Demystifying RMDs – The Basics to Know
by SGL Financial
Our 2 Cents – Episode #149
Demystifying RMDs – The Basics to Know
On today’s episode of the Our 2 Cents podcast, Steve and Gabriel are talking about the world of Required Minimum Distributions (RMDs). They’re here to help you understand the reasons behind the mandatory withdrawals from your retirement savings, strategies to avoid major tax issues, and why it is so important to plan in advance for them.
- Gabriel’s Quotes of the Month:
- “You’re never too old to set another goal or to dream a new dream” – Les Brown
- “Don’t simply retire from something, have something to retire to” – Harry Emerson Fosdick
- “The person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went” – Unknown
- Demystifying RMD’s – The Basics:
- What is an RMD?
- Is there anything I can do to avoid having to take them?
- What type of accounts do I have to take them from?
- At what age do I have to begin taking them?
- Can I take RMDs from multiple accounts?
- If I don’t need the RMD, what can I do with the money?
- How can I avoid big tax issues with proper planning?
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Podcast Transcript
Announcer: You are listening to Our 2 Cents with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the President of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest and financial news trends, strategies and more.
Gabriel Lewit: Welcome to our show today, everybody. You’ve got Gabriel Lewit here, you’ve got Steven Lewit, you’ve got producer Katie tucked away in the background because she doesn’t join the show.
Steve Lewit: She does. You should not pick on her like that.
Gabriel Lewit: Well. She helps us prepare for the show, but she doesn’t join the show live.
Steve Lewit: She’s sitting here rooting for us.
Gabriel Lewit: Of course.
Steve Lewit: Every time we say something great, she’s clapping. I love that.
Gabriel Lewit: I don’t think she claps.
Steve Lewit: No, she doesn’t.
Gabriel Lewit: She smiles.
Steve Lewit: Yeah, she smiles.
Gabriel Lewit: A nod of approval.
Steve Lewit: Yeah, like good job guys.
Gabriel Lewit: Well, hello Steve.
Steve Lewit: Well, hello Gabriel.
Gabriel Lewit: How are you today?
Steve Lewit: Well, I’m recovering from just being tired.
Gabriel Lewit: Well, everyone’s getting sick these days. Last week and a half, two weeks, I watch entirely too many, or not watch, but see entirely too many parent memes on Instagram when I scroll through it. And there’s all sorts of fun ones. And one of them is, I forget exactly what it was, but it was just basically just once all the kids go back to school, it’s like germ season is here, is like there’s two seasons, summer and germ season.
Steve Lewit: Well, kids go to school perfectly healthy and three days later they’re-
Gabriel Lewit: Everyone’s sick.
Steve Lewit: Everyone’s sick.
Gabriel Lewit: Whole world’s sick, it’s this little germ pool that they go back to school.
Steve Lewit: That’s really true.
Gabriel Lewit: And so, my kids are back to school. I almost got sick. I warded it off with, I’m a big fan of, I like to tell the whole world about Zicam. It’s like my go-to secret.
Steve Lewit: It’s good stuff.
Gabriel Lewit: I really do believe in it. It saved me from probably multiple dozens of colds in my life.
Steve Lewit: But you have to take it before you get the cold. Right?
Gabriel Lewit: The very first day I get a scratch in the back of my throat. I just start, well, I do double the recommended dose on the bottle. I’m sure it’s not healthy for me, but it works.
Steve Lewit: That’s great. So are you promoting-
Gabriel Lewit: They didn’t pay me.
Steve Lewit: like a sale?
Gabriel Lewit: No, I’m just saying,
Steve Lewit: Do you have a supply you’re trying to get rid of?
Gabriel Lewit: No commissions. No, I’ll take all the free Zicam I can get.
Steve Lewit: Is the profit motive motivating you?
Gabriel Lewit: It’s expensive stuff, by the way.
Steve Lewit: Yeah, it’s.
Gabriel Lewit: That’s part of the problem.
Steve Lewit: Yeah. But it’s great. You did that. I didn’t.
Gabriel Lewit: Well, hopefully you guys are doing well, enjoying your start to September, believe it or not, the year is-
Steve Lewit: Football season starts Thursday.
Gabriel Lewit: Yep. Bears, Packers, Sunday.
Steve Lewit: Sunday.
Gabriel Lewit: Big game to start off the season. We’ve got of course-
Steve Lewit: Giants, Cowboys Sunday night, I think.
Gabriel Lewit: You know fall is going to be in the air here any day now. I usually think of the moment Labor Day wraps up is the end of summer and the fall is thus here.
Steve Lewit: Yeah. When is the actual end of summer? Do you know?
Gabriel Lewit: That would be a producer Katie question to Google while we are on the show and talking, we’ll circle back to that one.
Steve Lewit: I’ll time her response.
Gabriel Lewit: So, Google’s fast though. Let’s see. No, First day of fall. September 22nd. So we’re still in summertime.
Steve Lewit: Did you know that it’s getting darker, that September and October is when the darkness really accelerates. So up until now you might’ve not perceived it too much. You don’t feel like-
Gabriel Lewit: I’ve noticed it for sure.
Steve Lewit: I have too, but September and October it gets worse.
Gabriel Lewit: Oh, thank you. That’s depressing.
Steve Lewit: Yeah, well look, we covered a lot of territory. We talked about colds. We talked about the end of summer, the darkness coming.
Gabriel Lewit: The darkness that has arrived. Well, let’s talk about some positive things here. I’m going to start off with some quotes for this month. I like to weave in some quotes and then dissect how you feel about them.
Steve Lewit: Okay. I will feel positive about those.
Gabriel Lewit: Okay, so here’s one. It says, “Don’t simply retire from something. Have something to retire to.”
Steve Lewit: Yes.
Gabriel Lewit: And this is, again, I never know who any of these people are. Harry Emerson Fosdick.
Steve Lewit: Well Harry,
Gabriel Lewit: That’s his name.
Steve Lewit: Harry, I agree.
Gabriel Lewit: Harry Emerson Fosdick.
Steve Lewit: Harry Emerson. I think you are correct. A lot of people retire. They say, “I don’t know what to do. I don’t know what I’m going to do.” And they figure it out. Most figure it out. Some get really depressed. But if you can move from one structure to another structure and not having any structure less in between, I think it’s psychologically much better for you.
Gabriel Lewit: Yeah. We humans tend to thrive on some form of structure versus just winging it all day long and not having a path or a plan. And so I agree. I think now if you’re inadvertently laid off, I think that’s the one that hits people the hardest. When they’ve got a plan for working another couple of years or they’ve got other goals and timelines and then that just all gets shot to, you know what? Because they get laid off or they get downsized or whatever the case may be. I think that’s the hard one because then people are just floundering, trying to figure out what do they do? How do they pay bills?
Steve Lewit: Well, they feel lost.
Gabriel Lewit: There’s a plan in place.
Steve Lewit: They feel lost. Like you said, I don’t know what to do. It was like the rug is pulled out from under me. My finances are a wreck, or I can’t afford this or I didn’t want to afford this. So it impacts every part of a life when structure is changed immediately without a interim, what do you call it? Slow going into it.
Gabriel Lewit: Yeah, like a deceleration zone.
Steve Lewit: Right. A deceleration zone. A good name for a retirement book.
Gabriel Lewit: Yeah, I just thought of that.
Steve Lewit: Yeah, it’s great. But that’s the problem is you go from fast to zero and that is very hard for the body to handle, for the mind to handle, for the emotions to handle. And you don’t know what’s coming towards you either. So yeah.
Gabriel Lewit: So, if you’ve got a vision, that’s good. If you don’t have a vision, not that that’s bad, but we would suggest start thinking what you want to do.
Steve Lewit: Exactly.
Gabriel Lewit: Work again, new hobbies, explore. So Harry Emerson, I think you’re onto something and thank you for sharing your quote with us here. Of course via Google.
Steve Lewit: It wasn’t Harry that shared it though.
Gabriel Lewit: It was Google that shared it.
Steve Lewit: Yes.
Gabriel Lewit: Google knows all. My wife makes fun of me because I always Google everything. So like, “What should we do about this with the kids?” I’m like, “I don’t know. Let me check Google first.” She’s like, “What do you Google?” I’m like, “I just want to see what the general Google consensus is.” That’s it.
Steve Lewit: And it’s everything.
Gabriel Lewit: Yeah. Okay, next. This is somewhat related, but I like it. So I’m just going to add it here. We won’t talk too much about it, but “You’re never too old to set another goal or to dream a new dream,” says Les Brown.
Steve Lewit: Well, Les is right on target. So I think as a human being, we are built to achieve things. And the day we stop doing that, we lose a lot of energy.
Gabriel Lewit: Exploring, learning, growing, developing, experiencing. You get most of that through new things. Goals, dreams.
Steve Lewit: Yeah. Well, people often say to me, I don’t want to get too philosophical here, but I am looking for my purpose in life. Yeah. Well purpose, what does that really mean? The overall purpose may mean that you need to accomplish things because we’re built to create. We’re creative beings. We have creative energy going through us. So our purpose, I believe, is to create something, whatever it is. And when you retire, if you’re not in some process of creation, I think there’s a loss of energy to you.
Gabriel Lewit: And I would agree with that. So I think as you retire to something, one of those somethings could be according to Les Brown setting more goals or dreaming new dreams.
Steve Lewit: Exactly.
Gabriel Lewit: And it’s the new chapter and you’ve got dozens of years of retirement to enjoy and experience and do new things and have some fun.
Steve Lewit: And that doesn’t mean it has to be like a global changing. It could be as small as cleaning out the garage.
Gabriel Lewit: Yeah, that’s a good goal. I have that for this fall also.
Steve Lewit: Yeah, you’ve had it for the last five falls.
Gabriel Lewit: I do it every spring and every fall. And it just gets cluttered again. It’s like the world’s-
Steve Lewit: It’s amazing how that happens right?
Gabriel Lewit: …never ending project. Yeah. Okay, I got one last quote for you here and then we’re going to move on to our topic for today. Our main topic, which is about RMDs. All about RMDs and maybe a couple of listener questions here for you today. But the last quote here is, I like this. “The person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went.”
Steve Lewit: Now who said that?
Gabriel Lewit: This according to Google, is unknown. Just wise words floating around the world.
Steve Lewit: Yeah. I don’t know. Let’s read it again. Let me be sure. I’m commenting on the right thought.
Gabriel Lewit: “The person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went.”
Steve Lewit: I would disagree with that. I don’t know if that… It’s not exciting me anyway possible. Philosophically-
Gabriel Lewit: They can’t all be winners.
Steve Lewit: Yeah. Watch what you spend, then count what you earn and make sure one doesn’t overwhelm the other.
Gabriel Lewit: There we go. “Watch what you spend. Count what you earn.” Steve Lewit.
Steve Lewit: Put that on Google, Gabriel.
Gabriel Lewit: We just put it on Google.
Steve Lewit: Katie, come on. I need a little fame.
Gabriel Lewit: All right, so I hope you enjoyed those. Just trying to have a little bit of fun to start our show here. If you’ve got any wise words of wisdom, any quotes of your own, you of course can email us info@sglfinancial.com anytime. We’ll share your words of wisdom with the world through our show here. At least a small slice of the world. But actually, we keep getting more and more listeners, it keeps growing. Thank you all for thinking of us when you share it with your friends, family members and keep doing that. We’d love to continue to see our audience grow.
Steve Lewit: Yes.
Gabriel Lewit: Okay. RMDs.
Steve Lewit: What is an RMD?
Gabriel Lewit: RMDs, well, that’s where we were going to start.
Steve Lewit: Okay.
Gabriel Lewit: We use obviously many acronyms in this business. A RMD is a required minimum distribution. Okay. So some people, funny enough, call them MRD.
Steve Lewit: A lot of people.
Gabriel Lewit: Yeah. Minimum required distributions, but technically it’s RMD is required minimum distributions. And what they are is a-
Steve Lewit: Required.
Gabriel Lewit: The IRS is requiring you after you turn a certain age to take minimum distributions out of account.
Steve Lewit: So Gabriel, to me, the word required means not optional.
Gabriel Lewit: That is a correct assessment.
Steve Lewit: So why do so many people say to me, can I not take my required minimum distribution?
Gabriel Lewit: It’s funny when it gets to RMDs required minimum distribution. Yeah. One of the very first questions is how do I not take my RMD?
Steve Lewit: I understand what they’re saying, but in my head, I’m saying what do you think the word required means?
Gabriel Lewit: Or followed closely, how do I get my money out of my IRA without paying any taxes?
Steve Lewit: Exactly.
Gabriel Lewit: So, there’s always a few variations of this. Well, let’s elaborate on this. So an RMD is predominantly, they actually can get very complicated, but it’s predominantly associated with a 401(k) a IRA or a rollover IRA. Okay. Individual retirement account. And your Roth IRAs don’t have RMDs.
Steve Lewit: Yes.
Gabriel Lewit: Your non-qualified accounts don’t have RMDs, your non-IRAs and 401(k)s. So it’s really limited to your qualified money, what we call qualified money. So as you look through your accounts, the first thing to notice is which of my accounts are qualified? Which means I will at some point have to take RMDs out of them and which ones aren’t.
Steve Lewit: Got to be careful here. The Roth is still a qualified account, so because it’s an IRA.
Gabriel Lewit: Roth IRA.
Steve Lewit: A Roth IRA, but it is exempt from the required minimum distribution.
Gabriel Lewit: And so, I just had that conversation with a client the other day. They actually thought they had to take RMDs from their Roth IRA too. Now if they did, and it wasn’t a taxable event, either way they don’t have to, but they thought they did and then just had to take that money and stick it in a checking account or something. But no, you can leave your Roth money in there. No worries there. And in fact, we’ll get to that as we talk about RMD strategies. That is one of the ways not to potentially eliminate them forever, but you can in some cases, depending on your situation, how much qualified IRA money you have that you need to take up from it, the Roth conversions that we’ll get into to minimize the bite of those future RMDs.
Now, RMD age is also a little bit confusing because there’s different ages now.
Steve Lewit: Yes.
Gabriel Lewit: New laws were passed last year and raising them to 73 for some people and then for others, younger folks, it’s more likely to be 75.
Steve Lewit: That’s correct. Okay. Yep.
Gabriel Lewit: If you want to talk about the exact age that applies to you, let us know. We’ll get you the dates, we’ll review your ages, your options. But just keep in mind there’s different ages for RMDs depending on when you were born. And that will become the first age where you are required to take out that first distribution.
Steve Lewit: In that year.
Gabriel Lewit: In that year. There is an exception on the first year too, which we’ll circle back to.
Steve Lewit: Okay.
Gabriel Lewit: Okay. So what do you do about these, people call them pesky RMDs. Why would they be pesky Mr. Lou?
Steve Lewit: Usually they’re pesky because people don’t need the money. In other words, you’ve got plenty of income coming in from somewhere else and you don’t need to take the RMDs. You don’t want to make your tax bill bigger. So people say, “Well, why can’t I just leave it there for the rest of my life?” I read an article that said, Well, the government wants you to enjoy your money. No, that’s not why they want your RMD. They want your RMD to collect taxes because they need taxes. So it is reasonable for the government to give you a tax deferral and then at some point say, “Hey, we need to collect now.”
Gabriel Lewit: Yeah. You can’t defer forever.
Steve Lewit: You can’t defer forever. But how you do that and what you do, like do I do Roth conversions. Do I do LIRP conversions? The traditional way is just I pull the money out, pay the taxes, and I’m one and done and then do the same thing next year. Yeah.
Gabriel Lewit: So, the baseline is you do nothing and when you turn, I’m just going to use 73 for an example. When you turn 73, you have to add up your IRA balances. Okay. Qualified traditional pre-tax IRAs. Okay? Not the Roth kind. As of the prior year’s 12/31. So this is how you calculate your RMD. You take your prior year, so 12/31/2022, if you’re turning 73 this year, and then you take that balance and you divide it by a factor. 27.4, 26.5, it goes down and down and down.
Steve Lewit: It’s easily obtainable on the internet. If you want a copy of the factor list, we can send that to you too.
Gabriel Lewit: Yeah. But basically the factor is a divisor. So you take your amount of your balances, say a million dollars, you divide it by your factor, and then voila, you’ve got to take out $30,000 when you turn 73 for your RMD for that year.
Steve Lewit: Yes.
Gabriel Lewit: Okay. Now you don’t have to take it out of one account.
Steve Lewit: Yeah. A lot of people think you have to take it out of one account.
Gabriel Lewit: Yeah. You can take it out of multiple accounts, one account, mix and match, two thirds out of one, one third out of the other. You’ve got choices. The government doesn’t care. They just want to get their, in this case, $30,000 RMD, which they can tax it and then collect their well delayed earned tax dollars from their perspective.
Steve Lewit: You’re exactly right.
Gabriel Lewit: Yeah.
Steve Lewit: I didn’t feel like an ornament on that.
Gabriel Lewit: Well, so that’s your baseline, right? You just do nothing every year. You calculate it, you take it out. What do you do with the money after you take it out, Steve, if you don’t need it?
Steve Lewit: Well, most people just dump it into a savings account. So three or four years later, now they have a hundred grand in cash usually making very little, and they just kind of ignore it. We would propose if you don’t need to spend the RMD to have a systematic place to put it. And there are lots of different options for that.
Gabriel Lewit: Yep. So, okay, so that’s option number one. You sit and do nothing and you just take it out. You maybe save the money in a checking, you may be reinvest it. What’s option number two? What could you do if you don’t want to take out these RMDs? Because keep in mind folks, what happens is if you don’t need the RMD, then all of a sudden that extra $30,000 that you withdrew is raising your limit, and maybe the next year it’s 35,000 and the next year it’s 40,000, and the next year it’s 45 and 10 years later it’s 85.
Steve Lewit: And that’s if taxes stay at the same rate in 10 years, you have to take more out. And what if taxes, I don’t think they’ll double, but what if they did? Now you’re paying more to the government because the money is still there in the account.
Gabriel Lewit: So, two things are happening. You’re potentially bumping into higher brackets. There’s the potential for higher tax rates. And if those two combine, that’s bad news for investors. And the third issue is it can also bump you inadvertently into higher Medicare surcharge brackets called IRMA, Income Related Monthly Adjustment amount. Our friend IRMA, we call her, she’s not so nice sometimes. And what that does is-
Steve Lewit: You know the problem I have with IRMA is I knew an Irma.
Gabriel Lewit: Was she nice?
Steve Lewit: Yeah. I want to see everything positively today.
Gabriel Lewit: There you go.
Steve Lewit: She was very firm in her opinions. Let me put it that way.
Gabriel Lewit: This Irma has no flexibility. If you hit one of her brackets by $1, you pay extra for the whole year.
Steve Lewit: Yeah. She’s ruthless.
Gabriel Lewit: She’s ruthless. So RMDs are problematic for most people why they’re known as pesky because they bump you into higher tax brackets, you have no flexibility. And when you’re required to take them and they risk causing you to pay higher Medicare brackets, those are the big reasons. And they can be expensive if they bump you into a higher bracket.
Steve Lewit: Sure can. And then understand when you pass away, if taxes have gone up, you’re going to pay more taxes because it’s all part of your taxable estate. And then the money goes to your kids and they have their own required minimum distributions at much higher tax rates.
Gabriel Lewit: Yeah. Inherited IRAs. We could get into those. Like I said, the world of RMDs can get quite complicated. Different types, inherited IRAs, regular IRAs, Benny IRAs, you name it. List goes on and on. So yeah. So what do we do about this? That’s really the main thing here. We wanted to give you an introduction into RMDs. Remind you, you got to take them by 12/31 by the way, if you don’t take them by the end of the calendar year, you could face penalties.
Steve Lewit: Yes.
Gabriel Lewit: Your very first year. You do have the ability to delay your first RMD until the following year. However, you then have to take two RMDs in one year, which for many people is just too much in taxes.
Steve Lewit: In taxes. Puts you into a higher tax bracket.
Gabriel Lewit: Yes. So what are the strategies here? I’m not asking this rhetorically, how do you avoid these pesky RMDs with planning Mr. Lou?
Steve Lewit: Well, I was going to ask you earlier, is there any way of avoiding an RMD? Now, I have read some funky articles that have clever ways that say you don’t have to pay the RMD, but the truth is that it’s not that you don’t have to pay the RMD, that you get the tax recouped from taking the RMD. The bottom line is you have to take an RMD. If we knew of a way not to take the RMD, I think there’d be a line a mile long of people that would want to see us because they don’t need it.
Gabriel Lewit: Well, I will give you one. It’s just not most people’s favorite one, which is you donated to charity called a QCD Qualified Charitable Distribution. Instead of you taking your RMD and paying taxes and keeping whatever’s left over, you just donate the whole thing to a charity.
Steve Lewit: That’s correct. Yes.
Gabriel Lewit: So, you didn’t pay the taxes, but you have less money.
Steve Lewit: You have a lot less money. Some people would rather pay the taxes.
Gabriel Lewit: So, I’m just putting that out there as an option.
Steve Lewit: Yeah, it’s a possibility.
Gabriel Lewit: You can avoid paying taxes, you can lose the entire amount of your RMD.
Steve Lewit: Yeah, that’s not the one I was reading about. That is really true. And people do that.
Gabriel Lewit: They do. So there’s different strategies to mitigate the bite. To offset the taxes. But to kind of put it bluntly, once you’re stuck with RMDs, you do have to take them out. So the best thing to try to do is minimize them in advance of turning 73.
Steve Lewit: So, when you reach 73 or 75, whatever it is for you, and well that money is not taxed at that time.
Gabriel Lewit: You don’t have to take an RMD. Right. So how do we do that is really our main question here. And there’s a number of different ways. Let’s start with the simplest. If you’re still contributing, you could elect to contribute to a Roth 401(k) or a Roth IRA instead of your pre-tax 401(k) or pre-tax IRA.
Steve Lewit: Yeah. So that’s a matter of paying the taxes now because you think like we think, taxes are going to go up in the future. Now, a lot of people won’t do that, Gabriel, because they believe if I pay the taxes now, so let’s say I have a million dollars, I convert it to a Roth and I give the government $200,000, the first thing they say is I have less money. And no, you do not have less money.
Gabriel Lewit: That one gets me too. Right. In other words, if you’re going to contribute this round number, $10,000 in a year through your 401(k) and you have a pre-tax and an after tax, well with the pre-tax, you’re going to see $10,000 in your pre-tax account. And let’s say you’re in the 22% bracket. If you’re doing the Roth election, you’re going to see 7,800 in your Roth 401(k) balance.
Steve Lewit: Because you paid the tax.
Gabriel Lewit: Because you paid the taxes. Same $10,000 pre-tax using both calculations. So yeah, people look at that and say, Well, I-
Steve Lewit: I have less money.
Gabriel Lewit: I have less money. Why would I do this?
Steve Lewit: And I’m going to lose the growth on all that money.
Gabriel Lewit: Well, this was my favorite question to pose to people and it’s just like they look at me blankly and then you see the light bulb go off and it’s like, okay, if you have a million dollars in your IRA, Mr. Lou, pre-tax IRA, how much money do you have?
Steve Lewit: A million.
Gabriel Lewit: That’s what everyone says.
Steve Lewit: That’s what everyone says. What do you mean I’ve got a million dollars?
Gabriel Lewit: Are you sure?
Steve Lewit: Well, they’re sure they have a million dollars in their account. What they’re not sure, what they often don’t want to know is that there’s a million dollars in their account, but it’s not all theirs.
Gabriel Lewit: Well, and then I ask them a follow up. I say, “So if you were to take that million dollars out today, could you go buy a million dollar house with it?”
Steve Lewit: No.
Gabriel Lewit: And they say “No.” And then I say, “How come?”
Steve Lewit: Well, I got to pay Uncle Sam. I got to pay the taxes, man, what do you think?
Gabriel Lewit: Yeah. So they start to see it and hopefully you’re starting to see it as you’re listening here. But yeah, at the end of the day, if you have money in a pre-tax account, its value is what it’s worth after paying the taxes. You can’t withdraw and not pay the taxes. You’ve got to withdraw it and pay the taxes. So whether you do that way on when you’re first contributing or later on when you take RMDs, it’s got to be paid at some point. And that gets into some tax planning stuff that we’re not going to get into. But one of the benefits of doing the Roth early on is that you don’t have RMDs later on potentially at higher and higher tax rates. You have more control. You don’t have to worry about IRMA brackets. So there are quite a few benefits of taking the Roth approach early on in life.
Steve Lewit: But wait, there’s more. I’m going to lose all the growth on the taxes that I gave the government. I don’t want to do that. So what would you say to that person?
Gabriel Lewit: Well, it is a very simple spreadsheet. If hypothetically you’re at the exact same tax bracket when you do a pre-tax contribution and Roth contribution, and then later on in life, if you were to take the money out-
Steve Lewit: At the same tax.
Gabriel Lewit: Same tax bracket.
Steve Lewit: Or even if it’s gone up.
Gabriel Lewit: Yeah, well forget the gone up for a second, that’s going to be confusing, you would be in the exact same spot net after tax.
Steve Lewit: So, what you’re saying is that it doesn’t matter if I pay the taxes now, if tax rates remain the same and I take them later, I’m in exactly the same position.
Gabriel Lewit: Yes. It’s a little bit more complicated because one of them, you’re putting money in little drips at a time. So if you dripped in 10 grand a year into a Roth 401(k), and then eventually you have a million dollars, right? The difference is you could pull out that full million lump sum from the Roth, pay no taxes. If you go to pull the full million out of a pre-tax IRA, even if it’s higher, let’s say a million two, you can’t take that all lump sum because you’d be in a way higher bracket with a million.
Steve Lewit: In that case you might run into a problem.
Gabriel Lewit: But if you were going to pull out just a small amount from that pre-tax IRA at the same exact tax rate as you would’ve done a Roth contribution earlier on, they end up being the same.
Steve Lewit: Exactly. It’s pretty interesting. If you just leave the money there, you take out and pay the taxes or you keep all the money and pay the taxes 15 years later, it’s the same.
Gabriel Lewit: Yeah. This is one of those things, folks. It’s easier with a spreadsheet.
Steve Lewit: Yeah, I wish I had-
Gabriel Lewit: If you’re getting lost, call us, we’ll show you. But bottom line is the Roth contribution is a great option if you’re working. We’re probably going to run out of time for our listener questions today. Looking at times. Really, we always get into the weeds, man with stuff. We get into the weeds. But that’s fun. I like getting into details here. Hopefully you are too.
Steve Lewit: That’s where the fun is because we hold these thoughts, but then you get into the weeds and you say, “Oh gosh, I got that wrong.” Or “Oh, I saw it a different way.” Oh, like you said, people think, Oh, I’ve got to take my RMD.
Gabriel Lewit: So maybe we’ll start next week with some advanced RMD concepts on our next show. We won’t get to all of them here, but let’s just at least touch on the second major approach to minimizing future RMDs. This is predominantly done before you start taking them. It could be done while you’re already taking them as a side note called a Roth IRA conversion. Okay.
Steve Lewit: I wasn’t sure where you were going with that. I’m saying, okay, he’s leading me on here and I’m not sure I know the answer.
Gabriel Lewit: And I know you know all about Roth conversions.
Steve Lewit: I do.
Gabriel Lewit: Yeah. So what’s a Roth IRA conversion. It’s when you take your pre-tax account, IRA pre-tax 401(k), and you convert it to a Roth, generally in this example before you, let’s say you’re 65 and you retire, you’re not 73, you’re no longer working. You don’t have to take RMDs yet. What’s the best thing to start to do? You want to start gradually converting your pre-tax accounts from pre-tax to Roth IRA called a Roth conversion.
Steve Lewit: And that doesn’t have to be a 401(k). It could be any IRA money that you have, you can convert to a Roth.
Gabriel Lewit: Yep.
Steve Lewit: So, what’s the benefit of that?
Gabriel Lewit: Well, the benefit is you bring down your pre-tax balances and let’s just say you were 65 and you’re young enough to have a 75-age starting point for RMDs. Remember talking different ages. So you have 10 year window and you converted simple math 10% of your money every year until you turn 75.
Steve Lewit: So, then I don’t have any RMDs.
Gabriel Lewit: In this simple example. You would have no RMDs any longer when you’re 75 because you took it all out bit by bit, very strategically in an effort to avoid being forced to do that in the future.
Steve Lewit: And if tax rates went up, I don’t have to pull money out because I’m required to at higher tax rates.
Gabriel Lewit: And you avoid IRMA charges if you do it the right way. There’s a lot lower brackets on the lower levels of IRMA. So if you do trigger one, it’s better to trigger it a little bit every year for maybe that conversion period instead of getting into the really high IRMA brackets from 75 to beyond. When you get to that point and start getting really large RMDs. So very interesting tools. Roth conversions, very complex tools today. We’re not going to get into the inner workings of performing one, although we probably should do that for a show too, Ms. Producer Katie.
Steve Lewit: So folks, October… November is where we focus on Roth conversions. We call those Roth conversion months. And we’ve seen a lot of you and we’re going to see you again, but if somehow you didn’t receive our correspondence or you forgot or whatever it is, start thinking about it because we’re right there and we look at every account and with you and determine whether it makes sense or not to do a Roth conversion.
Gabriel Lewit: Yeah, exactly.
Steve Lewit: And now you’re supposed to give the phone number or something.
Gabriel Lewit: Well, yeah, we’re out of our time for today. Went by fast, I swear, I blink sometimes and the show’s over. So we’ll have more to continue for next time in this crazy world of RMDs, crazy large world of RMDs, much more we could talk about. So if you have questions on what we’ve covered today, what RMDs are? When you take them? What ages? How much do you have to take out? Where do you put it? All the different things we dove into, call us (847) 499-3330 or email us info@sglfinancial.com to set up a meeting. And we would love to chat with you anytime.
Steve Lewit: Yeah, we would. I was just thinking Gabriel, I’d like to just say one more thing is that taxes folks are where the real wealth is built. And I know I say this every time and it’s my soapbox that I’m standing on because I think it’s so important. It’s not what you make, it’s what you keep. And taxes are one of the biggest drains of wealth and most people do not spend a lot of time talking about or planning taxes and Roth and RMDs and Roth conversions or LIRP conversions, which is using life insurance. There are so many ways that you can build wealth for yourself other than trying to get an extra one or 2% in the stock market.
Gabriel Lewit: Amen. We’ll talk more about those next time guys and gals, thanks so much for tuning in. We appreciate you. We love having you listen to our show and we will talk to you on the next one. Stay well.
Steve Lewit: Stay well, everybody.
Gabriel Lewit: Jinx. Stay well. Talk to you soon.
Steve Lewit: Bye.
Gabriel Lewit: Bye.
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