Year-End Financial Moves That Matter: RMDs, Roths & Tax-Smart Strategies

0:00 Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president and financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Thanks for being with us. I'm Chris Boyd. I'm here with Russ Ball. We are both of the AMR team at Wealth Enhancement and got a good show planned for you.

0:43 We're going to talk about some year-end planning issues. It's that time of year, we're in the final quarter of the year, and you can't help but start thinking about the end of the year is approaching. Have I gotten everything, taken advantage of all the things that I can do? We're going to go through a little bit of a list of ideas for you to think about and help you plan for that, ranging from some income tax and income and tax strategies, maybe some thinking about capital gains and charitable giving. There's a whole range of things. Where should we begin, Russ? Well, I know one that's been on our team's mind a lot lately is RMDs.

1:25 Yeah, definitely. This time of year, retirees or actually anyone who has either an IRA and then has reached 73 and older, or an inherited IRA where the original IRA owner was of an age that they had RMDs, you will also have to take a required distribution. This year is different from recent years where the IRS has been cutting some slack when it comes to this. I think they're trying to figure out their own rules on how all this is going to work out.

2:06 Well, I think there's been a lot of confusion for sure about, on the one hand, the new rules from the SECURE Act where the stretch IRA was changed to a 10 -year clock. Originally, people were thinking, well, I've got 10 years. And then there was also some expectation, well, you might also have to take money out during those 10 years. Who's which? So if the person you inherited an IRA from, if they were of an age that they had yet to start their required distributions, their required beginning date, you don't have to take a distribution annually over that 10-year period.

2:51 You can choose to take it if you want to. You can take a little bit each year. You can take a 10th. You can take it all in the first year, all in the last year or whatever, any combination. But if you receive that inherited IRA from the person who died and already started their required beginning date, required distributions, minimum distributions, then you too are expected to continue to take RMDs. Now, how it's calculated is different than what the person who died that you received the IRA from. So it's not exactly the same calculation. And it's not the same calculation you'd use for your own IRA when you reach an IRA, a required minimum distribution date.

3:39 But there is a minimum amount that you have to take. And we could probably do a show on this alone, right? Yeah. But the essence of it is there's a table you look to based on the age you are, the year after the person died that you received this IRA from, you have to start taking distributions. And you look up on this table what the essentially life expectancy number would be. It's not the uniform table. This is the single life table in this instance. And then you take that number. That's the divisor. You take the balance from the prior year end, the age you'd be at the end of the year, and look at what the factor is.

4:26 And you divide the balance by the factor. That's your RMD for this year. And every year after that, you subtract one from that life expectancy number. If that's not simple enough, there's a structure to it. There's calculators out there. If you work with an advisor, they'll help you to figure this out. But custodians will say, well, it's up to the individual to do the calculations. They might give you the ingredients of how to do it. But if you work with a good financial advisor, they'll help you. And they should know the rules. I spend a lot of time going to courses, the Ed Slot Program, and things like that.

5:07 Make sure we're up to date on how these rules work and how to help people. Because these are complicated. It's complex, the idea of how to navigate this. But in any case, if you have an IRA and you're over 73 today, you'll have a distribution requirement placed upon you as well. That one is calculated differently than what I just described. Great. Same idea. But instead of a single life table, you use a uniform table. The uniform table presumes that you're married, presumes that you're married to someone 10 years younger.

5:49 It's OK if you're not married or if you're not married to someone 10 years younger. If you're married to someone more than 10 years younger, there's a different way to calculate it. But for most people, the uniform table covers the range of possibilities. And that gives you the best calculation for how to do this. And you basically have a minimum amount you have to take out. It starts out a little less than 4 % per year. But as you get older, it goes up. We were talking to someone in their 90s. It's around 10%. So it starts off pretty modest but grows over time as a percentage you have to withdraw.

6:30 So this is the time of year. If you haven't dealt with it, now's the time. Some people like to do it monthly. But a lot of people tend to wait till year end to say, oh, I'll take the money when I have to, thinking they'll keep the money invested for the bulk of the year. This year, that would have been a good choice. In a year when the market goes down, it's not. So who knows what's going to happen when you start the year. But we do find that it used to be that people would put this off till December. And we really encourage people to think about doing this a little earlier.

7:11 What's been happening, we've noticed over the last few years, is custodians pretty much universally have this challenge where there's a glut of people taking their distributions at year end. And if you're going to take your distribution, don't put it off till December. Because there's going to be a lot of people pulling their money in December. And the custodians end up getting to a point where they say, well, best efforts. We'll try to get to it. But there's so much coming in that there's a lot of year end activity and things. So it's the final quarter. It's a good time to do it. October, November, let's get to it. Time to take those distributions.

7:51 Yeah. And a couple points on top of that. So if you have IRAs that are, if you're working with us, you might have IRAs somewhere else, a bank, sometimes I've seen CD IRAs, that sort of thing. The RMD applies to those as well. So sometimes your advisor might not know you have an IRA somewhere else that also has an RMD requirement. Yeah. And the way the IRS looks at your IRAs, it doesn't matter if you have five of them at different institutions or one of them at a single place, they think of them all as one IRA. That is to say, if you said, I'm going to take all of my calculated distribution requirements in those five different accounts, you can take it all out of one account, that one IRA account, that's fine.

8:38 It all is considered your IRA. If you prefer to take the appropriate amount from each account, that's fine too. Ultimately, as long as you meet that number, I will put a caveat to that. Don't confuse that notion that all those accounts are connected in a sense with the idea that if you have a 401k or 403b or something like a work plan, that has its own distribution requirement. And each of those might have to be addressed separately. So you don't want to say, oh, I took it out of my IRA. When you have a 401k, you'll need to take the 401k distribution from the 401k and the IRA distribution from the IRA.

9:24 So this is pretty easy, right? Easy stuff so far, right, Russ? It's pretty heavy duty. Oh my gosh. There's all these rules. I will add one more thing going back to the inherited IRAs as well. You might've mentioned this, but that only applies to inherited IRAs that are from someone other than a spouse. Oh, that's a great point. A spouse, that's a really great point. Those circumstances have unique treatment and you don't necessarily have, you have to make some decisions about how you want to handle it. But again, there's questions of, are there age discrepancies? Usually what happens is someone just rolls that into their own account and then it's up to what their age situation is.

10:08 Sometimes though you have someone who's like an older spouse who dies, but a younger spouse who's not yet eligible to withdraw from their IRA, but they might like to have access to that. So there's rules that you got to pay attention to to say, what's the right strategy in this circumstance? That's a great observation. So don't want to have people worried just because they have an inherited IRA that they need to take a distribution necessarily. It's a 10-year rule and those specific rules are for inherited IRAs from someone other than a spouse. Good point. I want to add another complicating factor. Sorry. It's like, how many of these do we have?

10:51 But we talk often about the virtues of a qualified charitable distribution, which is a means of withdrawing from your IRA to give directly to a charitable intention. And it can meet some of your required distribution figures. So let's say for example, you're over 70 and a half, whether you have an inherited IRA or an IRA, you can draw off money from your IRA and have it go directly to a charitable intention and a charitable entity of your choosing, church, alma mater, nonprofit of some kind.

11:44 And you could say, let's say you had a $10,000 required distribution this year. You could opt to say, I want to give $5,000 to charity. I'm going to give it 2x, whatever it is. And you opted to say, that's going to go from your IRA. You fill out a form. It goes from your IRA directly to the charity. And now your required minimum distribution that you have to pay tax on is diminished. Now, you have to do this before you start withdrawing money from your IRA. If you take the $10,000, you still could do a qualified charitable distribution, but it won't diminish how much you have to take out of your IRA because you've already done it.

12:28 But if you do the qualified charitable distribution before, this $5,000 in my $10,000 example, now you only have to take out $5,000. You just saved yourself from having $5,000 of income. You don't get any kind of deduction, but the money that was all subject to tax goes to the charity without any tax, and you didn't have to take it out and pay a tax on it. So it helps your tax planning in that regard. But that's something you want to do again, like ASAP at this point, because again, it has to process before the end of the year, and it's going to get busy.

13:12 So don't delay when it comes to year -end planning for that kind of thing, if you have that in mind. On that topic, I've talked to family members about that as an idea. And they're like, well, no, I like to do my monthly contributions or weekly, whatever it might be to a church or something like that. But then it's like, all right, well, how much do you give in a year to that charity? Oh, it's X amount. All right. So let's do that all in one go as the qualified charitable distribution, and then both the charity and you benefit from that. Yeah. And there's some tax savings for you, because most people don't do a lot of itemized deductions.

13:54 And again, you might get some of that money back when you get the deduction, but all of that money isn't taxed when you do it this other way. So it's, I think, a better approach. That's one of those things that changed this year when it came to the qualified charitable distributions, if you've ever done that in the past, is that it used to not be identified anywhere on your 1099. This year, they did change some of the rules that that will be made note of on your 1099 going forward. All right. What are we thinking about if we have someone come in at the end of the year? Another thing that's a big deal for people to be thinking about this time of year is capital gains.

14:37 They're trying to get a handle on how much capital gain am I dealing with? Is there anything I can do for harvesting losses to mitigate some of that capital gains exposure? Are there funds that you might need to plan for that could have embedded capital gains that they will distribute to you as a fund shareholder? All of these are variables that are worth taking a few minutes to give some thought to and evaluate if there's anything that's a change that you're going to do. Is it a change you want to do now, or is it a change that you can, for example, if you're adding money into stock, sometimes this time of year, we try to be careful about not buying into capital gains in a fund.

15:25 Mutual funds are notorious for capital gains distributions. If you can, that's an example of something to try to avoid. Now, that's a big reason why when we use funds, we try to use more exchange -traded funds because they are better at navigating these capital gains distributions than mutual funds tend to be. Let's not say we don't use mutual funds in our portfolios, but when it comes to this issue, we try to be careful about what we'd use. This time of year is a good time of year to be mindful of those possibilities.

16:07 I want to talk about income tax deferral through work plans and making sure you've maxed out your plan or done whatever you can do in your plan. Yeah. It's a good time of year to check out how much you've contributed to your work plan or to your Roth IRA, your traditional IRA, see where you're at, and try to maximize that before the end of the year. Those numbers change. Those contribution limits change every so often. For IRAs, for those under 50, it's $7 ,000 for a traditional IRA and a Roth IRA.

16:47 For a 401k, it's a little bit more complicated. Another complication, but for 401ks, it's $23 ,500, I believe, for people under. Yeah, $23,500 is the maximum for people under 50. For those over 50, it goes up to $31,000 as the maximum contribution for a 401k or 403b. Then there's this new rule for those between the 60 and 63 where there's this super catch-up contribution. Just within that window, people who are under 401k can contribute up to $34,750 per person.

17:32 Just within that window, that's the highest contribution that is allowed for a 401k. Again, these are rules that get a little convoluted and they change from one year to the next. Don't hesitate to reach out to your financial advisor. Perhaps if you don't have an advisor, you can certainly connect with us. We'll help you navigate some of that. There are some useful tools. Russ, I'm just going to borrow this. We got our handy-dandy resources that have, I don't know if I have that upside down there, all kinds of details where I call it my cheat sheet because it has all the numbers right at your fingertips. You don't have to remember every aspect of it offhand.

18:14 But if you're dealing with some of this, am I eligible to participate in an IRA with a deduction? Am I eligible to contribute to a Roth IRA? Did I make too much? One of the things we haven't talked about, Russ, is the net investment income tax. There are some thresholds for income that can push you into having an additional 3.8 % tax rate on certain kinds of circumstances. Do you want to check on that? Yeah. Basically, if you make over $200,000 as an individual or $250,000 as a married couple filing jointly, there's this additional tax.

19:01 You pay your income tax, then your state income tax. Then on top of that, there's this net investment income tax, which is 3.8%. It's calculated based on what the interest income is. Yeah, your investment income. That can be including capital gains and such. Capital gains, interest, dividends, that was all included in that. So those categories of investment income or of one type or another, there might be an additional 3.8% hit on that if you exceed a certain income threshold, as Russ was saying. So that's another reason why you may want to be trying to max out your retirement plan or contributing to an IRA.

19:50 Your HSA, if you are eligible at work for an HSA contribution, do that. Why not? It goes in tax-free. It doesn't pay taxes while it's in the HSA. If you take it out for healthcare expenses, you don't pay tax. That's even better than a Roth IRA, because it's not taxed on the front end. Take advantage of things like that. So there's a lot of variables that we can go into and different rules for how does a simple IRA work? What's the number for them? But anyway, so depending on what you have, there's things to be considered.

20:31 All right. So you talked about the 62, and there's all that complexity. Did we talk about that or not? For the super catch-up? Yeah. So those rules are new. And man, that's just another number that gets even more confusing. But don't forget if you fall into that age range, there's opportunity there to do a little bit more. What are the ages again? 60 to 63. 63. Another change that this year with the extension of the Tax Cut and Jobs Act into the One Beautiful Bill Act, there's the issue of the SALT tax treatment. And that could affect your tax numbers a little bit.

21:14 I don't know if that requires any year -end planning necessarily, but it does change some of your numbers. And you might have more capability if you have mortgage interest taxes on the state and local level. Depending on how you're paying your property taxes, right? So if you decide to pay, sometimes you get charged in January of following year. So depending on how you pay and when you pay, you could decide, I want to include those this year. If I'm going to itemize, then have those be part of the SALT's deduction up to $40,000 this year. $40,000.

21:55 That's a big difference from the $10,000 that was previously the case. So that could make a difference. Yeah. What about this whole thing with the Social Security? There was this talk in the campaign that Social Security would be tax-free. Well, it didn't work out exactly that way, but you talked a little bit about this, but maybe for those seniors to reiterate some of this. Another big change is the adjustments to the standard deduction. So it's especially high. So it was already higher than it had been.

22:35 Yeah. So what is it? $15,000 now? Yeah. So the standard deduction is up to $15 ,000. Not nothing. That's good. So your first $15,000, you get that deduction. So it's actually $15,750. Oh, that's what it went up to? Yeah. Yeah. Yeah. Okay. So that's for an individual. And that's for an individual. So you can essentially double that for a couple. But if you're over a certain age, you get a little more. And if you're over another age, you get this whole, at least for the next few years, some additional. So how's that all come together?

23:15 So already, if you were over 65, there's an additional $1,600 that gets added to the standard deduction. So if you're married, that adds up to $33,100 as the standard deduction. If you're over 65, just as things were. Before you even got to this new thing, which is temporary, but who knows, maybe it'll get extended after that. Yeah. And this is sort of the workaround for the social security issue. To change the social security taxation required a much more engaged... It needed more involvement to change the Social Security Act or something.

23:57 And it required a different majority or something for the way the Congress could deal with it. So this was their workaround, that it didn't require as many votes to be able to do this. So if you're over 65 now, between now and I believe... Oh, what is it? 2020. I think it's three this year and the next three years. Okay. Is that what it is? Something like that? Yeah, I think that's right. It's 2028. At least for the time being, for those over 65, it's a $6,000 addition to the standard deduction for individuals and $12,000 for couples who are both over 65. Now, if you're married and one person is over 65, you get the $6,000.

24:40 Yeah, there you go. But assuming you're both over 65, I mean... It goes up to $46,700 as the standard deduction for those over 65. Wow. So that's huge. Yeah. Yeah. So these are things that might affect whether you actually even have a tax in that case, right? Mm-hmm. All right. So there's a number of good tidbits as we think about year-end planning. What about some other considerations? This time of year, a lot of times people think about doing a Roth conversion. And we talk about this quite a bit to say, well, let's look at your financial plan. And what we find oftentimes, particularly for people who are near retirement, looking to forecast into retirement.

25:28 We just had this the other day, right? While they're working, they have a 22% or a 24% tax bracket. But when they retire, that tax bracket drops dramatically, at least until they turn on Social Security and their RMDs kick in. Now, so they've got a window where they might have this opportunity to do some Roth conversions. Really, I mean, again, do you think taxes are going to be lower than they are today? I think most people would agree, probably not. The tax code was permanently changed with the One Big Beautiful Bill Act.

26:10 But you and I both know that nothing is permanent when it comes to taxation, right? So with deficits and debts growing, maybe there's a little less deficit from some cutting that's been done. But ultimately, we're looking at some pretty big outspending what's coming in for revenues annually. So if that's going to be the case, you got to assume at some point Social Security is going to run short, have a shortfall in 2032. Medicare, similar story. There's going to be a revision at some point in time. This is a window for people to think about doing some Roth conversion, pay the tax now, choose how much, what bracket you want to do while these brackets are low, while you've got all these great deductions and so forth.

27:03 Use this as a window and an opportunity to decide how much tax you're to pay now versus later when the tax rates might be higher, or you might be pushed into a higher bracket because RMDs, which get bigger each year as a percentage, or because if you're married, but maybe at some point you'll be single because of death, widowed, widower, whatever the right terminology, it could be a situation where your taxes go up dramatically. Use this as a window to get some of that IRA money for people, especially people who have such an abundance, a concentration of wealth in their IRAs.

27:50 Use this as a window to do some converting. Trey Lockerbie And we've been hearing more and more of that with some legacy planning issues as well. I want to leave this money for my kids, but I don't want them to have to pay all this tax after 10 years while they're still working. Roth IRAs don't have those same restrictions as those other inherited IRAs you were talking about earlier. They still have to be taken out within 10 years, but there's no taxation when the income comes out or when the funds come out. Yeah, and Roth conversions can be confusing. So if that's something that you're considering, definitely have us help you model that and see what an optimal amount might be to start with.

28:36 Trey Lockerbie Other things for consideration, do you do charitable giving regularly? Aside from whether or not you're eligible for the qualified charitable distribution, maybe you want to do some bundling of your charitable giving. Again, there's tax-smart ways to do this. If you have appreciated assets, those are an attractive resource to do some of that giving. But bundle some of your charitable giving. Instead of doing so much per year, maybe do a bunch of it in one year so that you get the benefit of the tax instead of a standard deduction. Maybe you can use a itemized deduction by doing some of this planning for when you do your giving.

29:24 If you don't necessarily want to give it all to the charitable intention right away, you can always look at a donor advised fund as a tool, a technique to maybe get the donation and the charitable deduction now, but you can dole it out to the charitable intentions over time if you didn't want to do it all at once. Let's see. What are a few other things? Some regular stuff. If you're a business owner, you might have the ability to say, I'm going to defer that income until next year. Maybe hold on to that invoice or whatever it might be. You might be thinking that way. Maybe you're moving some expenses up to try to get your income lower this year and push income next year and expenses this year.

30:11 Business owners often do that kind of thing. We talked about Roth conversions, Russ, but we didn't talk about mega backdoor. There are some techniques for people who have retirement plans at work that could allow them to do excess contributions above what's considered to be the threshold. Not every plan allows for this and it's a little bit convoluted, certainly more than we're going to get into right now, but a mega backdoor, what do they call that for a Roth contribution for a qualified plan? That's the mega backdoor.

30:52 Then of course there's the traditional IRA contribution, do a backdoor Roth contribution. That again, specific rules. If you have an IRA with a balance, not a good idea. Talk to a professional, make sure they understand these rules and can help you navigate what's a good idea, what's not. These are the times of year when you think about some of those kinds of techniques. Incidentally, we have a great tool, some software that does use artificial intelligence to take a look at your tax return and evaluate are there observations for maybe ideas for where to do something a little differently that might help your tax picture.

31:41 If you need a little bit of a second set of eyes on that, let us take a look at your tax return and put it through some software and see if we can identify any opportunities there. This is often a time of year when people start thinking, gee, I might want somebody different for my taxes. If you're thinking you need a new tax advisor, talk to them now. Whoever that's going to be, have them take a look at this 2024 filing, the one you just did this year, have them take a look at that. See if there's any observations, anything that they might've had to do differently. Make sure that you've had the conversation before the end of the year while there's time to either file an estimated tax or whatever it might be.

32:28 Keep that in mind. If you were told on your tax return you're going to be doing estimated taxes, don't forget to do it. It's not too late. That's a good year-end thing to be talking about. I don't know, Russ. I think we covered a lot, but I'm sure there's other things we should be talking about. What didn't we get to? We talked a little bit about capital gains. We didn't talk a lot about tax loss harvesting. Good time of year to take a look at your portfolios, in your taxable accounts. It's been a little difficult because markets have just gone up, but sometimes there are holdings. Sometimes there are specific holdings. If you've got a lot of individual stocks that have lost value over the course of the year, good opportunity to get some tax alpha there by selling those losers and having that count against your income taxes.

33:23 Yeah. Up to $3,000 off your income by doing so. More importantly, help you with either future gains or this year's gains. Yeah. That's just scratching the surface of the benefits of the tax loss harvesting. The other piece in a different angle is the Medicare and Medicare Advantage open enrollment period is beginning soon. Didn't think of that. Yeah. That's a good point. We're going to be hit over the head with all those advertisements the next month or month and a half or whatever it is. Yeah. Good point that if you are on Medicare, you have a window annually where you can choose to revisit, do I have the right plan?

34:10 There are different approaches to that and we've done shows on this in the past, but I do think there is a virtue if your health has changed or you're having changing health needs, it's worth giving thought to what's the right plan for me given changing health dynamics. Oftentimes people don't want to make changes when they're going through difficulties of one health issue or another, but there can be dramatically different benefits between different plans. It could be worth looking at if you've got the right plan at a given moment in time.

34:51 Yeah. Just on top of that, just to make sure that if you have a Medicare Advantage plan, that your doctors that you usually see are still covered under that plan. Make sure your prescription drugs are covered under your Part D supplemental plan. A lot of things you can look at this time of year and make changes if necessary. Not just yet. I think it's the 15th of October that it begins, but it stretches until December. Another thing to be thinking about is, this is probably not for everybody, but certain times people have stock options available through work and those can often create instances where you get pushed not to a higher bracket necessarily just because of that, but because of the alternative minimum tax.

35:40 We don't talk about that as much as we used to because it's not been as prevalent with, I think it was the Secure Act, but I've lost track of which tax legislation helped to make that a little less prominent, but that's a common instance where people do get hit by the alternative minimum tax. If you have those kinds of circumstances, pay attention to the calculation, have your tax advisor do a run-through of your tax picture. One other thing that I think this time of year lends itself to for year-end planning is, it's a good time of year to revisit things like, who are my beneficiaries?

36:22 Have you updated your beneficiaries? We run into this. It's incredibly surprising how often clients don't update their beneficiaries and they have an ex-spouse or a parent who is long deceased or whatever it might be. It may not always reflect who you want. We had a client in recently whose spouse had passed, a child had passed. Sometimes you need these things updated because of life's circumstances and so there's a need to revise them. Additionally, when it comes to your estate plan, that's another circumstance that has changing dynamics from different life circumstances.

37:11 Things evolve. It's probably a good idea annually to at least take a step back and look at, what is my estate plan right now? Is there anything I'd want to do differently and have an understanding of what that is? We've covered a lot here, Russ. I'm sure we scratched the surface, but I think we did a pretty healthy scratch on that. As you think about these issues, obviously, we're here to help if you need a little helping hand in thinking about your financial planning, your portfolio management. Certainly, it integrates with your tax planning and all the rest of these kinds of issues. Don't hesitate to reach out to us. We're here to be a resource.

37:53 If we can be a help, we'd love to serve you. With that in mind, until next time, everybody, keep striving for something more. Thank you for listening to Something More with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns, or those quality of life issues that make the money matters matter. Whatever's on your mind, visit us at somethingmorewithchrisboyd .com or call us toll-free at 866 -771-8901 or send us your questions to amr-info at wealthenhancement.com. You're listening to Something More with Chris Boyd Financial Talk Show. Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only.

38:38 Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.