out next steps. Once next steps were in place, she had her career again. Things were moving forward. Then we took that inherited IRA and moved it into regular traditional IRA. For her There was no longer subject to RMDs and won't be subject to RMDs until she reaches 75. So it was just a unique way of saying how can we access some of this balance without paying the 10% penalty, but only do that for as long as the balance was needed and then shift it back into a traditional IRA where RMDs wouldn't be subjected again or wouldn't be forced again until her RMD date. So those are the options for spousal IRA.
Speaker 1:Now let's talk about non-spouse inherited IRAs. The next thing to know with this is it still depends, and it depends upon when you inherited it, and what it depends upon is did you inherit it before January 1st of 2020, or January 1st of 2020 or later? So let's talk about what if you inherited an IRA before January 1st of 2020. If you did that, you have required distributions over the course of your lifetime. So even if you're not 73 or 75, starting the year after you inherited the IRA, you would have to begin taking RMDs. Now those RMDs are based upon your life expectancy as well as some other details about the original account owner, but you had the option of taking these required distributions over the course of your lifetime.
Speaker 1:So if you've ever heard someone talk about a stretch IRA, a stretch IRA isn't a separate account type. It's just a normal traditional IRA. But, for example, if you inherit that at age 40 and then you take distributions over the course of your lifetime, will the tax deferred benefits of all the funds that remain in the IRA? those remain intact, so you're able to defer a lot of the taxes for a long period of time. So you could go and reference the IRS life expectancy table to see exactly what your distribution would need to be each year If you inherited an IRA before January 1st of 2020,.
Speaker 1:What I'd suggest instead, though, is just go use an online inherited IRA or RMD calculator. You can find these if you simply Google it, and you'll plug in your date of birth, the original IRA owner's date of birth, their date of death, the account balance, and it's going to spit out a number for you, essentially telling you here's the minimum that you have to take And, again, as a reminder, you can always take more, but you can't take less without paying a penalty. Also, as a reminder, even if you're under age 59 and a half, you can access required distributions from an IRA without the 10% early distribution penalty. That's where people get tripped up Is, i think, because they're not 73 or they're not 75, they don't have to take these RMDs. Well, if it's inherited IRA, even if it's an inherited Roth IRA, you do So. Those are the rules If the original IRA account holder died before 2020. Now, what if the original IRA account holder passed away on January 1st 2020 or later? Well, in this case, you don't actually have any required distributions in any given year, but instead you must fully distribute the account over the next 10 years. So, technically, the accounts must be fully distributed by December 31st, the 10th year following the death The death of the IRA owner. So, for example, let's say you inherited a traditional IRA on February 1st of 2023. Well, by December 31st of 2033, you would have to have fully distributed the account.
Speaker 1:There are some exceptions to this rule. The first exception is if you are the IRA owner's spouse. Now we just discussed rules for what the options are If you're the spouse of the decedent, so I won't go into those again. But that's the first exception to this rule. You are not required to take funds out over the next 10 years. You have the option to if you elect that, but you're not forced to. You could just move their IRA into your own.
Speaker 1:The second exception is for the IRA owner's minor child. So if your child is the beneficiary of your account and they're a minor, so say under the age of 18, they don't have to take account distributions out over the next 10 years. Now, once that minor child reaches the age of majority so call it age 18, then they become subject to the 10 year rule. For example, maybe you have a child who is 12 years old and you pass away. Well, the child inherits your IRA, they can keep it as is until age 18. Once they turn 18, then the 10-year rule begins and they would have to fully distribute the account by age 28. They would have access anytime without penalty, but they're not required. That 10-year clock isn't starting until the child reaches the age of majority. The third exception is any individual who is not more than 10 years younger than the IRA owner. What does that mean? Well, let's assume an example of you inherit your sibling's IRA and they were only five years older than you. Well, let's assume they just passed away in 2023. So after 2020, when that 10-year rule went into effect, but because you were 10 years younger or less than 10 years younger than the original owner, you can still take IRA distributions or required distributions out over the course of your lifetime, as opposed to having to do it over the next 10 years. So you would use the IRS life expectancy table in this instance to take a smaller required distribution out each year as opposed to fully distributing it.
Speaker 1:Now, side note, not all beneficiaries on an IRA might be subject to the same RMD rules. I had a case where this was the example There was an IRA and the owner passed away. Now there was three different beneficiaries on the account. There was a grown child, a child of the IRA owner, there was a sibling that was a partial beneficiary. And there was a charity that was a partial beneficiary Now the grown child. They were subject to the 10-year rule distribution. So because they were over the age of 18, but more than 10 years younger than the original account holder, they had to fully distribute the account over the next 10 years. The sibling, however, was six years younger than the original IRA account holder. So because the sibling was within 10 years of the original account holder, they could take RMDs out over the course of their lifetime. So they could stretch that further and, based upon IRS life expectancy tables, potentially do so for 30 plus years.
Speaker 1:Then, finally, the charity. The charity could just take the IRA distribution all at once because it was tax-free. Charity doesn't pay taxes if you leave an IRA to it, so they could just take it all at once. So three different beneficiaries all had three different RMD rules. So this is just something to be mindful of as you're planning for this. Then the fourth exception to this 10-year rule is if you're disabled as defined by the IRS. And the fifth exception is if you're chronically ill, again as defined by the IRS, you're not subject to the 10-year rule.
Speaker 1:However, in all other cases, if the original IRA owner passes away on or after January 1st of 2020, you must fully distribute that IRA, regardless of its traditional IRA or Roth IRA. You must distribute it over 10 years. Now, that was a lot of data. If you're still here with me, thank you, because now there's a whole bunch of different things we just went through. Here is the planning point, so here's the things that I want you to keep in mind now, knowing the information that we just covered. This is in no particular order, but just thinking through some things you can do to enhance your situation.
Speaker 1:Number one what do you do if you inherit an IRA? Well, if it's a traditional IRA and let's assume that you inherit this 2020 or later take a look at your next 10 years of taxable income. Now, i know it's probably impossible to predict exactly what taxable income will look like, but what you kind of want to know is when do you expect taxable income to be the highest? When do you expect taxable income to be the lowest? Because you have 10 years to take that distribution as you see fit. You could take it all in one year and take a pretty significant tax. It all in one year, or you could spread it out, or you could take different amounts in different years, based upon when your taxable income is going to be highest or lowest, because ideally you'd want to take more of your inherited IRA when your income is lower, because it's not going to be subject to as much taxes if your other income sources aren't as high, and you'd want to take less of your inherited IRA out when your taxable income is higher. So this is a little bit of a game that you play of trying to see when does it make sense or how does it make sense.
Speaker 1:Assuming this lump sum inherited IRA thought in your lap, how do you take it out? What do you do? Well, it's very much a tax decision of how can you effectively take that out to minimize the tax impact. Now, what if you inherit a Roth IRA? Okay, here's where I would make the case in a lot of instances to wait until the end of the 10th year to distribute that. Now, if you need it, you need it, and that's a separate issue. But assuming you don't need that and assuming okay, this just becomes part of my portfolio. What I would like to do is I would like to say well, can we retain the tax free benefits of that account for as long as possible? Now I know that the end of the 10th year I have to fully distribute it, but can I leave money in that inherited Roth IRA for as long as possible, where it keeps growing tax free and then whatever I take out is completely tax free? Just a quick example to illustrate that.
Speaker 1:What if you inherited $500,000 in an inherited Roth IRA? Well, you could take it all out now and you would receive that $500,000 completely tax free. But if you turn around and reinvest it, then any future gains are then taxable. On the other hand, what if you simply left it alone? So you took it into the inherited Roth IRA, you let it continue to grow and let's just assume it grows by 7% for a year for the next 10 years. Well, by the end of those 10 years now you have about $984,000. And if you take that distribution, then it's still entirely tax-free in. All of the gains from the time that you inherited the account until the time that you distributed the account are tax-free in addition to the original tax-free account balance. So, as I mentioned, if you need the funds before the end of the 10th year, well then, absolutely, you got to account for that. But if you don't, and if you try to incorporate this into your overall portfolio, try to squeeze out as much of those tax-free returns as you can possibly get. So that's the first planning. Point is what you do if you inherit an IRA. Well, depending on if it's a traditional IRA or a Roth IRA that you're inheriting, understand what's the best way to distribute this.
Speaker 1:The second thing to understand is how will RMDs impact your retirement? Well, a huge planning point in retirement for a lot of people is managing their tax liability, and one of the things that makes that most difficult to one of the biggest challenges is managing the impact that required distributions will have on their tax bill. Now, there's a lot of things you can do to mitigate that or plan for that. I'm not going to go through all the things today because this episode's already running a little bit longer than it typically does, but episode 126, or episode 126, i do go through a very comprehensive list of options that you have to reduce your RMD, so that episode is called. What are the best strategies for reducing required minimum distributions. Again, that's episode number 126. Give that a listen if you're concerned about how your RMDs might impact your tax strategy in retirement.
Speaker 1:The third planning point, with this information in mind, is what about legacy planning? So, yes, a lot of people want to make sure that they're managing their RMDs for their plan and their tax liability. Other people, a lot of other people, are saying well, how do we think about our kids or our future heirs? And if you have a significant IRA balance and your children might inherit that and their peak earning years, then their tax bill could be huge. Now, obviously, it's still a net positive to leave them the IRA balances, but good, good planning help to avoid that. So what you have to ask is what would it look like for your kids, or whoever your beneficiaries are, to inherit this?
Speaker 1:So let's just use a round number again. What if you have a million bucks and you have one child who's inheriting that million dollars in your IRA? Well, that million dollars has to be distributed over 10 years, so your kid could take out a million dollars in one year. That's a pretty significant tax hit. Or they could spread it out If they spread it out evenly and assuming those assets are grown by 7% per year, then what that means is your child would need to take out $142,000 each year if they wanted to be on track to fully distribute that by the end of year 10. So take that $142,000, look at their own personal situation already and whatever salary they have or income they have, that $142,000 stacks on top of that. So if you're looking at Roth conversions or RMD management from the standpoint not just of your situation but your potential errors situation, then we need to start incorporating their tax brackets into those decisions to make sure that you're being mindful of that, because if they're already in a high income tax bracket, then a huge chunk of whatever you're leaving them in an IRA will be taxed and sent into the IRS, as opposed to, of course, your child receiving it.
Speaker 1:Then the fourth planning point around all this is charitable giving, and again I go into this in more detail in episode 126,. But if charitable giving is an important part of what you do, then use that to offset the impact of RMDs, or offset the impact of RMDs for your children. How can you do that? Well, the first way is by using qualified charitable distributions. So once you're 70 and a half or older, you can gift funds directly from your IRA and gift them to a charity of your choice. Now, once you're of RMD age, any amount you distribute from your IRA as a qualified charitable distribution or a QCD, it counts against your RMD. So if you want to gift $10,000 a year and your RMD the first year of crossing the RMD age is, let's say, $40,000, well, what that means is you could gift $10,000 of the charity and your remaining RMD is $30,000. So that $10,000 is not taxable to you. Now that $30,000 that you take out, that's the only thing you're paying taxes on. So it's helping to reduce your tax liability by doing your giving directly from your IRA as opposed to doing it from your normal cash flow.
Speaker 1:Or another thing you could consider is if you are going to leave part of your portfolio, your estate, to charity. Don't just leave things equally. So use a simple example. Let's assume you have half of your money in an IRA and half in a brokerage account and you have one child who's an heir and you have a charity that's going to be an heir. Well, if you want to split things 50-50, don't just go 50-50 on the IRA and 50-50 on the brokerage account when you list your beneficiaries. That would be highly ineffective. Instead, let the charity receive 100% of your traditional IRA, because charities don't pay taxes on anything. So if you leave a charity in IRA and they distribute it to the charity, the charity's not paying any taxes. Versus anything you leave your child or grandchild or any heir they are going to be paying taxes on that. So instead of going 50-50 on each in this example, i would do 50% or, i'm sorry, 100% of the IRA left a charity and 100% of the brokerage account left to the child, because there's a step-up in basis, and then they don't pay taxes on that brokerage account either.
Speaker 1:Now you need to manage this each year because the account balances might fluctuate and there's multiple parties involved. This is not a set and forget it strategy, but just something to be mindful of. So we're now 30 plus minutes into required minimum distributions, which I know is not the most exhilarating topic, but it is important to know how they work, whether it's your own RMD or an IRA that you inherited from a spouse or an IRA that you inherited from someone else, because when you understand how they work, you can understand the planning points involved with this and you can use this information to manage your plan most effectively. So I hope that was helpful. Thank you very much for the initial question.
Speaker 1:If you're listening and want more information, just like this, be sure to check us out on YouTube under Root Financial You can find this podcast. You can find a lot of other great information as well. Thank you, as always, for listening and I'll see you next time. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom. Click Start Here, where you can schedule a call to one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.