Ken Moraif  

Hello and welcome to our Retirement Planners of America Podcast. And in this episode, we’re going to be talking about the tax time bomb that lurks in your IRAs and your tax deferred savings accounts. And let me tell you, if you are not aware of it and you don’t do what you’re supposed to the penalty is 50% of that which you should have taken out. So we’re going to be talking about that on this episode.

Hello, I’m Ken Moraif. I’m the founder and CEO of Retirement Planners of America, and we’re a firm that specializes in retirement planning. So we work with people who are over 50, who are retired or retiring soon, and we are so honored and blessed to be able to work with over 6500 families across the country. And so I hope this video finds you healthy, wealthy and wise. And in this episode, we’re going to be talking about the required minimum distribution, which we’ve also kind of branded, I guess, as the ticking tax time bomb, and to help me out with our podcast today, I’ve got my sidekick, Jeremy, the artist formerly known as jerbear, right? We’re not allowed to call him that anymore. He doesn’t like jer bear. So, so whatever you do, do not call him jer bear. Okay, it’s Jeremy. So Jeremy, Hi, how are you doing? I’m doing quite well, really well.

Jeremy Thornton  

Great, dapper. I like that. I thank you very much. I have a new jacket. It’s super cool. Yeah, it’s got, it’s a really cool lining on the inside. Oh my Yeah, yeah. So very fancy, nice.

Ken Moraif  

Okay, note to self. We’re paying. Jeremy, okay, yeah, all right, yeah. So we’re supposed to be doing some business here. Let’s talk about, let’s talk about the ticking tax time bomb. So yeah, what do we got on the agenda here?

Jeremy Thornton  

So there are, pretty much everybody has this, whether or not they know it or not is sitting waiting for them. It’s it’s taking away right now for a lot of people, yes, and if you don’t know about it, then you don’t know what to do. And so I’m hoping you can help equip our listeners and our watchers to be able to do something about it.

Ken Moraif  

Yeah, yeah. So let me, let me, kind of give you the rule. So first of all, if you were born, I got to read this, because they just changed the rules, and I got to be right. So if you were, if you were born between 1951 and 1959 then your, what are called required minimum distributions, begin when you are 73 years old. Okay, okay. Now, if you were born 1960 or later, then your required minimum distributions begin when you are 75 okay. So this affects people who will be 73 or 75 depending on when they were born. Okay,

Jeremy Thornton  

so as somebody that is not retired myself, Yes, what is a required minimum distribution.

Ken Moraif  

I thought you would never we just started. So here’s what happened, you know, when they invented IRAs and 401, k’s and all that kind of stuff. So what happened was, there was they said, you know, we need to have a something to encourage people, you know, to be self sufficient, to save up for their retirement. And so how are we going to do that? And they said, Well, what we ought to do is we ought to give them some tax incentives. How about that? That’s a good idea. Yeah. So this was like a big smoke filled room, if you can imagine that, you know, since a long time ago, right, when everybody smoked cigarettes and cigars, they were in the smoke filled room. And so they were sitting there, and they’re going, okay, so yeah, that’s a great idea. Let’s give them tax incentives. So they said, Well, how do we do that? They said, Well, you know, we’re going to do is we’re going to say that if you contribute to these plans, we’re going to give you a tax deduction to do it. Essentially, by doing so, we’re going to, we’re going to subsidize, you know, we’re to the extent that you’re saving on taxes. So you put $1 in if you’re in the 20% tax bracket, basically we’re putting in another 20 cents for you, straight off the bat with a deduction. And everybody’s like, wow, that’s a great idea. That’ll really encourage people to do it right? But then, you know, there’s the guy in the back of the room, okay, the guy with the coke bottle glasses. He’s got the pocket protector with 17 pins in it. There’s all this ink all over it. And he’s like, in the back, and he’s sitting there with a white shirt, you know, and the band aid, you know, right here that holds his glasses together. And he goes, Okay, hold on, hold on, everybody. And the whole room went silent. And they’re like, Okay, what’s he going to say? And he says, So, do you guys realize that Americans are actually going to take advantage of this? And if they do, there’s gonna be hundreds of billions of dollars in all these IRA accounts, and if they don’t take the money out, we’ll never collect any taxes on it. A travesty. Oh no, you should have seen what happened. I mean, what happened with the whole room? Like, went crazy, like, oh my gosh, we have not thought about that. Yeah. So. So, you know, we can’t have people not pay taxes on all those hundreds of billions of dollars. I mean, that would be downright un American. So they all look back at him and they say, well, then what do you think we should do? And he said, Well, what I think we should do is we should have a law that says that when they reach a certain age, they’re going to be required to start taking the money out, whether they want to or not. We’re going to require these minimum distributions, and we’re going to organize it in such a way that it’s going to be based on their life expectancy. And the goal is that we’re going to force them to take a little bit out every year over the course of their life expectancy, so by the time they die, they’ve taken it all out and they paid all the taxes. Yeah, and you should have seen the room, it erupted. They were like, Oh, you’re our hero. They literally picked him up and carried him around the room. They were cheering this guy invented the required minimum distribution. And that’s actually a true story.

Jeremy Thornton  

Yeah, I’m guessing you saw a film of this.

Ken Moraif  

Yeah, it was in the documentary, so that’s where the required distributions came along. Okay, okay, so basically, the purpose of it is to force you to drain the tub, yeah, and pay all the taxes, because they didn’t want you to, like, go forever without paying taxes,

Jeremy Thornton  

right? Well, and then you’d be able to give all that money away to your heirs if you wanted to. And then maybe, or maybe not, they don’t spend it, yeah,

Ken Moraif  

and then they could inherit it, and then they don’t pay taxes. That money could keep growing. Money could keep growing for debt for, you know, generation. So they had to figure out how to make sure that we paid all of the taxes that they felt we are due to pay. So the other thing they did, just to make it even more interesting, is they said, well, but what if people don’t comply? Right now, people might say, You know what, I’m not going to take the money out, right? Heck with you, right? So they said, Okay, we got to handle that one too. So what we’re going to do is we’re going to make the penalty so draconian. Yeah, you like that word? I do. I love that word draconian. It’s going to be so draconian that if you don’t comply, it’s essentially going to be, you ready for this word, confiscatory?

Jeremy Thornton  

Oh, I have not heard that one. I don’t

Ken Moraif  

believe confiscatory, baby. Yes. So here’s the penalty. It’s 50% of that which you should have taken out. Okay, so if you were required to take out $1,000 right then, and you didn’t, right? The penalty is $500 Wow. And on top of that, it’s the tax on the $500 so if you’re in a 20% tax bracket, just as an example, you have to take five the penalty is $500 plus another 20% of the original amount, right? So it’s another $200 so now it’s $700 on your $1,000 Wow, that’s the definition of confiscatory, right there? Confiscatory. So you do not want to run a rye right of the required minimum distribution rules, yeah. And because, you know, we don’t like all these long things like required, minimum, distributed, it’s hard to say, right? We shorten it to RMD,

Jeremy Thornton  

perfect. Another acronym, another acronym. There’s, there’s not

Ken Moraif  

enough of those. No, the government loves and we, we use them. It’s true.

Jeremy Thornton  

No, that’s, that’s fantastic. Well, you know, I think that’s, that’s something that I never really thought about. I knew, like, okay, you know, you save up for retirement and you have all this money and never really thought like, if you don’t spend it, they’re gonna come take

Ken Moraif  

it, they’re gonna force you to take it out, and they’re gonna penalize that, right? Have you, right? If you don’t qualify, if you don’t satisfy

Jeremy Thornton  

the rules, yeah, yeah. So, yeah, very important that you do that, I’m guessing. So I would want, I would think that if I’m looking at that, I’m, thinking, Okay, how do I minimize that impact? Because they’re going to get the taxes anyway, I would want to reduce that, right?

Ken Moraif  

Yes, you do. And the reason, there’s a several reasons why, okay, one is that the way they calculate the required minimum distributions is they base it on your life expectancy, right? Okay. So what they do is they essentially say, How much, how many more years do we think that this person is going to live? Right? And they don’t pick you individually. They use law of large numbers. So basically they have this table, and the table says, you know, you got 13 years, 10 years, five years left in your life, and that’s how they determine the amount you’re going to take out. So if you got five years left. And I think it’s, you know, when you’re 85 or something, they say you’re like, you got five years left, you have to take 20% of the money out, right? Because five, you know, right, 100 divided by five is 20, so you got to take 20 so you’re draining it out. So every year the amount you’re required to take out as a percentage goes up. That makes sense, because it’s based on how many years you have left to lift. So they want you to drain it, right? And so what happens there is that the amount you’re going to take out potentially can keep getting bigger and bigger, yeah. And if it does, these distributions are taxable, right? So if you take larger and larger amounts of if you get, if you’re taking distributions, and you have larger. Larger taxable distributions. Guess what that does to the tax bracket you’re in? It’s going to go up, right? It can potentially push you into some pretty high tax brackets. And then, if that’s not bad enough, what it could also do, because it’s called taxable income, it could cause your Medicare premiums to go up, jeez. It could cause you to pay tax on your Social Security benefits. So they get you coming and going this thing. It’s genius. The guy with the coke bottle glasses, yeah, I think that they’re at the IRS building. There’s like a golden statue. He came up with a trillion dollar idea.

Jeremy Thornton  

Yeah, I hate to use the word, but devious comes to mind. Maybe a mustache, a totally mustache, yeah, yeah, yeah, to be pushed into a higher tax bracket because of a requirement is it’s an interesting strategy to employ, yeah? Not a big fan. From their perspective, it makes total sense. Oh, for sure, yeah, I would. I would think so.

Ken Moraif  

By the way, I want to say if I’m grimacing every time I drink this, it’s because my assistant Gigi decided that it was time for me to drink green tea. Have you ever had green tea once or twice? Oh my gosh, it’s

Jeremy Thornton  

awful. Yeah, it’s not fun, but it’s supposed

Ken Moraif  

to be good for Why is everything good for you? Right? Taste awful, yeah. Okay, anyway, so I’ll get used to it.

Jeremy Thornton  

Okay, great. So kind of set up what RMDs are, yep, what those penalties could be. Yes. Is there anything so, Social Security, Medicare, tax bracket. I mean, just the penalties on top of themselves being taxed as well. Do you want to? Do you want to talk about the possible legacy issues that could come with those penalties?

Ken Moraif  

Oh, yeah, yeah. I mean, basically, if you’re paying taxes more than you should, if you have penalties more than you should, then, you know, we call your heirs your greedy, unwashed, undeserving heirs, and that’s a joke, okay, I’m kidding. Do not it’s funny, because I get emails from people my heirs are not greedy, unwashed or undeserving, okay, sorry, right, you know, right? Apparently, they hosed them off, you know. Yeah, they’re not unwashed anymore. But yeah, the greedy unwashed are going to be upset with you, because, you know, all those penalties are taking away from their inheritance. That’s true. You know, you’re going to get a nasty gram from from your grandson. You know, it’s like, Hey, what’s up with the penalties you’re paying? Yeah, I could have inherited more and you screwed it up. So yeah, it could impact that. It also, you know, from a standpoint of that money having been invested also, so there’s lots of impacts on, you know, the inheritance that you leave, yeah, if you are so inclined, right? Not all of our clients want to leave anything to their greedy, unwashed some of them say, you know, if the last dollar, the last check I write, bounces, that’s fine with me, yeah? So, you know it depends on you

Jeremy Thornton  

spend it while you got it, I guess. Yeah, I totally get that. Okay, great. So big, scary penalties,

Ken Moraif  

yeah, have we done a good job making everybody aware? Yeah, okay, hopefully you’re aware now, ladies and gentlemen, you do not want to miss taking your required minimum distribution is not a good thing. Yeah, right. So I think we’ve

Jeremy Thornton  

established as if, if a bomb iteration was not clear enough, there’s plenty to be scared of, in in or wary of. Maybe,

Ken Moraif  

you know one thing that I just want to make clear, and that is that the required minimum distributions, when I say confiscatory, I mean the penalty is confiscatory, but the required minimum distributions themselves, basically, you take them out. So let’s say your required distribution is $1,000 okay, so you take the $1,000 out as you are required to you pay your tax on the $1,000 so again, let’s say you’re in the 20% bracket. So you pay $200 in taxes. You’re still left with the $800 yeah. Okay, so they the required distributions are not where they’re going to, you know, confiscate your money right there. You just have to take it out and pay your tax right now, if you don’t do what you’re supposed to, then, yeah, then we start getting into where they’re going to confiscate

Jeremy Thornton  

it, yeah, yeah. Don’t, don’t, just don’t tread that line. Okay, great. So big, scary stuff. What can we do about it?

Ken Moraif  

There are several strategies. In fact, I think what did we say? There are five strategies. Okay, so we got five strategies to talk about. So one of them is what we call tax bracket management. Okay, ooh, you like that? Yeah, all right, we’re gonna start getting into some complicated stuff here. So tax bracket management. So basically, what we do with clients is we look at what tax bracket are you in? All right, so let’s say again, you’re in the 22% tax bracket. And offhand, I don’t know what the dollar. Brackets are, but let’s say that it’s $150,000 so if you get up over 150,000 you move up into the next highest tax bracket. Okay, so as long as you stay under the 150 and I’m making this up, I don’t have the things right in front of me, but as long as you’re under that 150 let’s say you stay in the 22% okay, so we look at how much is your taxable income going to be for this year, and let’s say it turns out to be 100,000 Okay, so if your taxable income is 100,000 to stay in the tax bracket that you’re in, you got $50,000 to work with, right, right? You’re not going to move up to the next bracket unless you get over the 150 your taxable income is 100, so that 50,000 guess what we can do? We can take that out of the IRA and pay the tax at our current tax bracket, right? And if we do that, we stay in the bracket that we’re in. So why would you want to do this? Well, as I mentioned before, the required minimum distributions are going to get larger and larger over time. The percentage you have to take out is gonna be based on your life expectancy, so it’s gonna get more and more, right? So if you start draining the tub in advance, then the amount you have to take out later is less, and potentially then later you’re taking out a smaller amount, and it won’t push you then into a higher tax bracket, right? So tax bracket management means look at the tax bracket that you are in see if there’s a gap between your taxable income and moving into the next higher level. If there is, you can take that out of your IRA and yes, you’ll pay tax on it. I know it’s a bitter pill to swallow, right, but it’s worth it, yeah, because you’re locking down the lower tax rate with that money once paid, it’s done right right now, the other thing that that these that doing tax bracket management does that you can do with that money. Okay, once you take that money, how do you do it? Well, what are the things that we recommend is what’s called a Roth conversion. Okay, so in other words, what you can do with your IRA is you can convert it to what’s called a Roth IRA, right? Okay, so let me define my terms here. So a traditional IRA is one where you put the money in, you get a tax deduction for making the contribution. It grows without being taxed, and then when you take it out, you pay tax on the distribution, right? The Roth IRA is kind of the opposite of that. You get no tax deduction up front, but it grows tax free. And the big benefit is that when you take it out, it’s tax free at that time as well, right? Okay, so that’s the difference between a traditional and a Roth, right? So if you convert, in my example of the 50,000 so you say, I’m going to convert $50,000 of my IRA to a Roth. Okay? When you do that, you essentially took the money out of the IRA that 50,000 is taxable to you, but now you convert it to the Roth, right? And now, when it’s in the Roth, it grows tax free for you, yeah, for the rest of your life, yeah. And then the distributions are tax free as well, yeah. And under certain circumstances, it’ll also be tax free to your greedy, unwashed, undeserving heir, so they’ll love you even more now, yeah, so they’re thinking, man, thank you. I just inherited a tax free account is going to grow tax free, and the distributions are tax free, they’ll love you. Yeah, you get a much better eulogy. So, so, yeah, exactly, better than the other one, right? Yeah, you’re screwing up and you’re messing up my inheritance. So, so, yeah, so what? By doing the Roth conversion, you basically are doing the tax bracket management, right? You’re looking at how much leeway Do you still have. And in some cases, you know, from the tax bracket management standpoint, you may say, You know what, it’s okay to go up to the next highest tax bracket, if you want to, because you’re going to look into the future. And, you know, we make certain assumptions, and we say, am I going to be in a higher tax bracket in the future? Yeah, then even the next bracket up from where I am now, right? And so you might say, you know, maybe I don’t stop at 50, maybe I do a $70,000 conversion. And so what you’re doing is, and every year, you convert a little bit a little bit, a little bit. And so over the course of time, by the time you reach the age where you’re required to take those distributions, the account is smaller. It’s all residing in Roth IRAs, which is fantastic because they’re growing tax free. Yeah, and your required distributions at that time are lower because the account is smaller, yeah, it’s a wonderful thing, in my opinion. Yeah,

Jeremy Thornton  

I in, you know, as a non gambling man, the likelihood of, because I struggled a little bit, or I thought about, Okay, do I want to start investing in IRA, a traditional one, or a Roth? And I eventually switched over to a Roth myself. And kind of the thought process was, Okay, do I think taxes are going to be higher or lower when I want to be taking this out? And obviously don’t have a crystal ball. I was I am betting on taxes being lower now than they will be when I retire, even if I do. Stay in the same tax bracket?

Ken Moraif  

Yeah. I mean, the income tax brackets today are at historic lows, yeah. And so the likelihood is, with the deficits that we’re running, I mean, the money has to come from somewhere to pay for all this stuff right now, hopefully with Doge and some of the other things right reduce government spending and the finance the government won’t be as expensive. Maybe taxes won’t need to go so high. But having said that, you know, with interest rates, where they are, and the amount of money we’re spending out of our budget to just pay the interest on the debt, and interest rates went up, it’s costing us so much that money has to come from somewhere. It doesn’t get manufactured out of nothing. The Fed can print it, but that will create inflation or it’ll come out of taxes, yeah. And either way, it makes us poor. So I would say that unless something significant is done, it’s likely that at some point we’re gonna have to look at the tax code and say, you know, we need more money, yeah, and people need to pay more

Jeremy Thornton  

taxes. And that’s happened historically. Our taxes have have fluctuated.

Ken Moraif  

During the Ronald Reagan years. There was a 70% tax bracket to pay for all the stuff that had happened, you know, World War Two and right? And in the 60s, yeah.

Jeremy Thornton  

So I’m gonna make hay while the sun shining and pay those taxes now. Yeah.

Ken Moraif  

So a Roth, a Roth conversion, is probably a good idea, you know, even from the standpoint of looking into the future and saying, I think taxes will be lower, will be higher. Rather now, if you think taxes are going to be lower in the future than where you are today, and that’s possible, because you may be a high income earner today and lower in the future. If that’s the case, then you may not want to do the Roth conversion, because you’re paying taxes today when you did the Roth conversion. But in almost every instance, yeah, a Roth conversion makes, makes the most sense. Yeah, absolutely, yeah. And by the way, you still have access to the money. Even though you know it’s, it’s, you put it in the Roth, you still have access to it like you would have in your IRA. So even lost access, yeah,

Jeremy Thornton  

that’s, yeah. That’s a fantastic point. Okay, so that’s tip one early kind of Roth conversion of that traditional Roth IRA.

Ken Moraif  

Yeah, that was a fun one.

Jeremy Thornton  

Yeah, yeah. That’s a lot of math going on with tax brackets and all the rest of it, so I’m not going to be tackling that

Ken Moraif  

one. No. Well, that’s what people need us for, right? Yeah, that’s

Jeremy Thornton  

what we do. Absolutely. Okay. So what’s number two?

Ken Moraif  

Number two is giving money to charity. So there are almost no loopholes to the RMD. They’ve locked that baby down. Yeah, right. I mean, there’s no, you know, clients are always asking, is there a loophole to this? No loophole. Sorry, pretty airtight. Nothing you can do. You’re gonna have to take the required distribution and you’re going to and they call it required minimum, right? And just explain that it’s a minimum amount you’re required. Now, you can take more than that if you want, and in the example of the tax bracket management, you are taking more potentially, right? But that’s the minimum, okay, so they’re going to require you to take that out. Now, the loopholes, there’s one, and it’s called a qualified charitable distribution, okay, okay, so what, basically, they’re saying is, is that if you direct the money from your IRA, your required minimum distribution, if you direct that instead of anywhere else, you direct it directly, you send it directly to a charity, okay? So you never take hold of that money, and nobody else does. It goes directly from your IRA to the charity that is called a qualified charitable distribution, and it is tax deductible, okay, so what we so? So for many people, the charitable contributions that you make are not deductible to you or fully deductible because there are certain there are certain floors you know that you have to meet before anything’s deductible, and they made the rules crazy. And so for a lot of people, you give money to charity and it’s not deductible, right, right, right. So to the charitable, the contribution from your IRA is fully deductible. So what we tell clients is that when you have your required distributions, let’s say that your required distribution this year is going to be $10,000 how much do you give to charity every year? How much you give to your church? You know, what do you do? Do you make contributions already anyway? And if the answer is yes, then what we say is, okay, how much do you give to your church? Okay? So in this example, let’s say the required distribution is 10,000 and they say, well, we get 5000 a year to the church or to our favorite charity, whichever. That may be, right. Okay, fine. So what I’m going to suggest is that instead of you writing a check to the charity for that $5,000 why don’t we have 5000 of your 10,000 required minimum distribution go directly to the charity? Yeah, okay, so because here’s the difference, if you receive that $5,000 you pay tax on it, right? And then you turn around and you want to write a check to the charity, and you. Got less than 5000 to make up the difference, right? But if it goes directly from your IRA to the charity, the full 5000 is deductible to you. Okay, so I’ll call that maybe the only loophole, yeah, that required minimum distributions have, which is the sending the money directly to the charity. Now it has to be a qualified charity, yes. So not all charities qualify, but the vast majority do, and it has to go directly. So when, when you fill out the form that says, you know, I’m going to transfer the money. If you talk to whichever is the charity that you want to have the money go to, I will make you a 100% iron clad guarantee they know how to do it? Oh, for sure. Oh, absolutely. If there’s one thing they know how to do it is how to receive these charitable contributions. So they they will tell you, here’s the account number, here’s the they’ll give you all the info you need. And if you give that to us, if you’re our client, then we put it on the form. We make sure that the money goes directly from your IRA to the charity, yeah? And if we do that, then it’s fully deductible

Jeremy Thornton  

to you, yeah, yeah. So, so no, Jeremy’s Bentley foundation, I couldn’t do that, right? The

Ken Moraif  

Bentley foundation you want to buy, right? Yeah,

Jeremy Thornton  

yeah. Well, you know, I didn’t figure I would get away with it. But no, that’s how it makes sense. In the past, charitable contributions have been tax deductible, so not getting your grubby little fingers on it first, and just tell it, I promise. Mr. IRS, I’m going to be sending this to a charity. Don’t worry, yeah, yeah. They’re like, No, no, no. We’ve seen they probably had one or two cases of that happen. They’re like, okay, no, we got to cut this out right now. It directly. Do not pass go. Do not collect $200

Ken Moraif  

yeah. Now there is one limitation to the qualified distribution to charities, and for most of our clients, they don’t get anywhere near that, right, but it is $100,000 Oh, okay, they maxes out at 100,000 Okay, interesting. Yeah. So for most people, it’s not a problem. I don’t think most people are gonna, man, have $100,000

Jeremy Thornton  

secondly, that they want

Ken Moraif  

to give all that kind of that kind of money to charity. For most of our clients, that’s not

Jeremy Thornton  

the case. Yeah, I would say for most people, that’s probably not going to happen. Yeah, but fair point to make that known. I totally get that. Is there a minimum time that you can actually implement that at an age?

Ken Moraif  

Well, it has to be a required distribution. So it’s based on how old, okay, so if you’re, it’s, it’s, currently, it’s either 73 or 75 okay, in the dates of birth that I was talking about. Okay. But if you’re already taking distributions, because you’ve already reached the age, right? And you’re, you’re doing them now, then you can,

Jeremy Thornton  

okay, okay, so then you’re eligible to do that. Okay, very good. Okay, so we have a couple of them already. Our next, I guess, strategy to help with this ticking time bomb that’s just waiting no is going to

Ken Moraif  

be that’s my job. You’re supposed to just, oh, sorry, I’m the color here.

Jeremy Thornton  

But okay, so tax diversification, yeah, with contributions. What does that mean?

Ken Moraif  

Okay, so basically what that strategy is, it’s for the younger people. Okay, okay, when I say younger, I mean, let’s say that you’re about 10 years away from your required distributions, so you’re in your early 60s. Okay, so you’re a kid, right? You’re right. You’re a youngin, absolutely. So if you’re a youngin, you may want to start thinking right now. You know about that. So how you, you know you were mentioning earlier that you made the decision to put money into a Roth in your 401 k, is that where you’re getting Yeah, okay, so, so or traditional Roth. So diversifying where you put your IRA and your 401 K money, right? Because you have the choice, in many cases, to make it a deductible, right, which is called a traditional or you can put it into the Roth version, right? So what you can do is hedge your bets. You know, we were talking earlier about, yeah, we’re pretty sure taxes will be higher in the future. But you know what? Who knew you know that Donald Trump would come along and drop or, actually, George Bush dropped taxes significantly, and then Trump dropped them even lower. And who knew that was going to happen? So so you don’t know. So you may want to diversify your the tax buckets, if you will, that you have your money in. So you may want to put a portion of your money in a Roth and a portion of your money to traditional, you know, in your 401, K or otherwise. So if you do that, then what happens is that, you know, when RMD time comes, half your bet will be right, yeah, right, yeah. The other half will be wrong, but hopefully the right part is so much better than the wrong part, and you and you come out ahead. So that’s way to hedge your bets. We don’t necessarily recommend that, but that’s something to be considered. I would say. For you, if you have a large IRA, I’d say, if you’re over a million dollars in your IRAs, maybe something you want to consider, you know, in the future as to what taxes will be.

Jeremy Thornton  

Oh, that’s that. Yeah, it’s always okay. Do you put it all on black, right?

Ken Moraif  

Yeah. And you know what we were talking earlier about, you know, what’s what are the chances of this or that? We don’t know. We don’t know,

Jeremy Thornton  

right? Absolutely, yeah. And that’s, you know, that’s an excellent point. And it changes from year to year, maybe one RMD year that it is lower, and maybe one year it’s higher. You know, it can fluctuate, yeah.

Ken Moraif  

And also, you know, it depends on your tax bracket. So, for example, if you’re having a really good year and you’re in a high tax bracket, and it may be worth it to you to do the deductible version, right, right? Because you’re saving taxes, because you’re in a higher bracket, and then next year, you’re in a lower bracket, you know, maybe you retired and are working part time or something, so now you’re in a much lower bracket. So in that case, you know, then you’re looking into the future and saying, I might be in a higher later. So it’s the flexibility of being able to do that offers planning opportunities

Jeremy Thornton  

absolutely, yeah, definitely something to consider and something to talk about and really mull over tax diversification. That’s pretty straightforward. I would say it is pretty straightforward. Yeah, yeah, luckily. Okay, next strategy to talk about spousal planning.

Ken Moraif  

Spousal planning, yeah, so spousal planning is basically you can, even if your spouse is not working, you can contribute to a spouse’s IRA. It’s called a spousal IRA, okay, and so you may be the working one your spouse is not, is not earning any wages, but you can contribute to the money there. So by doing that, you can spread it between two different accounts. This works when there’s an age difference between the two of you. Okay, so let’s say that your spouse is younger than you, so their required distributions won’t start till after you Yeah, so you may want to be funding your spouse’s IRA and those kind of things, because now you’re delaying it by, I don’t know how many years, depending on the age difference, right as to when you have to start taking required distributions and when you’ll start having those taxes. So having looking at that as a strategy as well. This is something that you want to start thinking about, probably around 10 years before you get to record minimum age, because you know time, over time, you know small differences can add up to a larger to a larger benefit,

Jeremy Thornton  

absolutely compounds of snowballs. That’s obviously going to affect your your tax brackets as well, and where you’re going to fall in that one, or especially if you start withdrawing and all that kind of good stuff too. Yeah, yeah. Okay, now again, another short one, pretty, pretty straightforward. Okay, our next one to talk about.

Ken Moraif  

You know, you have to be aware, though, yeah, you know, from the spousal planning thing, don’t do it if you think there’s a possibility of a divorce,

Jeremy Thornton  

right? Yeah, yeah, right, yeah, that’s not your money.

Ken Moraif  

Yeah. Hopefully you’re in a in a happy marriage. It’s gonna last forever, right? And you’ll never regret putting that money in your spouse’s IRA and they divorce you, and you’re like, Oh, crap, look what I did.

Jeremy Thornton  

We have talked about before, the happiest people in retirement and who that

Ken Moraif  

is, yeah? Well, yeah, the three things, right, your health, your money and your social life, right? And so having money is important,

Jeremy Thornton  

yeah, yeah, that’s very important. But no, the happiest people though, oh, happiest persona are divorced women.

Ken Moraif  

Oh, that’s right, yeah, you’re right, yeah, funny, divorced women.

Jeremy Thornton  

Everything. I could never would have guessed it.

Ken Moraif  

I would. I don’t know what that says about us, right? Looks good. Yeah, it’s he’s right. Ladies and gentlemen, there’s a, I forget who did the study, but yeah, they said that. You know, the happiest people, retired people in the United States, are divorced women who knew, listen, I’ve

Jeremy Thornton  

spent some time alone with myself, so I kind of get it. Oh yeah, yeah. Okay. All right, our next, our next thing are okay. We have all of these plans. We have all of these strategies. Those are all great. What are those tools for those clients that are already taking those RMDs, required, minimum distributions? What are those tools? And how do we how do we use those?

Ken Moraif  

Yeah, I mean, we’ve talked about strategies up until now, but there are tools that can help you to calculate your required distribution. It’s formulaic. You know, the government basically gives us the tables and they tell us the. These you know, this is what it’s going to be, the percentage and mechanically, what the tools do you they based on the tables. You know what your required minimum distribution denominator is for this year? All right, so let’s say you’re going to have a required distribution for this year. So what they do is they say, How old are you this year? Okay? And based on that, you look on the table and it says, that’s the denominator. So that denominator becomes a number. Then you write the numerator is the value of your IRAs at the end of 2024 Okay, on December 31 what was the value? So you take the value of all of those and you divide it by the life expectancy the table number that they give you, and that then gives you what your required distribution amount is, gotcha. So there are calculators, rather than doing that manually, yeah, looking at the table and all that. There are calculators that you know and you can use to help you to see what that would be, and you can and what we do is we project it out, you know, over a person’s life expectancy. And so that way we can see the advantage of doing it one way versus another. We can do what if scenarios and kind of plan it out. You know, you have to have the ability to put in assumptions as to, you know, return on investment, our tax will be higher in the future than they are now, etc, etc, right? But there are tools that are available to help you to

Jeremy Thornton  

do that. And I would guess a lot of that kind of that needs to be looked at every year,

Ken Moraif  

yeah, because the denominator, the life expectancy number, changes, yeah, it changes every single

Jeremy Thornton  

year. And then whatever events happen with whatever money you have in there, whatever

Ken Moraif  

kind of the value of your money can change. That’s correct, yeah. So that’s, I think that’s yeah, because they use the value at the end of the previous year to determine the required distribution for the following year. Yeah. And so the value at the end of the year is determined by how much did you take out the prior year, prior year, what were the returns you made the prior year? You know? So it could be lower or higher based on those factors, but the denominator, the factor that the government gives you, it’s a table, yeah, and it hasn’t changed. As far back as I’ve been in this business, yeah, they haven’t changed. Yeah, yeah. I think at some point they might though, you know, people are living longer, so they might, that may, might be something they do, but if they do it, guess what it does? It reduces their tax revenue, right? So I suspect it’s not going to happen. Probably not, yeah, unless they raise it. Call me crazy, yeah, but I don’t think they’re gonna, like, figure out ways to make us pay less taxes. I don’t know if they’re gonna be like, you’re really incented to do that, especially when it’s something that nobody even understands, right? Right? I mean, if it’s something that everybody sees, like your tax bracket, then that’s politically very favorable, right? But to reduce the tables on the RMDs that nobody even knows what they are, yeah, what’s the value in that? There isn’t

Jeremy Thornton  

any? Yeah, I was gonna say, if I saw a headline for that, my eyes would gloss over and move on. There’s nothing there, yeah? So with those tools, with me not wanting to do it. How do you use those like, who would you recommend helping with that?

Ken Moraif  

Well, I mean, it’s self serving, but this is something that we do every day. I’ll tell you the way that we do it. There’s, there are two kinds of clients when it comes to RMDs. Okay? So one is where they need the money. Okay? So they need the money to live, to live, right? They are drawing money out of their investments. So, and then the other is they don’t need the money, right, right? So what we do is leading we, first of all, we don’t want to take any money out of IRAs unless we have to. So again, that’s why they have the required minimum distributions. So unless we have to, we don’t. So we use what we call non IRA money to provide the income for our clients until we have to take the required distributions. So let’s say you have a client that they’re they need to take out $40,000 a year from their investments to cover their cost of living. Okay, so they got to take 40,000 a year. Now we want to take it all from their non IRA money for as long as possible before we start taking it from their IRAs. Why? Because the non IRA money potentially is taxed at Capital Gain rates. It may even be tax free if you’re basically dipping into principal, but every dollar you take out of your IRAs will be taxable to you as ordinary income, not capital gains. So it’s the highest tax place to get your money from. So we don’t want to do that unless we have to, right? So again, you need 40,000 you’re taking it from your non IRA money. All right. Now you become of age, and you have to now start taking required distributions, right? And let’s say that your required distribution is $20,000 okay, so you need 40 Okay, so what we’re going to do is we’re going to take the 20 and we’re going to. Reduce what we’re taking from the non Ira from 40 to 20. So you’re still going to get your 40 right. But now we’re taking 20 from Ira and 20 from non IRA, and as the amount of your required distributions gets bigger, we reduce the amount that you have to take from the other and it may end up that, you know, the required distribution is so high at some point that it satisfies everything you need to cover your cost of living, right? Okay, so that’s kind of the mechanics of, you know, how do you decide, you know, where do you get the money from? The general rule we have is, you know, defer, defer, defer, defer, right? Do not pay taxes before you have to, yeah. So that’s one thing. So the other thing is, then, what are the mechanics of doing that? Yes, right. So if you need the money to live on, what we do is we set up a non IRA account. Okay? So you have your IRA, here you have your non IRA, and we have the required distribution come out of the IRA, okay? And depending on the client, we can either withhold taxes or we can not. It’s up to them. You know, we have clients that they don’t want to mess with it, withhold the taxes. I don’t have to worry about it. And we have others that say, Nope, I want to pay it, you know, I want to manage that myself. And so they get the full distribution, and then they pay the taxes on their own. So depending on who you are, but what we do is we have the money, the investment, come out of the IRA, yes, and go into the non IRA, okay, in kind what that means is, we didn’t sell it, yeah, we didn’t do anything to it. We just moved it out of the IRA and into the non IRA in the amount of the required distribution, okay? So if it’s 40 to 20,000 we take 20,000 of those investments and we move them into the non IRA, so the money never goes uninvested. So that’s the key thing. You don’t want the money to be sitting there earning nothing for yes, so we move it into the non IRA. We can withhold the taxes out of it or not, but it goes into the non IRA account. From there, if you need the money, we have it sent to your bank automatically every month or whatever, right? So it goes from there to there, and then from there into the bank. Now, if you don’t use it, then it’s invested, yeah, still invested, right? Yeah. And if you don’t need it for this much distribution, it stays invested Absolutely. So we want to keep the money invested all the time, if we can, right? And that’s the way we do that. So that’s for the first kind of client, which is somebody that you know is living on the money Absolutely. Now let’s say that you’re not, right. You’re fortunate that the required distribution dollars are you don’t need them, yes, so you still have to take them, right? Yes, still a penalty if you don’t absolutely. But what we do is the same process, right? We have the money come out of the IRA into the non IRA, and it stays invested. It doesn’t go uninvested even for a day, right? And you just never take a distribution from it. You leave it invested and have it hopefully over time, right? And so then, and then, if you ever need it, because you want to buy a car, pay for an expensive vacation or something, it’s available to you, absolutely. But it never went uninvested. That’s the important thing. Okay, so the mechanics of it are, you know, we move the money into a non IRA, and from there you can either get distributions every month or however frequently you want for your cost of living, or you don’t just leave it in there and let it grow as long as possible.

Jeremy Thornton  

Yeah, hopefully, yes. Yeah. That’s the goal. Yeah. Well, you know, in just having a RMD distribution sitting in a checking account doesn’t do you any good if you’re not spending it correct, if you don’t plan on spending it, yeah.

Ken Moraif  

And the other thing also is that with putting it on automatic pilot is really important. Yeah, you know, once, once a client of ours, and we call a client who’s retired a squipper. And for people who don’t know what that is, quipper is the acronym for second childhood without parental supervision. So for our skippers that the we that reached the age of required distributions, what we do is we put it on autopilot, right? So every year we calculate for you, yes, what is your required distribution? Yes, okay, so what’s your required distribution for this year? Yes. And then we decide, okay, you’re, let’s say that you’re living on the money, right? So we want to make sure that you satisfy the, the return, the retired, the required minimum distribution. So we take what it is, we divide it by 12, yeah, and we make sure that that distribution comes out to you as you need it. But putting it on autopilot is very important, because that way you don’t miss it. Yes, right? And so it’s just a form. You sign the form and you authorize whoever you’re working with to automatically calculate that required distribution for you every year and make sure it goes to where you want it to go, withhold taxes or not, right? And the only decision you need to make every year after that is the amount of taxes if you’re having them withheld. What percentage do you want us to withhold for you? Right? Is it 15% you know? Is it 20? Is it 30? We have in some cases where the required distribution is relatively small. All where somebody will say, Well, I want 100% of it to go to the IRS, okay? Because, you know, I’m going to owe $5,000 in taxes, and my already is 5000 so just send it to them. Interesting. So you can, you can say a percentage of your, you know, the amount, and it can be 100% or 10% or 0% and so putting it on autopilot saves having to think about it, calculate it and all that, and make sure that you don’t run awry of the rules. Yes. Now one thing that we think is very important is that you set it up to go off in early December. Okay, if you, if you don’t need the money, have it go off early in December. And the reason why is because that way it’s been invested for the whole year. Oh, yeah, right. And so you don’t want the taxes withheld in January, and you didn’t get to earn anything on those taxes. So we like it to go off in early December, early December, yes. And the reason why we say that is because as good as technology is, and as good as all these things are, you know, inevitably, Murphy’s Law, right? There’s a glitch. Absolutely. Now they don’t have them very they’re very, very infrequent, absolutely, but the penalty is 50% so even if it happens, you know, we, like I said, we work with 6500 families, you know, if one of them goes wrong, oh yeah, to that one client, it’s a big deal. Absolutely, the scope of things, you know, it’s only one big deal. No, it is, yeah. So we don’t want to go wrong for anybody. So basically, we have it go off in early December, yeah. And that way, if, for some reason, you know, there was a glitch in the machine, then we have time to make sure it’s right, even if you have to generate, like a manual, whatever, you know, whatever that may be, right. And over the years, it hasn’t, like I said, it’s very infrequent, but it has happened, yeah. And so giving us that, that leeway, you don’t want to say, have it go off on, you know, December 24 Christmas and New Year’s. And if something went wrong, then you’re, you know, it’s too late to

Jeremy Thornton  

fix it. Yeah, yeah. That’s, that’s an excellent point, yeah, having it set for late December’s in my, in my life, experience, never a great idea to, like, wait till the last minute. I continually wait to last minute for a lot of things, knowing full well I shouldn’t

Ken Moraif  

hacking,

Jeremy Thornton  

oh man, don’t even you mean morning of Yeah, that’s what I do. Correct? Yeah, that’s excellent point. Yeah, having it automatic, you don’t have to think about it, and it’s someone else’s responsibility. I think that’s super important because of all the things that are happening in your life. Yeah, this is you’re not going to be thinking about RMDs coming approaching the end of the year, right? Who’s thinking about RMDs in December? Right? Hopefully you

Ken Moraif  

Well, we are right, yeah, but it’s easy. It’s easy. And, you know, the penalties are draconian and confiscatory. Yes, man, I will. They’re Draco confisc made up of work. Wonderful.

Jeremy Thornton  

Okay, so some other plans to doing it, some What are some common things that you see people do that are avoidable.

Ken Moraif  

Well, I mean, the big one is, is missing. It is it’s not, is not actually taking the required distribution, not being aware of it. You’d be surprised how often it happens. Yeah, you know, now there are you can, you know the IRS is not, like, super cruel, despite what their reputation is, and so if you throw yourself at their mercy, yeah, if you missed it, you know you can, you know, you can get dispensation. We’ve had, we’ve had people that you know have come on as a client. We’re like, oh golly, you missed your required distribution. And they’re like, what’s that? Oh, no, okay, well, yeah, so, so we throw ourselves on the mercy. We find it first, you know, if you find it first, right? Yeah, they do. And then you tell them, hey, I messed up, right? I should have, I didn’t, you know, here it is, and it’s not, like, two years later, you know, then, you know, you might get some dispensation there. They might say, Okay, fine, you know, we get it. You’re old. You forgot your require. You, right? Yeah, there are people too, yeah. Well, that reminds me, actually, there’s a the required distribution, if it’s your first time, there is, and I call it the old person rule, okay? You’re not gonna get mad at me for saying that. I’m sorry. But what they do is, if it’s your first one, yeah, you actually have until April 1 of the following year to do it. That’s very funny, you know? Why? Right? Because old people are gonna screw this up. They’re gonna forget. They’re gonna do something, yeah, and so they give you till April 1 of the following year to do it, right, right, right? So that way, if you forgot, and it’s your first time, you have till April. 1. Problem with that, though, is that if you take, let’s say, let’s say you forgot to do it last year, it’s your first time, right? You have till April, 1 of this year, okay, but you still have to take this year’s as well, right? Yeah, so you’re gonna end up taking two in that, yeah, in the same year. They’re both taxable, so that could push you in a higher tax bracket? Yeah. So one of the strategies that we do look at is, does it make sense if it’s your first time to wait until April 1 again? Because I’m not going to get even if you take both of them, you won’t be in a higher bracket, right? Might make sense to take both of them, sure, in the same year. If it’s going to push you in a higher bracket, then probably you don’t. You want to take it one in one year and one in one year and one of the other. So, yeah, that’s, that’s, I’ve also why, why the first time did they wait till April 1? I know because he’s they think he’s a bunch of old people right, that are going to not know what the heck’s going on. And we don’t need 1000 of them asking for forgiveness. So fine, April 1. Yeah, you got a little runway there. You got three months to figure out the mistake you make,

Jeremy Thornton  

and it’s a brand new thing that you’re starting when, when you’re at that you’ve gone your whole life without having to even think about that. Maybe you’ve been paying your own taxes, all that kind of stuff, right? That’s never a thing you’ve thought about, yeah? And it’s like, oh, by the way, this year, you’ve got to start this new thing. Okay, yeah, I’m sure, I’m sure that rule got started a couple of years after the RMDs were implemented,

Ken Moraif  

and they were like, Okay, no, no, the guy with the cars, he was saying, what about the these people are gonna be in their 70s when we’re doing this? They’re old. They’re not gonna know what the heck’s going on. How do we, how do we make sure we give them a little period there? And so that’s what

Jeremy Thornton  

they did. Yeah, that’s very forward thinking. That sounds very interesting. Well,

Ken Moraif  

ladies and gentlemen, I hope that this video found you healthy, wealthy and wise, and I hope that we helped you to understand the importance of avoiding the embedded ticking tax time bomb in your IRAs and your retirement plans. And so armed with that knowledge, we hope that you will do what is needed to avoid those penalties. I want to make sure to ask you to please subscribe. Please like this. And also make sure that you go to our website, rpoa.com and you find our weekly market alert video where we give you our latest thinking on what’s going on in the markets and interest rates, inflation and all that kind of stuff. I think you’ll love it, and you’ll get a lot out of it. So again, thanks for watching, thanks for listening, and we’ll talk soon.