How to Plan for Your Upcoming RMDs [Video]

You should start planning for upcoming RMDs BEFORE retirement. Required minimum distributions force you to withdraw money from accounts like IRAs or 401(k)s. But to avoid paying unnecessary tax, here’s how you can try to match your real expenses with your retirement income. Read the transcript below!

Video Transcript

Well, just like when you were in your 20s and 30s and people told you to start saving for retirement now, when you’re in your 50s and 60s, you need to start thinking about retirement today.

Hi, my name is Michelle and I’m a financial advisor here at Financial Design Studio. And today I want to explain how corporate executives within 10 years of retirement can start planning for their RMDs. And there’s three things that I want to cover. So first, what and when to think about before retirement, then what affects your RMD, and finally, what strategies you can use and how to plan and optimize for your RMD.

Planning Windows for Upcoming RMDs

So first, let’s just look at a timeline here of leading up to retirement. For example, we’re going to look at someone who’s going to retire at age 65. Let’s say today you’re age 50 to 55. You’re 10 years before retirement. At the other end of our timeline, I want to put when we need to take our RMDs. So typically this is age 73 or after for most people. And then finally, I just want to put on here when we’re planning to retire. So let’s say you’re planning to retire at age 65.

Now I do want to mention that we just posted an article that talks about these strategies in more depth. If you want to explore these strategies further, that’s a great resource to check out!

We can think 10 years before retirement is a long time. But when we see it on a timeline like this, we can see that there’s planning windows that we can act within. It’s really helpful to just view it on a very simple scale like this. What and when to think about are these ages and the things that are gonna happen? At age 73 is when your RMD typically starts for most people age.

When you retire what a lot of people think is that you have less income. And you might have less income, but you don’t have zero income. That’s where a lot of people think, oh, my paycheck just ends because I retired. And that’s one of the key things that we’re going to talk about in this next part. so 10 years before retirement, so these 10 years prior, what’s really important is that you have this 10 year window that you can actually be planning and saying when I retire, when my RMD start, what am I going to do? So we’re preparing for that because as you’ll see, there’s some things that kind of these ages.

What Affects Your RMD Amount?

So let’s talk about that. Secondly, what affects your upcoming RMDs? So this RMD starts out here at age 73 and each year you have to start taking an amount and typically it’s around 4% of your retirement account balance. So think of your 401k that you have you’ve saved into. You haven’t paid taxes on that money, but it’s just been growing tax deferred. Well now at age 73, the government says you have to start taking some money out of that.

if you haven’t already. And even if you have been, you have to continue that. there’s this amount, it’s around 4% that gets calculated each year. And that’s the amount you have to take out every year. Now, what happens is that this RMD, this 4%, this is included as income. So your RMD, let’s just say for an example that this is $50,000 that you have to take. It’s not uncommon for corporate executives who have been saving the max into their 401k every year to have large 401ks.

And so let’s say that your RMD is $50,000 you have to take out in that year. Well, that $50,000 is income. So it’s just as if you earned it like a paycheck. Now let’s look back at this timeline because other things that affect your RMD are at age 65.

You may be starting Social Security. Or let’s say you’re someone who says age 70, because this is the latest that you could delay it, you start Social Security. Within this range, you also have more income starting here. And let’s just assume that that income, again, for a corporate executive could be 40 to $45,000. So let’s say it’s $40,000. What you can see here is that as these things start, it adds income to on top of each other.

We’ve now got income from Social Security, and we’re adding our RMD. Really quickly, just in this really simple example, we’ve got $90,000 of income. And what I said earlier is that people typically think, my paycheck goes away, so I don’t have any income. And this is where you can see this difference in what actually makes up your income now. This is why when we have this RMD, we actually want to try and minimize it. But in these years leading up to retirement or in these ages, after retirement.

There’s these big gaps here before you have to start your RMD that if your income, so for example, if we go back to age 65, our income is $40,000 here. Well, if it’s only $40,000, maybe we want to take some money out of our IRAs or 401ks before age 73 so that that amount at age 73 is less.

That’s the idea. We’re really building a timeline for our money, not just saying, okay, whatever the income happens, that’s when I’m going to pay the tax, whatever that tax may be. Instead, we’re saying, let’s build a timeline for your money to choose when we pay the tax and to choose what income and what amount of tax we want to pay. That’s the difference of how you’re looking at that. And that is really how the strategy works or how strategies around RMDs work.

So one thing that affects your RMD is the amount that you have in your 401k. That’s one of the biggest pieces. And then also the that you need.

What Strategies Can You Use?

So as we’re planning for this, some of the strategies, we need to know how much you need to spend. One of the things that a lot of people, again, when they retire is they may not spend as much as they think they need to or used to. So for example, in this example that we have, let’s assume that your expenses are only, let’s use a very low number, but let’s just say $70,000. If your expenses are only $70,000, but we’ve got income of $90,000,

Well, now we can see that I’m actually paying tax on more money than I even need. And that’s also the other goal is that we’re matching how much income we’re paying tax on with the expenses we actually have every year. Again, this is the benefit when we stretch it out over this whole time period, we can build a plan to say, when do we need this money and what amount do we want to pay tax on it? There’s some common strategies that can be used. For example, Roth conversions, that’s a big one in this entire timeline that we can play with for people that we can say where do we match up the income best in what year. So that’s one common strategy.

Other ones that we compare this with are charitable giving. So maybe you like to give to not-for-profit organizations. That’s a way again to affect this RMD amount. You can decrease the amount of taxes you pay on the money coming out if it’s going to a charitable organization.

And then even some others again if you’re a corporate executive you might have some appreciated stock. Again we can say maybe we don’t want tax on that, but we want to give that appreciated stock to a charitable organization. What you can see here in this timeline is there’s a lot of wiggle room, there’s a lot of windows for things that we can do if you’re giving it enough time to plan ahead. That’s the biggest thing that you want to be thinking for in planning ahead so that your RMD isn’t making a really big dent in the money that you’ve saved, but rather you’re only paying the taxes that you need to, but you’re actually choosing to pay it at the lowest rate possible.

So if you’re someone who’s nearing retirement and you’re starting to consider how to plan for things like your upcoming RMDs, why go it alone? Our team is here to help. We specialize in tax efficiency and we would love to partner with you in your finances. You can reach out to financialdesignstudio.com to get started and thanks for watching!

Next Steps for Upcoming RMDs

If you have more questions, then reach out! We specialize in complexities like executive compensation, tax planning, and investment management. Our team would love to see how we can help bring confidence to you and your family’s finances.

Thanks for watching!