Cooling Off RMDs
by SGL Financial
Our 2 Cents – Episode #178
Cooling Off RMDs
After a short break, we return with another episode of Our 2 Cents with Steve and Gabriel Lewit! The hosts are excited to explore the economic effects of this heat wave and the new Illinois’s DMV on-the-go program. Then, they discuss ways to manage those pesky RMDs. Listen in now using a link below!
- The Economic Impact of 2024 Heat Wave:
- As this year’s scorching heat continues to increase, learn how this heat wave negatively affects economic growth and productivity for many industries.
- Illinois’s First Mobile DMV:
- Hate waiting in long lines at the DMV and wish it could just come to you? With the Illinois’s ‘DMV on Wheels’ program, your wish is coming true.
- Managing RMDs Overview:
- Discover multiple ways to approach RMDs and reduce RMD amounts that best suit your retirement needs.
- Determine if a QLAC will be a helpful component in your retirement plan and what other alternatives are offered.
Request Your Free Consultation Today
847.499.3330
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 in financial news, trends, strategies, and more.
Gabriel Lewit: Welcome, everybody, back to Our 2 Cents. You’ve got Gabriel Lewit here on the show with, of course, my co-host and co-star …
Steve Lewit: And copper penny.
Gabriel Lewit: Well, you could be any …
Steve Lewit: Gold penny. Gold penny. Gold penny.
Gabriel Lewit: Gold penny. Yeah, there you go. Gold penny, Steve Lewit.
Steve Lewit: Good morning, everybody. Or good afternoon or good evening.
Gabriel Lewit: Welcome. Yeah, we hope you’re doing great. I think we’ve got, of course, a phenomenal show …
Steve Lewit: Scorching hot.
Gabriel Lewit: … is lined up today.
Steve Lewit: We have a scorching hot show.
Gabriel Lewit: Well, that’s a good intro. I was going to, actually, talk about the fact that the country, or much of it’s, what, in a heat dome or something like that?
Steve Lewit: Yeah, it’s kind of crazy.
Gabriel Lewit: I always forget what a …
Steve Lewit: Everybody’s at 98, 100, 110.
Gabriel Lewit: Everybody is feeling toasty-roasty.
Steve Lewit: Oh, my gosh.
Gabriel Lewit: That’s my official definition of it. Toasty-roasty. We had …
Steve Lewit: I actually like it. In fact, I actually like that.
Gabriel Lewit: In fact, we had to lower the shades here in our conference room where we record the show because the sun is beating through the windows here, and it was getting too hot to record.
Steve Lewit: Yeah, the landlord doesn’t turn on the air conditioning.
Gabriel Lewit: Yeah. Well, they do, but it fluctuates, I don’t know, hot and cold.
Steve Lewit: It’s very strange.
Gabriel Lewit: Yeah.
Steve Lewit: Yeah.
Gabriel Lewit: Well, anywhos, yeah. So, some interesting things about the heat, not to turn this … This isn’t an environmental discussion about the heat. It has been a very …
Steve Lewit: It’s the Gabriel Lewit weather forecast.
Gabriel Lewit: It’s been a very hot year for over the last year, so a lot of the heat records are being broken. And of course, again, not getting into the environmental side of that. It could be environmental. It could be just a cycle or whatever, but it’s hot.
Steve Lewit: That’s what the earth does.
Gabriel Lewit: Yeah. We’re not talking about why it’s hot, but it is hot. And the question is how can you escape the heat? All right?
Steve Lewit: Gabriel, you escape the heat.
Gabriel Lewit: And I was going to give a couple options for people.
Steve Lewit: It’s called air conditioning.
Gabriel Lewit: Number one. Air conditioning.
Steve Lewit: Yes. Air conditioning.
Gabriel Lewit: Now if you’re looking to save money, some people, I know there are people out there, and I’ve talked to a few that will attempt to just use fans instead of air conditioning, even in this extensive heat.
Steve Lewit: I had a friend when I was younger that refused to use air conditioning and just used a fan in his place. It was god-awful hot.
Gabriel Lewit: Well, the challenge is running air conditioning 24/7, those can start to be expensive. So, it is a bit of a challenge out there …
Steve Lewit: It is. It is expensive.
Gabriel Lewit: … for some people financially to keep that temperature thermostat at what? 72, right?
Steve Lewit: Yeah. Well, that wasn’t his issue.
Gabriel Lewit: No.
Another option, of course, is take the family and the kiddos to the pool.
Steve Lewit: The beach. The beach. The beach.
Gabriel Lewit: Do we have beaches around here?
Steve Lewit: Yeah, we have beaches. You got to drive a little bit to the lake.
Gabriel Lewit: The lake is probably still pretty chilly, I’m guessing, in June. I usually think the lake’s pretty chilly.
Steve Lewit: Yeah. But …
Gabriel Lewit: So that would be a good way to cool off.
Steve Lewit: Cool off. Run up to Lake Geneva and sit around the lake. Or the pool is great. You run in, take a dip, come out and sweat. Run in, take a dip. The dip and sweat routine.
Gabriel Lewit: Make sure you stay hydrated …
Steve Lewit: Very important.
Gabriel Lewit: … if you’re out there doing exercising. I saw on my drive home yesterday, or whatever day it was like 92 degrees and humid, I saw a lot of people jogging out there in that, just drenched.
Steve Lewit: I could not jog.
Gabriel Lewit: That’s not how you stay cool in the heat, by the way.
Steve Lewit: No, it’s not. But yeah, I saw a lot of people jogging, and it’s like, “How do you do that?”
Gabriel Lewit: Well, yeah. Just make sure you stay hydrated there. We don’t want anything unfortunate to happen. And probably, by the time you guys hear this show, it’ll be cooled off anyways. The heat will all pass.
Steve Lewit: I hope so. I hope so.
Gabriel Lewit: But we are coming up against July, August weather. So make sure, health wise, you pay attention to not overexert yourself in the heat because it really is a thing that people do.
Steve Lewit: Yeah, especially you gardeners, get up at six, at sunrise, when it’s nice and cool. And the mosquitoes are out, but so what? And do your gardening in the morning because gardening’s actually very laborious. It’s hard work. And be careful.
Gabriel Lewit: Yeah. Well, yes. Amen. And I’ll tell you my favorite thing to stay cool in hot weather …
Steve Lewit: Pina Colada.
Gabriel Lewit: No, no. So, I forget how we got it, but we have a water bottle in our house that is a combination … You can obviously drink from it like a normal water bottle, but it’s got a little fan thing right at the very top with a squirt bottle.
Steve Lewit: Oh, my. Oh.
Gabriel Lewit: So, it’s a combo drink-squirt-fan-spray-thing.
Steve Lewit: No, no, no.
Gabriel Lewit: And all I’m saying is you can get a nice cooling mist anytime you want if you fill that bottle with ice-cold water.
Steve Lewit: No. No. No, no.
Gabriel Lewit: You can get a spritz anytime. It’s refreshing. It’s cool. Glorious.
Steve Lewit: I could see you sitting there spritzing.
Gabriel Lewit: Well, what’s funny is our …
Steve Lewit: You could hire somebody to spritz you.
Gabriel Lewit: Our kids decide that they just want to do it any and all times, whether you want to be spritzed or not. So there’s that downfall to it. But yeah, also those cooling ice towels, if you’re feeling hot, just chuck some of those in your freezer.
Steve Lewit: Yeah, those are nice.
Gabriel Lewit: Hop home, just drape it over your forehead. It’s like heaven, okay?
Steve Lewit: Yeah, yeah. Well, I don’t know if it’s like heaven, but it is cooler.
Gabriel Lewit: That’s just an expression. I don’t actually know that.
Steve Lewit: Yeah.
Gabriel Lewit: Yes. Well, so those were my little tips for us here today. Any others that you would add, Mr. Lew?
Steve Lewit: Well, no, but it’s interesting that heat actually affects the economy. And at what point do you really start talking about the heat and how it affects workers, especially outside workers, construction? Does construction slow down? Do the poor countries that … If you’re wealthy, and you can handle the heat, and there’s air conditioning, you get a break. But if you’re in a poorer country or a poorer neck of the woods in the US, do you work slower? Does GDP go down? And heat can have a negative effect on the economy.
Gabriel Lewit: Unless everybody decides to travel all at once to Lake Alaska where it’s cooler, and then, there’d be a lot of tourism boosts.
Steve Lewit: Boost. Yes. But that’s not going to happen.
Gabriel Lewit: Probably not.
Steve Lewit: And who wants to go to Lake Alaska?
Gabriel Lewit: I didn’t say Lake Alaska. I meant the state.
Steve Lewit: State? Well, it’s a nice state.
Gabriel Lewit: I don’t know if there is a Lake Alaska.
Steve Lewit: There probably is.
Gabriel Lewit: There’s a state Alaska.
Steve Lewit: Yep, there is that state. Yes.
Gabriel Lewit: All right. So anyways, yeah, we hope you’re enjoying the warmer weather and staying cool, but that’s our talk about that.
Steve Lewit: Yes, yes.
Gabriel Lewit: Yes. Okay. Now I’ve got some other snippets for you. Quick hits. News to know if you’re in the Chicago area. Well, have you ever been to the car show, Mr. Lewit?
Steve Lewit: I have.
Gabriel Lewit: Okay. Well, you may or may not have noticed this when you’re there, but when you’re at the Chicago Auto Show, there’s a DMV station there. They put up a temporary DMV station.
Steve Lewit: Oh, yeah. Yeah, I heard about this.
Gabriel Lewit: A lot of people realized there’s no line, and they would take advantage of the car show going to the DMV. Well, maybe the state has realized though, “Hey, this is kind of cool.” So they’re announcing a new mobile DMV unit.
Steve Lewit: Yeah, I heard about this. Yeah.
Gabriel Lewit: Okay? Where they’re essentially going to have an electric-powered, mobile DMV Center that will, multiple, I think, three more coming this summer, that are going to drive around and park themselves at various events around the state.
Steve Lewit: Fantastic.
Gabriel Lewit: So mobile DMV coming to you.
Steve Lewit: It’s a great idea.
Gabriel Lewit: And the goal there is, of course, to reduce the lovely lines that always present themselves at the local DMV.
Steve Lewit: Yeah, I think that’s a super idea.
Gabriel Lewit: I guarantee you on these 95-degree days, there’s like an two-hour-long line outside these DMVs. Ugh.
Steve Lewit: Just to get into the air conditioned …
Gabriel Lewit: Oh, my goodness.
Steve Lewit: … vehicle.
So do we have any idea where these will be located, or is it a moving location?
Gabriel Lewit: Yes, they are going to be at events. They’re going to move around to events around the state.
Steve Lewit: Ah.
Gabriel Lewit: So, I’m assuming somewhere on their website they will probably tell you where the mobile DMVs are going to be. And I guess the idea is that it’ll help give people access at more places and reduce lines overall.
Steve Lewit: Sure, sure. Good idea. I like it.
Gabriel Lewit: So, I just thought it was interesting for anyone that dislikes DMV lines as much as I do.
Steve Lewit: Well, I’m right behind you, and I don’t mean that online. Yeah.
Gabriel Lewit: Yeah. Well, you can stand in line there for a long time.
The other thing, my other trick, it’s completely irrelevant here, but I would get there at like 5:30, like 45 minutes before people even started showing up. So I was number one in line.
Steve Lewit: Yeah. I did that once, and then they told me I couldn’t do what I wanted to do.
Gabriel Lewit: Oh, you didn’t bring the right documents or something?
Steve Lewit: Yeah, they sent me home. I say, “Can I get back in the front of the line when I come back?” And they said,
Gabriel Lewit: Of course. Yeah. Just cut everybody, right?
Steve Lewit: Absolutely. We’ll let you in the front. No, they didn’t.
Gabriel Lewit: All right. My last quick hit for you today, then we’ll get to some more detail-oriented stuff here. New study says, everyone’s going to love this, world’s richest have never been so rich.
Steve Lewit: Boy, isn’t it true? The rich get richer.
Gabriel Lewit: Yeah. So apparently high net worth individuals …
Steve Lewit: How do they define that?
Gabriel Lewit: People over 1 million of that, liquid assets …
Steve Lewit: Okay.
Gabriel Lewit: … increased by over 5% last year to now a total of over 22.8 million millionaires. Not just net worth, but investible assets.
Steve Lewit: Yeah, it’s incredible. A million dollars, obviously, is at least a lot of money, but at the same time, it’s not a lot of money. When you retire with a million bucks, and you’ve got grandkids and kids, and you want to spend money, and you want to travel, and so on, and so on, a million dollars may not go as far as you would like it to.
Gabriel Lewit: Well, the total wealth of all of these 22.8 million people reached a record $86.8 trillion held by those high-net-worth individuals. So yeah, quite interesting there, but it’s the highest increase in the highest number of high net worth people since the study began in 1997.
Steve Lewit: Now, Gabriel, when you talk to a client that has a million dollars, and you say, “You’re a high net worth individual,” what do they say to you?
Gabriel Lewit: “I don’t feel like it,” if it is just a million dollars.
Steve Lewit: If I haven’t … Yeah, no, they don’t. Even with people $2, $3, or $4 million say to me, “Well, I don’t feel that wealthy.” Yet what most people don’t understand is that 60% of the country, I think the number is 60%, don’t have more than $500 in their savings account where they can pay an emergency expense.
Gabriel Lewit: Yeah. I think we’ve had some statistic like that prior on the show.
Steve Lewit: Yeah.
Gabriel Lewit: Yeah. It’s pretty crazy. So yeah, big income …
Steve Lewit: Disparity.
Gabriel Lewit: Disparity. I was going to say discrepancies, and then I got stuck somewhere between the two words.
Steve Lewit: Yeah, folks, I have to help him out now and then.
Gabriel Lewit: Yeah. So obviously, us being financial planners, our rule … We just had a team meeting, for example, with our company here. What was it? A couple of weeks ago, and we reminded everybody, no matter who they are in our company, what their role is, set money aside from your paycheck. I know it’s hard. That’s the number one way to grow wealth is 5%. Doesn’t matter if you’re making $50,000 or $200,000, set aside money and start letting it grow. Believe it or not, you will start surpassing those savings milestones over time.
Steve Lewit: And you’ll be thankful for that when you’re 60, when you want to retire, and all of a sudden you have a lot more money than your neighbor who was having more fun than you as they were getting older. But now they’ve got 30 years ahead of them where they’re going to be tight on money.
Gabriel Lewit: But it really does seem like the rich get richer, doesn’t it?
Steve Lewit: Absolutely.
Gabriel Lewit: Yeah.
Steve Lewit: It is quite sad because the middle class that I grew up in … Everybody knows my story that I was brought up in the South Bronx. My parents had virtually nothing, lower middle-class people. And that whole generation of middle class people is weathered … Withered! Not weathered. Well, they could have weathered, but they did wither.
Gabriel Lewit: They’re withered and weathered.
Steve Lewit: They’re withered and weathered. Yeah. And this is very sad because our country has really been built by the middle class.
Gabriel Lewit: Yeah. Well, it’s interesting. I don’t have it on the agenda for today’s show, but I guess I will bring it up because I just thought about it. My wife sends me these Instagram videos from time to time, and apparently there’s a whole new thing out there now called a Finfluencer. Have you heard of this?
Steve Lewit: You know? Yes, but I don’t know what it is.
Gabriel Lewit: Maybe … Producer, again, maybe next show we’ll talk more about Finfluencers. So anyways, it stands for Financial Influencer.
Steve Lewit: Oh, can we become that? Are we that?
Gabriel Lewit: First of all, first of all, I dislike social media influencers in general just because, I mean, “Okay, I’ll influence you on the makeup I can put on,” for girls.
Steve Lewit: What’s wrong with influencing people? We try to …
Gabriel Lewit: It’s a little … We’ll talk about that later.
Steve Lewit: No, there’s nothing wrong with that.
Gabriel Lewit: No offense if you are a social media influencer out there, happening to listen to this show.
Steve Lewit: I think you’re jealous. I think you’re jealous.
Gabriel Lewit: Well, anyways, the point is there are …
Steve Lewit: No, no. Let’s stay with this jealousy.
Gabriel Lewit: Let’s talk about Finfluencers for a second. There are people out there saying, “Be cautious because there are all these people out there that have zero financial credentials.”
Steve Lewit: Oh, that’s different.
Gabriel Lewit: Yapping about financial things that have no clue what they’re talking about.
Steve Lewit: But great personalities.
Gabriel Lewit: And people are snapping it up like its good advice.
Steve Lewit: Yeah, yeah. How do we be … ?
Gabriel Lewit: So anyways, I got on this because I was saying, my wife sent me one. She’s like, “What do you think?” from this Finfluencer. And I about rolled it …
Steve Lewit: You rolled your eyes.
Gabriel Lewit: Rolled my eyes six times over because this lady was like … I’m laughing because it was so out of touch. She said, “If you really want to do a good job for your kids, here’s what you do. The moment they’re born, you buy every one of your kids a house.”
Steve Lewit: Um … No, she was talking about a toy house.
Gabriel Lewit: Here was the logic. She said, “Your kids won’t be able to afford houses when they’re grown up,” which is really how I got started this. I was thinking about middle classes and the challenges they’re having affording houses. And so, this lady’s advice was to buy your kids, today, every kid you have, a house, and the comments were just lambasting her because they’re like, “Lady, we can’t even afford our own houses. How are we buying each one of our own kids a … ?” Yeah, it sounds like a great idea. Just buy your kids a house so you can give it to them when they’re older and they can afford it.
Steve Lewit: And pay off their college education before they go.
Gabriel Lewit: And she was saying, “Don’t put money into a 529 plan. It’s ridiculous. Just buy your kids a house.” Then it got me thinking, who are these Finfluencers? This is …
Steve Lewit: She must sell real estate.
Gabriel Lewit: I don’t know. I don’t know. Anywhos, I digress. But yes, the middle class is …
Steve Lewit: How do you become a Finfluencer?
Gabriel Lewit: You have to go posting on TikTok and hope that, before it gets banned, by the way, which it might get banned soon …
Steve Lewit: Oh. I can’t stand TikTok.
Gabriel Lewit: And then hopefully attract a number of followers that like your, if like in this lady’s case, terrible advice. “Can you just buy all five of your kids a house real quick?”
Steve Lewit: I’m so sorry. I’m so sorry.
Gabriel Lewit: Where was my house?
Steve Lewit: I’m so sorry I didn’t do that when I was dead broke. Five kids, you’ve got five houses.
Gabriel Lewit: Look, we work with wealthy clients. The advice just boggled my mind. I’m like, “Who can, just, out there buy their kids … ?”
Steve Lewit: I will tell you this.
Gabriel Lewit: Four kids, just buy four houses.
Steve Lewit: None of my clients, even those that could afford to buy their kids houses when they’re born, are not doing it.
Gabriel Lewit: I like the concept theoretically.
Steve Lewit: No.
Gabriel Lewit: Yeah, that’s great.
Steve Lewit: Why?
Gabriel Lewit: Buy your kid a house if you could afford it, and then give it to them later on. But the point is, other than the ultra-wealthy, who could afford that? And if you’re already ultra wealthy, you could help your kids buy a house. I don’t know. Just the whole thing seemed a little backwards to me. But anywhos.
Steve Lewit: Yeah. How did we get off on that?
Gabriel Lewit: Well, you were talking about the struggles of the middle class.
Steve Lewit: Oh, yeah, and there is none.
Gabriel Lewit: And then I was thinking, “Yeah, it’s impacting, especially with housing.” And then I just went off my little ADD deep end there about Finfluencers.
Steve Lewit: Yeah, I could see that. Well, she’s not talking to poor people. This Finfluencer.
Gabriel Lewit: Finfluencer. Yes.
Steve Lewit: Yeah. Interesting. Yeah.
Gabriel Lewit: Okay.
Steve Lewit: Where are we going?
Gabriel Lewit: Well, I had a few different directions we could go in. Well, let’s do this. I think we’ll have enough time to maybe just do this once. So we’re going to talk about ways to manage your required minimum distributions, especially if you don’t need the money or don’t think you’re going to need the money.
Steve Lewit: You know what’s interesting? I gave a seminar last night, and I’d say 50% of the questions were about IRAs and RMDs.
Gabriel Lewit: Yeah. Well, so yeah, RMD. Folks, if you hear this phrase, it is required, R, minimum, M, distribution, D, RMD, which means when you turn a certain age, and we’ll talk about that here, you are required by IRS law to …
Steve Lewit: Required, folks, means you must take them.
Gabriel Lewit: Well, I’m just going to say it. The number of times I’ve been asked, “Am I required to take my RMD?”
Steve Lewit: Am I required to take my required minimum distribution?
Gabriel Lewit: I just chuckle a little because yes, the R stands for required. So yes, you are required to take the required minimum distribution.
Steve Lewit: So if I don’t need the money, Gabriel, I can’t say, “You know what, I’m not going to take it this year because … ”
Gabriel Lewit: There are some exceptions which we’re going to talk about here, some minor exceptions to that. But the quick and skinny is: required means you do have to take it. Whether you want to take it, need to take it, or otherwise you’ll be required to take that RMD when you turn a certain age. Okay?
Steve Lewit: Yep.
Gabriel Lewit: Now the age for most, it used to be 70 and a half, right?
Steve Lewit: Yep. Ye, for a long time.
Gabriel Lewit: Which confused the heck out of people. “When do I turn 70 and a half?” Half birthdays are very confusing. So then they changed it to 72, which had been 72 for a bit. Now it’s seventy …
Steve Lewit: Three.
Gabriel Lewit: 73. Yes.
Steve Lewit: Maybe.
Gabriel Lewit: For most. Younger folks, it’ll be … Well, I should say, if you’re going to turn 73 before the year 2033 … Everybody with me?
Steve Lewit: That’s before 2033, right?
Gabriel Lewit: Your RMD age is 73 if you turn 73 before 2033.
Steve Lewit: Yep.
Gabriel Lewit: Okay. If you turn 73 after 2033, then your RMD age is 75.
Steve Lewit: Yep. Confusing.
Gabriel Lewit: But basically for most folks today, it’ll either be 73 or 75. 75 if you’re a little bit younger.
Steve Lewit: Yeah. But if you’re 55 years old today, your RMD right now will start at 75.
Gabriel Lewit: Yes. Correct. Correct. Yes.
Okay. So what does that mean? It means when you get to that age, in that year you turn 73 or 75, you are forced to take, AKA required, to take a distribution out of your collective IRA balances.
Steve Lewit: Other than …?
Gabriel Lewit: Other than Roth IRAs.
Steve Lewit: Roth IRAs, yeah.
Gabriel Lewit: And so how do you calculate this? Well, let’s talk about how you calculate it first. You take your ending year balances of the prior year. So for example, 1231 of 2023 would be how you would calculate this year’s RMD for 2024. So if you were turning 73 this year, you would use your 1231 ’23 year-end balances to tally up the total of all your pre-tax IRAs.
Steve Lewit: You’ll add up all your IRAs.
Gabriel Lewit: 401Ks.
Steve Lewit: 401ks, 457s, 403Bs, TSAs, you add it all up. And your RMD is calculated upon that total amount of IRA.
Gabriel Lewit: So, you’ve got that total, and then you have to divide that total by what’s called a factor or a divisor factor, and that’s going to equal your required minimum distribution.
Steve Lewit: Yeah. And that table, it’s an age factor table.
Gabriel Lewit: They call it life expectancy table. Yep. Even though there’s factors all the way up, I think, to 110 and beyond, if you happen to live that long. But essentially, it starts off around 26.3, I think, is the factor.
Steve Lewit: 27.4.
Gabriel Lewit: I think that was the 72 now.
Steve Lewit: Or 24.7. I got backwards. Yeah.
Gabriel Lewit: So anyways, the formula would say, say you have a million dollars in IRAs, you would divide it by 26.3, and then that would equal your required minimum distribution for that year. Okay?
Steve Lewit: Yes.
Gabriel Lewit: Now, you can collect this RMD a couple of different ways. Let’s say all one million dollars is in one account, then you would just take that RMD out of that one account.
Steve Lewit: Yeah. You don’t have to take it out of each account.
Gabriel Lewit: Well, let’s say you have 10 accounts with a hundred thousand each. You could take that RMD out of one account.
Steve Lewit: That’s correct.
Gabriel Lewit: Or you could take the same prorated percentage out of all 10 accounts.
Steve Lewit: That’s correct.
Gabriel Lewit: IRS doesn’t care. You’ve got to figure that out and coordinate that on your end, though. They don’t help you figure that part out.
Steve Lewit: Yeah. One footnote, however, let’s say you’re turning 73 in August. You can’t take the RMD in February. You got to take it after your birthday in that year.
Gabriel Lewit: Yeah. Well …
Steve Lewit: Yeah. He’s looking at me with squinty eyes, folks.
Gabriel Lewit: I don’t believe that’s …
Steve Lewit: … which is usually a message that says, “Dad, I think you got that wrong.” I don’t think so, though, because …
Gabriel Lewit: I’m fairly certain that’s not correct. So if you’re …
Steve Lewit: All right, folks, send us in your opinion because I’m fairly certain it is correct.
Gabriel Lewit: Where did you come up with that? I’ve never heard that before in my life.
Steve Lewit: One of our CPAs told me that.
Gabriel Lewit: Well, I’m not sure if they’re correct. Okay. Yeah, I don’t think that’s correct, but I will verify for you. I won’t be able to verify that while we’re speaking here. He may have stumped me, but I also think I’m correct. So we’ll confirm that. All right.
So anyways, RMDs, you’ve got to take them. They’re going to get taxed. That’s the next part about them. So what does that mean for you? Once you take your RMD, you are going to get taxed in that year. So let’s say your RMD for a year was $10,000. You would get taxed $10,000 because it’s being distributed to you, and therefore, you’re going to receive a tax form from whatever custodian made that distribution. And you’re going to have to pay taxes on that distribution the following year.
Steve Lewit: Because it’s credited as ordinary income. Anything that comes out of an IRA is ordinary income. Now the question always is, “Well, is there a way getting money out of an IRA without making it ordinary income?” And the answer to that is no.
Gabriel Lewit: Well, yeah. Here’s the flow, right? First question, am I required to take my required minimum? Yes. Once we clarify that, then the question is, “Well, how can I avoid paying taxes on my RMD?”
Steve Lewit: And the answer to that is …
Gabriel Lewit: Well, 99% of the time, the answer is you can’t. There are a few random exceptions here …
Steve Lewit: Very random.
Gabriel Lewit: … which we’re going to talk about. All right? Most of them are not very palatable to most, and therefore, most people are going to pay taxes on their distributions.
Steve Lewit: Yes.
Gabriel Lewit: Now, the other thing you’ve got to keep in mind here with these distributions is if they bump you into a higher bracket. Again, you don’t necessarily need the income, but you’re forced to take it. They can bump you into higher tax brackets, and they can bump you into Medicare surcharge.
Steve Lewit: IRMAA.
Gabriel Lewit: IRMAA called Income Related Monthly Adjustment Amount or IRMAA.
Steve Lewit: How do you remember it? I always like, “IRMAA? Income Related Monthly …” There’s two M’s, though. Monthly Maintenance?
Gabriel Lewit: No, it’s I-R-M-A-A.
Steve Lewit: Oh, monthly …
Gabriel Lewit: It’s not I-R-M-M-A. It’s I-R-M-A-A, IRMAA.
Steve Lewit: Income Related Monthly …
Gabriel Lewit: Adjustment Amount.
Steve Lewit: Adjustment Amount.
Gabriel Lewit: Yes.
Steve Lewit: I got to remember that. I should. I’m a professional.
Gabriel Lewit: IRMAA. Yeah, so she basically, IRMAA, we call her, will basically cause you to pay more money every month for your Medicare if you’re not careful and you bump into a higher bracket.
Steve Lewit: Yes.
Gabriel Lewit: All right, so with that explained, let’s talk about some strategies here.
First and foremost, know what an RMD is and how it will impact you. That’s strategy number one. So not to toot our own horns, but if you create a retirement plan, you will have a picture of your income over the next 20, 25-plus years of your retirement, including when you reach age 73 or age 75. And we can start to get a preliminary assessment of exactly how much your RMDs will be and, more importantly, if you’re going to need to take more of an RMD than you would otherwise need, to take a distribution from your IRA to meet your living expenses in retirement. That’s where people mostly get tripped up.
In other words, if your RMD is $10,000, but you need $20,000 to live on, you’re going to draw $20,000 from your IRA. You’ve already met or exceeded the minimum distribution. You’re not going to care. Where people really care is when you maybe only need to take out $20,000 from your IRA to meet your income needs, but your RMD amount is $80,000.
Steve Lewit: So now you’re getting $60,000 of taxable money that you don’t need.
Gabriel Lewit: That you don’t need. That’s where people get frustrated. And so once you can project that or predict that in advance, we can start talking about ways to minimize that future RMD and the tax impact or other impacts that might have on you. So you’ve got to have that projection first and foremost, which we can very much help you with here.
Steve Lewit: Yep.
Gabriel Lewit: Now the next question is, “Can I reduce my RMDs?” Yes. The most common way is by A, stop contributing more to your …
Steve Lewit: To your 401K.
Gabriel Lewit: … to your pre-tax balances. Although I’ll put an asterisk there, that would only make sense if you are already saving enough for retirement and/or in the right tax brackets. Maybe you switch to a Roth. That’ll lower your future RMD balances.
You can also look at things like Roth conversions. Now, we’re not going to talk about the full scope of Roth conversions here today, but they’re an excellent tool right now to reduce your future tax required distributions, your future tax implications, and to save you a lot of money on taxes over your lifetime.
Steve Lewit: Yeah. So, if you’re 65 and you have to take your RMD when you’re 73, the question to ask yourself is … And you don’t need the RMD, let’s say, for income, can I convert between, in the next eight years, most or all of my IRA to Roth?
Gabriel Lewit: Some or most or all. Yep.
Steve Lewit: Yep. And then I don’t have to worry about RMDs for the rest of my life that I don’t need. So I’m not artificially inflating my income just because there’s a rule that says I have to.
Gabriel Lewit: Yeah, exactly. So that’s another great strategy. A third option, which is the one that I always tell people, “Well, if you really want to save taxes, you can give away your RMD to charity, called a Qualified Charitable Distribution, QCD.”
Steve Lewit: QCD.
Gabriel Lewit: But here’s what I say. When you give away a hundred percent of your RMD dollars to save 22% of it on taxes, you still have less money.
Steve Lewit: Yes. Yeah, people don’t quite make that connection.
Gabriel Lewit: But if you are already charitably inclined and you are, in fact, donating to charity but not using a QCD, that’s when you want to switch at least a good chunk of your charitable distribution to a qualified charitable distribution.
Steve Lewit: So, if you’re a giver and you’re supporting the church or the synagogue or mosque, whatever it is you’re supporting, once you start having RMDs, you have to look at that and say, “Man, I’m going to take my RMD and give it to the charity and then bypass all the taxes on it.”
Gabriel Lewit: Yes, yes, yes. Okay.
There is one other option as well to defer your RMD is called a QLAC. Today’s the acronym day, Qualified Longevity Annuity Contract.
Steve Lewit: I think QLACs lack …
Gabriel Lewit: Anything of value?
Steve Lewit: I love your description. Gabriel gave me the description …
Gabriel Lewit: Before the show.
Steve Lewit: Before the show. Can I repeat it? I don’t know.
Gabriel Lewit: I’ll say it. So Steve’s like, “We’re talking about QLACs today.” Before the show. “What do you think about QLACs?” I’m like, “I think they’re stupid.”
Steve Lewit: Yeah, that was the answer.
Gabriel Lewit: I said it even a little more sassy than that, I think.
Steve Lewit: And then Gabby, our director, says, “You sound like a kid in high school. ‘It’s stupid.'”
Gabriel Lewit: Well, then we were going over, and you were like, “Okay, I see what you’re saying. Yeah, they are kind of stupid.”
Anyways, if my kids were on the show, I’d be like, okay, bad words.
Steve Lewit: Bad word.
Gabriel Lewit: But yeah. So I don’t like them. Why? Because here’s how a QLAC works. You’re 73, and you can say, “All right, I’m going to put up to,” I’m just going to say a hundred thousand dollars, I think it’s a little higher than that.
Steve Lewit: $130, yeah.
Gabriel Lewit: … into a QAC for this year. And I can defer taking payments from this. It turns it into an annuity that you can start taking life expectancy payments from when you are as old as 83.
Steve Lewit: But you’re not paying RMDs on it.
Gabriel Lewit: Right. So you’re taking this a hundred grand. You no longer have access to it, right? It’s out of your control. And all you’re going to get is, starting at age 83, a lifetime annual annuity payment.
Steve Lewit: Yes.
Gabriel Lewit: Well, what’s the problem when you’re 83?
Steve Lewit: You might die.
Gabriel Lewit: Pretty much at life expectancy, which is 83, 84, 85.
Steve Lewit: You might need less income because you don’t do as much.
Gabriel Lewit: But my point is, so you give away a hundred to start getting a stream of income payments at 83, of which the likelihood of living more than, the probability, I should say, of living more than five, seven years is very low. And so people barely even get their money back from this.
Steve Lewit: No. If they die, do they get their money back?
Gabriel Lewit: You would have to elect a QLAC with a return of a premium.
Steve Lewit: Premium.
Gabriel Lewit: Or a death benefit.
Steve Lewit: So, here. I buy a QLAC. First of all, that’s an irreversible decision. In other words, once you put your money in, unless you have a return of premium, you can’t … Now is return of premium only on death?
Gabriel Lewit: Most, yes. So you can do life only or life with return of premium for the most part. So you’re 83, let’s say you defer to 10 years. It’s probably a high payment stream. You start getting two grand a month or something like that, and then you die in two years.
Steve Lewit: Yep. Money’s gone.
Gabriel Lewit: Well, what happens is, let’s say you chose the return the premium, which you should always do, your beneficiaries get the difference between what you’ve received and your original a hundred thousand dollars.
Steve Lewit: So, my original a hundred thousand dollars doesn’t grow.
Gabriel Lewit: It didn’t grow. So I saved money on not paying taxes, but also, my asset never grew.
Steve Lewit: Right? That’s like the people that say, “I’m going to stop working because I have to pay taxes on …” So, wait a second. So you’d rather make nothing than lose 20% to taxes?
Gabriel Lewit: Then make 80% of whatever you otherwise would’ve earned. So yeah, you’ve got to look at the net-net, I’ll call it. It’s not just about avoiding paying taxes. Which approach will give you more net after tax money at the net after the end of the 10 years, for example, if we were comparing them side by side. And I just never understand, and I have yet to see anybody give me an example, where the QLAC makes sense.
Steve Lewit: So, in one word, how would you summarize your thoughts about a QLAC?
Gabriel Lewit: You already heard me earlier.
Steve Lewit: I know.
Gabriel Lewit: You already heard me.
Steve Lewit: Yeah, I heard you.
Gabriel Lewit: Well, there is more, of course, with RMDs. There’s considerations around how it passes to beneficiaries. There’s considerations around all sorts of things. RMDs are quite the topic.
Steve Lewit: It is, and there’s also a consideration, Gabriel. Most people take their RMDs from market money, which means that when the market is down, guess what? They’re selling to take their RMD when the market is down, and if the market is trying to recover, they’re selling every year at the wrong time. So there are more efficient strategies of taking RMDs, such as through an annuity or through a structured product where there are no losses.
Gabriel Lewit: Or something with principal safety so you don’t have to worry about forced withdrawals during down markets.
Steve Lewit: During down … Well said.
Gabriel Lewit: Which makes a big impact. It really does.
Steve Lewit: Well said.
Gabriel Lewit: People don’t think about that. And also, if you do take an RMD that you don’t need, please, please, don’t just take it and sit it in cash. If it was …
Steve Lewit: Well, here’s the problem. It goes into the checking account.
Gabriel Lewit: Earning no interest because it’s what everyone does.
Steve Lewit: Earning no … And people leave it there.
Gabriel Lewit: Just reinvest it. Right? Just reinvest it. So, simple things. Makes you lots of money though.
All right, well that’s our time. We hope you enjoyed our journey here today through the world of RMDs, heat waves.
Steve Lewit: Heat waves. Yeah.
Gabriel Lewit: What else did we talk about? Oh, mobile DMVs.
Steve Lewit: Yeah. Can’t wait.
Gabriel Lewit: Whatever else we covered here today. Oh, buying homes for your children.
Steve Lewit: I got to rethink that.
Gabriel Lewit: I would like a second home, if you could purchase one for me.
Steve Lewit: Maybe I’ll buy a home for your kids, my grandkids.
Gabriel Lewit: All right. Well, if you’ve got questions on planning, of course, or investments or taxes or QLACs or RMDs, call us. (847) 499-3330. We can’t help you with mobile DMV questions.
Steve Lewit: Nope.
Gabriel Lewit: We are not the DMV. Do not call us to renew your license.
Steve Lewit: And we do not want to be.
Gabriel Lewit: Oh, never would want to be a DMV. But if you need to go to our website, sglfinancial.com, click contact us or email us info@sglfinancial.com. And we would love, of course, to hear from you.
Steve Lewit: Y’all stay well, everybody.
Gabriel Lewit: Stay cool!
Steve Lewit: Stay cool.
Gabriel Lewit: And we’ll talk to you on the next show.
Steve Lewit: Bye now.
Gabriel Lewit: Bye-Bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at sglfinancial.com, and be sure to subscribe to join us on next week’s episode.
Prerecorded Voice: Investment Advisory Services are offered through SGL Financial, LLC, an SEC-Registered Investment Advisor. Insurance and other financial products are offered separately through individually licensed and appointed agents.
