April 2025
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Watch previous episodes here:
Ep. 135 Trump, the Fed, and the Fight Over Interest Rates
Ep. 134 Watch This Before You Move States to Avoid Taxes
Hello, everyone, and thank you for joining us for a new episode of The Financial Commute. I'm Chris, your host, joined by Brittany Yudkowsky, financial planning advisor here at Morton Wealth. You have the ski team here talking about required minimum distributions. I had to say it.
Yeah. That's how we go around the office.
The ski team. So required minimum distributions tend to be a big topic for our clients that are older. The new otrule is over the age of 73. Have to start taking money out of your retirement plans and you know pay taxes. It's always a fun discussion. So let's talk first about strategies that people can do prior to being age 73 to help do some planning around their required minimum distributions and maybe save taxes.
I mean you're right, this is a huge topic. And one of those strategies that we really look at all the time are Roth conversions. I think, you know that a lot of people have heard about those before. But even talking about that tax issue, you do have to pay taxes upfront when you convert money from a pretax IRA to that post-tax or Roth IRA in order to minimize those taxes, when you actually do have to start drawing on them.
So there's a lot of considerations when it comes to Roth conversions, like at what point do paying those taxes upfront really make it worthwhile in order to do that? We talked about that being the break even point. And if you want to use those funds during your lifetime to help with any expenses later in life in a tax free way, then it makes sense for that break even point to be earlier in your life.
But if you really want to do legacy planning in an efficient way, and then having that break even point happened later in your life is is totally fine. And I mean, this could be a whole nother episode, but for inherited RMDs, you have to take them out within ten years. So a Roth IRA passing that on to the next generation might be a really nice strategy.
Yeah, I love the fact that you said pay taxes upfront, because whether you're doing Roth conversions or you're taking money out for required minimum distribution, those are subject to tax. There's no getting around the tax. But maybe if you're young enough or it's early enough and you have the money outside of the retirement account to pay the tax, it could be a beneficial strategy.
I know that some people that are fortunate enough to not have to rely on their IRAs or their retirement dollars for for income for many, many years, the RMD just seems like an extra tax bill that they have to take. It's like I don't technically need the money. Yeah, but I have to take it out now. I've got a little bit larger of a tax bill and it can be a little bit frustrating.
So planning far enough advance is really important.
Yeah, really really important. We're planners. We like to do that here.
Yeah. One other strategy that we like to deploy with people that are subject to, required minimum distributions. So they're over the age of, you know, 73 or technically 70.5, because that's the age where you can do a qualified charitable distribution. So when you take the money out of the IRA, you can donate, you know, some or a portion of it up to, I think, $105,000.
I really hope that number's right. It's a little high.
108,000 because like, great thing is like now this is indexed for inflation. It goes up every single year.
Oh nice. So the qualified charitable distribution is 108,000 for 2021. For 2025. And if they take that money and give it directly to the charity, they're not realizing it as income.
Yeah, I really love that strategy too, because it doesn't it's not included in your taxable income like you just said. So for certain things where you're 70.5 and maybe you're still working. So taking that qualified charitable distribution as essentially we call what we call above the line deduction, essentially not included in your taxable income. That means your gross income, which has an impact on your retirement plan, contributions, your medical deductions and you the threshold that you have to meet, it has an impact on that as well.
So I really do qualify. Charitable distributions are great if they make sense for you.
Yeah.
One of the other things that we talked about a little bit, it was, was donor advised fund contributions in years where you're having higher income years. So if you're doing anything like Roth conversions or you now have to start taking the required minimum distributions and your income goes up, you can make a larger contribution or donation to a donor advised fund to help offset the tax impact, and then have a charitable account that you can give to charities later on down the road.
Exactly. You don't have to do it right away. You can capture that tax benefit right away, but you don't actually have to decide which charities you want to send it to. So yes, great option if you do that Roth conversion and if you have to start taking RMDs. Because also I think we got questions about this too. For the first year that you have to take your RMD, you can actually delay it until April 1st of the year, the that you turn 73.
But caveat being you have to take two in the same year. So from a tax impact like yes, you have to take more in one year. But if it makes sense for you to delay, let's say you stopped working so your income will be much lower. Take the two next year and maybe double up with some kind of donor advised fund contribution to really minimize the taxes and maximize the growth.
I like that. So if I'm turning 73 this year, I technically don't have to take my first required minimum distribution until April 1st of next year. But now in 2026, I've got to take out two. Exactly what are some other ways that people can help have some strategies around minimizing the required minimum distribution or delaying it.
So there's this. And and people have probably heard about this too. The still working exemption. And this only really impacts your 41K through your work. This does not apply to your IRA. So if you're still working your RMD age then you actually don't have to take your R&D. But there are, caveats to that. Of course there are.
Number one being your plan has to allow for it, very important. Number one and then number two, you cannot be, 5% or more than 5% owner of the company. Now, I think a little bit of, the nuance of that. And I and I learned this as well because it actually applies here. If you are an owner of the company and let's say you're less than 5%, but you work with, you know, your spouse, your child, your grandchild, your parents, if they are also owners, their percentage gets added to yours.
So it doesn't happen that often, but we have a father-daughter situation here. But I think sometimes there are spouses who work together to, who would be owners. So that's that's an important nuance.
You also have to really like the investment options inside the 41K plan versus what you have access to in an IRA. For that to make sense, it might actually be worth it to leave the money in the IRA to have access to more investment options that provide a little bit more diversification or stability, as opposed to just the traditional mutual funds and stocks and bonds that 41K plans have.
But that's a good option.
Yeah, exactly. With these a lot of these strategies do there are trade offs. So that's why we really have to look at your situation. Do these trade offs make sense because it's different for everyone.
Yeah.
All right. So I've got some client questions that often come up throughout the year. And I want to I want you to to answer them for for the audience. So should somebody take their required minimum distribution directly from the IRA and spend it or put it in their trust to invest in, what should they do?
I mean, part of that, and this is where, you know, I'm a financial planning advisors, this is top for me is do you need it like to live your life style. So part of that is like if you need it then you need it. But if you don't, then what are ways that you can actually either get a tax benefit.
So those qualified distributions that we're talking about, all of those things or if you know, you've kind of you've done all those things and you need more things to do, then why not invest it again, having a sense of purpose of what the money is for you?
One of the things that I like with working with clients around the financial planning projections is now all of a sudden they're forced to take this requirement, required distribution. They may not feel like they need the money to spend it, but it can be that forced sort of spending for experiences with their family and their friends, because it's money that they have to take out, and now they have a new choice that they can make with it, as opposed to just saving it and socking it away and investing it for later on.
Yeah, exactly.
Should you use your required minimum distribution to pay your taxes? You know how much clients love taxes? No. Very many or anybody that really does. But a lot of clients recently just aren't enjoying paying paying quarterly taxes. And so one of the things that I've seen clients do is they withhold more taxes on their required minimum distribution to lower the amount that they have to send quarterly.
What are your thoughts?
That's interesting. I haven't come across that as much. But taking out more I mean, it is really the do you want to pay more in taxes upfront or let you know more later? So I think again, I'm going to go back to like purpose. Some of the funds that's my favorite. And really what do you want to use it for?
I don't know, in your experience, have clients behaved a certain way when it comes to that?
No, I think it just helps ease their mind. I mean, you know, having to worry about making, you know, April and September and June and January payments and, you know, sometimes they want to enjoy their April, June and September timeframe in their retirement years. They don't want to have to worry about writing a check for taxes. So if they can get away with just withholding more from that distribution to pay the taxes and not have to worry about it, it seems like not a bad strategy.
That's definitely an important part of what we do. Like there's the numbers aspect and really the peace of mind if it makes you feel better to do that, 100% do that and you and you can handle that in terms of your cash flow, go for it.
Yeah. The other question that we get a lot is when should I take my required distribution. If I have to take it before December 31st. And some people, because it's in a tax deferred account, want to wait as long as possible to get the tax deferred growth. But you know, that comes with some complications as well. So when should people take it?
I think I am even just talking about that peace of mind. In your last example, I'm a little bit of a fan of taking it throughout the year. It's even it's the same concept almost when we do dollar cost averaging. So we get into the market a little bit at a time. So they want to wait till the end of the year to capture the growth.
But what if the market goes down? Then you don't really capture the growth there. So I think even just from a peace of mind, make sure you do it so that you don't have to scramble at the end of the year, taking it throughout the year. I mean, I know we have clients who do that and they just don't have to worry about it.
But, I mean, we might have clients who are like, nope, I want to wait until the end.
We do. I mean, we have a mix of both, and I think that everybody does it a little bit differently. Some people want to receive a monthly, some quarterly, some do want to wait till the end of the year. You know, it's my preference to try to get it checked off the list by October 15th. I mean the end of the year with other deadlines.
It can be, you know, a busy time of the year. And the last thing that we want to do is, is make a mistake or miss something and then, somebody be subject to the penalty. So I would I would ask everybody to talk to their advisor and see what are the steps that we need to do to either take it quarterly or before the end of October, just to kind of get that peace of mind, enjoy the holidays and not have to have that looming over our heads.
Exactly. One of the things that, I've seen people do as well with regards to required minimum distributions, instead of selling an investment in the IRA, creating cash, and then moving the cash to to their trust account, they can move a specific position. Yeah. And when they do that, then the date of which they move that position that becomes the cost basis for that investment.
So you actually don't even have to deal with buying or selling it. Yeah. It's pretty good.
Yeah. I think people don't realize that, which is why in a four year.
Warranty, I know that we covered a lot around required minimum distributions. This was not the episode to really tackle inherited IRAs. Yeah. Which that's something that Amber and I did earlier in the year. So if people would like to go back to that episode, those rules have changed and you need to pay attention, especially as it relates to needing to have to take a distribution higher inherited IRAs.
I'm sure it'll will be something that we talk about in the future.
