Ed Slott: What Retirees Need to Know About Required Minimum Distributions

Key Concepts

• Required Minimum Distributions (RMDs): Minimum amounts that individuals must withdraw annually from certain retirement accounts, typically starting at age 73.
• Qualified Charitable Distributions (QCDs): Direct transfers of funds from an IRA to a qualified charity, which can offset RMD income.
• Roth Contributions/Conversions: Contributions made to or conversions of traditional IRA assets to Roth IRAs, which grow tax-free and are not subject to RMDs.
• Backdoor Roth: A strategy to contribute to a Roth IRA for individuals whose income exceeds the Roth contribution limits.
• Tax Brackets: Ranges of income taxed at different rates.
• Tax Deferred Growth: The ability of investments to grow without being taxed until withdrawal.
• Secure Act: Legislation that changed RMD rules, including the requirement for most beneficiaries to withdraw inherited IRA assets within 10 years of the original owner's death.

Timing of RMDs

Investors have until December 31st to take their Required Minimum Distributions (RMDs) for the current year. The decision of whether to take RMDs earlier or later in the year depends on individual circumstances and preferences.

• Waiting until year-end: This strategy is often beneficial if an individual plans to utilize Qualified Charitable Distributions (QCDs). By taking the QCD first, it can offset the income from the RMD, potentially reducing or even eliminating the taxable RMD amount. This approach allows funds to continue growing tax-deferred for longer.
• Taking RMDs early in the year: Some individuals prefer to take their RMDs in January to get them out of the way and avoid the stress of remembering them later. This is a personal preference and a psychological choice.
• Market timing: Attempting to time the market with RMD withdrawals is generally not advised and is unlikely to be successful.

First-Time RMD Takers and Delayed Distributions

First-time RMD takers have the option to delay their initial RMD until April 1st of the year following the year they turn 73. However, Ed Slott advises against this in most cases.

• Consequences of delaying the first RMD: If an individual delays their first RMD until April 1st of the following year, they will be required to take two RMDs in that subsequent year (the delayed first RMD and the current year's RMD).
• Potential exceptions: Delaying the first RMD might be advantageous if the individual anticipates significantly lower income or has substantial deductions in the year they would have to take two RMDs, which could absorb the increased tax liability.
• General recommendation: For most individuals, taking one RMD per year, even if it means taking the first distribution before the April 1st deadline, results in a lower RMD amount each year and a smoother tax bill over the two-year period.

Reducing RMDs and Tools Available

A primary concern for many investors is how to reduce their RMDs. While Roth contributions and conversions are effective strategies, they are most impactful before RMDs begin. Once an individual is subject to RMDs (typically starting at age 73), the available tools are more limited.

• Qualified Charitable Distributions (QCDs): This is the most significant tool for reducing RMDs once they have started. QCDs allow direct transfers from an IRA to a charity, which can offset the taxable income from the RMD.
• Other deductions: Certain business deductions or losses that flow through to an individual's tax return can also help reduce taxable income, but these are not specific RMD reduction strategies.
• Ineligibility of RMDs for Conversion: A crucial point is that RMDs themselves cannot be converted to a Roth IRA. Once an RMD is taken, it is considered taxable income, and those funds can be used for any purpose, including contributing to a Roth IRA (if earned income is available) or paying taxes on other conversions. However, the RMD amount itself cannot be directly converted.
• Conversions before RMDs: Ed Slott strongly advocates for making Roth conversions before RMDs begin. This is because any amount converted is taxed at current rates, which are generally lower than future rates, and the converted funds will then grow tax-free and be exempt from RMDs.
• Satisfying RMDs before converting: If an individual has multiple IRAs, they must satisfy their RMD obligations for all of them before they can convert any remaining balances.

Roth Contributions and Earned Income

If an individual is still working and has earned income, they can contribute to a Roth IRA, even if they are of RMD age.

• Using RMD funds for Roth contributions: Once an RMD is taken and taxed, the resulting funds are considered regular money. If the individual has earned income, they can use these funds to make a Roth IRA contribution.
• Contribution limits: Roth IRA contributions are subject to annual limits. For those who exceed these limits, the "backdoor Roth" strategy can be employed. This involves making a non-deductible contribution to a traditional IRA (which has no income limits) and then converting it to a Roth IRA.

Contrarian Thesis: Accelerating RMDs

Ed Slott presents a contrarian view that individuals should not necessarily wait to take RMDs when required and may even benefit from accelerating them in certain situations.

• Rationale: This thesis is based on the belief that current tax rates are historically low and that future tax rates are likely to increase due to rising national debt and deficits.
• Low Tax Brackets: If an individual's RMD only pushes them into a lower tax bracket (e.g., 12%), Slott argues they should consider taking more than the minimum RMD to utilize these lower rates. By doing so, they can maximize their income within these lower brackets and avoid paying higher taxes on that same income in the future.
• Multigenerational Planning: The Secure Act mandates that most inherited IRA assets must be distributed within 10 years of the original owner's death. This shorter window means that accumulating large IRA balances can lead to significant tax bills for beneficiaries. Therefore, strategic withdrawals and Roth conversions during the owner's lifetime can help reduce the overall tax burden across generations.
• "Always Pay Taxes at the Lowest Rates": Slott's core principle is to always pay taxes at the lowest available rates, even if it means paying taxes when they are not strictly required (e.g., by taking more than the RMD).
• Early Roth Conversions: For individuals not yet at RMD age (e.g., age 60), Slott recommends starting Roth conversions to move assets out of traditional IRAs at current low tax rates, especially if they have large IRA balances that will eventually be subject to higher taxes or the 10-year distribution rule for beneficiaries.

Conclusion

The discussion highlights the importance of strategic planning around RMDs. While QCDs offer a way to reduce RMDs once they begin, the most effective approach to minimizing future tax liabilities involves proactive Roth conversions and contributions before RMDs are required. Ed Slott's contrarian view emphasizes the potential benefits of accelerating withdrawals and paying taxes at current low rates to avoid higher taxes in the future, particularly in light of the national debt and the implications of the Secure Act for multigenerational wealth transfer. The key takeaway is to view retirement planning not just on an annual basis but as a long-term, multigenerational strategy focused on paying taxes at the lowest possible rates.