[00:00:38] Andrew: Welcome, listeners, to another action-packed episode of Your Wealth & Beyond. I’m your host, Andrew Rafal, the founder and CEO of Bayntree Wealth Advisors. And we do this podcast for a simple reason, to help retirees and business owners and those climbing the retirement mountain really arm you with the information you need to make sound decisions to build your retirement and then decumulate those assets in retirement so that you have the income that you need along the way. And today is the second part of our three-part series regarding a very fun and sexy topic which are required minimum distributions from your retirement account. In episode one, if you didn’t catch it, you can go back to the last episode where we go through the basics of required minimum distributions, the important dates, the deadlines, the amounts you’ll have to pull from, really just breaking down the mechanics of it.

Today’s episode we’re going to dig in deeper and talk about some of the strategies that you can look at to reduce or minimize the required minimum distribution from your retirement accounts. And when I say minimize that, that means really one thing is positioning and helping you keep more of the dollars that you were deferring while you contributed to these accounts keeping more of those dollars in your pocket and less in the hands of your business partner, Uncle Sam. So, there are different ways in how you can construct these types of plans and again, everything is today about education. Don’t take from what we say of one strategy and go run with it before talking to a licensed advisor, a CPA, but really look today to start getting your mind going that there’s things you can be doing especially if you are well before 70 ½. It’s never too early to start proactively planning.

[00:02:39] Andrew: So, again, the quick high-level when you think in terms of required minimum distributions when you turn 70 ½ the government requires based on a life expectancy table for you to start withdrawing up specific amount from your retirement accounts. Now, the one thing that we talked about in the last show is that if you have multiple IRA accounts they do allow you to aggregate those and pull out the minimum distribution from one of them, from a combination of them, but you don’t have to pull them out separately. If you have a 401(k) account or 403(b) account or 457, a TSP, you have to pull those out and they’re treated as their own. So, kind of think of them on their own island. So, a lot of times it gets confusing.

So, first tip to help reduce your mandatory distributions is if you are still working and you’re 70 ½ and you’ve got a 401(k), you’d want to start thinking about this prior to turning to 70 ½ but one thing that you may be allowed to do and it’s going to be based on your 401(k) plan rules but let’s say you’re at the position. You’re 69, you’re working, you’re planning on working full-time for another couple of years, and let’s assume you have $0.5 million in an IRA account and you have the good fortune that when you turn 70 ½ you’re really not going to need the funds that are going to be required to pull out and that amount will be approximately almost $19,000, about $18,250. So, if you’re working and you have a 401(k) plan, one item that you may want to look at is does your plan allow you to roll your outside IRAs and roll them to the 401(k) plan?

[00:04:35] Andrew: So, one of the main benefits there is if you took that $0.5 million and you move them into your 401(k) plan and you did that before 70 ½ or the year you’re turning 70 ½ then if you are still working full-time and there are certain restrictions on this role which we can get into if you have questions but if you’re the owner of the business or if there’s family involved in the business and you own more than 5% then you’re not able to take advantage of this. But those of you that are working, if you roll that IRA into the 401(k) right now, you would not have to pull out your mandatory distributions from your 401(k). So, what you’ve done there is you’ve essentially saved over $18,000 of income falling down to you. If you’re working and collecting Social Security, you may be at the 24% or higher tax bracket so think of the power of that.

Now, the one reason you may not have heard of this is that your advisory firm or CPA may not know about it but also if they’re managing your assets and now you move them to the 401(k) they may not be able to get that management fee on it. So, I know this doesn’t relate to a lot of you who are in your late 60s and still working but if you are, you definitely want to understand how that can fit in. So, if you eliminate your IRA, you move it to the 401(k), you’re eliminating the mandatory or minimum distributions. Now, once you separate from service then you’re going to have to start taking out the required minimum distribution so at that point you can roll the money back over to IRAs, a combination, whatever strategy that fits your bill. So, that is an important caveat for those of you that are working. A second strategy to reduce your eventual required minimum distributions is utilizing an HSA or health savings account and funding it with withdrawals from your IRA.

[00:06:39] Andrew: So, first and foremost, the HSA in our world and the advisory world we look at that as the optimal type of retirement account. It offers the trifecta of tax deductions, tax deferral, and if utilized for healthcare and other benefits when it comes out, it’s tax-free. So, it’s the triple crown of retirement planning accounts. Now, in 2018 the maximum amount that you can allocate to an HSA as a family is $6,900. Those that are older than 55 can put away another $1,000, $7900, and individuals it’s $3,450. $3,450 is the limit and then an extra $1,000 if they are over 55.

So, if you’ve got an IRA and you want to fund your HSA account, well, a fantastic way to do that is to take money out of the IRA. You would have to be over 59 ½ to make this strategy work. So, let’s say you’re 60. Let’s say you took out the full $7,900 so normally that $7,900 would flow through and you pay taxes on that as ordinary income. But because you’re contributing the $7,900 to the HSA account and that’s a tax deduction, it’s a wash. So, what you’ve done now is you’ve been able to fund your HSA. You’re reducing your IRA and pulling money out in a sense and paying no taxes on it and then by reducing your IRA now and funding the HSA, in the future, you would have less money in your IRA because you withdrew it. You’re positioning that now into the HSA that will continue to grow tax-deferred and, of course, there are no mandatory distributions on the HSA. And of course, when the money comes out for medical and other aspects, prescription drugs, paying your Medicare premium, it comes out tax-free.

[00:08:41] Andrew: So, that is a wonderful way for you to take money from an IRA and reposition it into the best retirement account out there, the retirement account on steroids which is the HSA. So, listeners, if you qualify for funding in HSA I don’t care if you’re going to use IRA money or not, you’ve got to look at ways on how you can maximize that and put the most money you can into that. If your advisors are not talking to you about it, you’ve got to look at this. Inside of the HSA, there are investment vehicles. Most of the time they’re pretty vanilla type of mutual funds but it’s not like that money inside there doesn’t have a chance to grow. So, that’s strategy number two is withdrawing some of your IRA to fund an HSA account.

A third option and this is one that we’re working and rolling up the sleeves on a daily basis and working with clients as we build out their financial plan and their tax minimization plan is Roth conversions. So, what are Roth conversion is, is the ability for an individual to take money that they’ve been deferring, money inside of an IRA and they got a tax deduction when they put it in. It’s been growing tax-deferred and then when it is withdrawn as a distribution, it will be taxed as ordinary income. So, where the Roth conversion can work really well especially in a year where somebody retires and their income drops precipitously. Let’s say they’re making $150,000 of income and now they step away and they’re not making any income and they have a small pension and then they have some after-tax money to live off of or maybe some rental income. So, now is an opportune time for that individual to look at what would a conversion cost to position from the pretax IRA, convert it meaning you’re taking the money, you’re going to position it into the Roth, but you’re going to pay the taxes along the way.

[00:10:38] Andrew: Meaning, if somebody converted $50,000 of their IRA, that $50,000 would be taxed like you took income or that would be taxed like you took a distribution from your IRA. So, although you didn’t get the money, you reposition it to the Roth, that $50,000 will still flow down. So, one of the things we can look at with the Tax Cuts and Jobs Act is that the standard deduction has doubled. We can look at somebody’s income versus the money that they’re putting away and understanding what their taxable consequence will be by putting $30,000 or $50,000 and converting it to the Roth. So, what we can ideally show is that you can potentially pay a lot less taxes on that conversion today than what it will be taxed at later when you have to start withdrawing that money because of the required minimum distributions.

When you position that money to the Roth, inside of the Roth the money continues to grow tax-deferred. When you pull that out, the interest and the earnings and the monies that you put in are tax-free. Now, there is a caveat. You do have to wait. Your Roth IRA has to be enforced for at least five years. Now, it doesn’t mean that the conversions every time you put money in starts another five years but that’s one thing to remember. And the other item is if you’re going to do a conversion, you really want to look at that Roth as one of the last buckets to pull from because you want to get the power of compounding the tax deferral within the account. Otherwise, you’re just paying taxes on something and then not reaping the benefit. So, a lot of times what we’ll do is first we look at how much it will cost for the individual to convert so we look at the pain today and then we can look at well how much will that reduce their mandatory distribution in the future so the benefit later. And with that way, we can really run the gamut to see how much they want to pay today in taxes and then making sure that they have the money to pay the taxes is the other important component.

[00:12:40] Andrew: What we’ll also do then is look at the Roth of more of that longer-term planning. Maybe you want to take more risk in the Roth and that way that may be some of your investment strategies and allocations that are more equity-based, more high beta, more going to have the volatility which should bring you the reward if you hold on. So, those are just some things that we can think about. You don’t have to be over 59 ½ to do a conversion but you have to really look at it and understand where your income is, what your deductions are, and there may be a year or two that you are starting a business and you are going to be profitable in year 3 but you’ve got two years where you’re showing a loss. Well, this is an opportune time, business owners, for you to look at trying to minimize your down-the-road taxes on that IRA or 401(k) and working with your trusted team discussing what would a conversion look like especially with the lower tax brackets, the higher standard deductions. And if your income went from X all the way down to a very low number, think you’re missing the boat if you’re not really looking at that and seeing how it fits into your overall long-term planning. So, that is the third strategy is the Roth IRA conversion, very, very important there.

A fourth one and this is for those of you that are over 70 ½ but those that are getting close you can prepare for it. So, one of the things with the Tax Cuts and Jobs Act, as the standard deduction doubled and that’s $24,000 for married filing jointly, if you’re over 65 it’s an additional $1,300 for each individual husband-and-wife so it’s $26,600. So, for a lot of people, they’re not going to itemize anymore, and itemization takes into account your interest on your mortgage, your property taxes, your medical, and your contribution and donations to charities.

[00:14:35] Andrew: So, we still want to give but the key is if you’re giving and you’re using the standard deduction, you may not qualify for any benefit for you on a taxable basis. So, one thing to think about and finally the government made this law in stone at least for now but it’s called the qualified charitable distributions and in the show notes we’ll have a white paper on this that you can click on to walk you through how it works. So, the qualified charitable distribution allows you to donate a portion of your required minimum distribution directly to a charity to a foundation. It has to be a qualifying charity, goes directly from the IRA to the qualifying charity. They allow you to do up to $100,000. So, what happens, in this case, is that you’re able to donate these monies from your mandatory distribution and that money that went to the qualifying charity does not count as taxable income. So, the real value here and whether you’re giving $50,000 a year or even just $3,000 a year if you have certain charities you want to give money to and you have an IRA that you have to take out your mandatory distributions, well wouldn’t it behoove you to have that money that you want to donate, have it come from the IRA mandatory distribution, go directly from the custodian to the charity and in that case that money that otherwise would’ve went down to you, you would’ve gotten been taxed on that and then you would’ve donated it from your savings account which is fantastic but you wouldn’t have gotten a tax deduction on it. So, now in this example we can, if we wanted to do $5,000, you can direct where that goes. That qualifies against the amount the government requires that you pull out. You’ve given to the charity and in a sense, you’ve gotten a tax deduction on that money because you’re not paying taxes on that $5,000 which let’s say that saved you over $1,000.

[00:16:36] Andrew: A couple of caveats. You have to make sure that money goes directly from the custodian to the charity. That custodian again whether it’s Fidelity, TD Ameritrade, Schwab, the big companies have certain forms and they’ll send that out. Some of the insurance annuity companies it’s a little bit more difficult and also more difficult in the 401(k)s to do these types of transfers. So, that’s why an IRA gives you a lot more flexibility. So, that allows you to qualify in charitable distribution. That allows you to reduce the amount of taxes that you’re going to pay in your mandatory distribution to donate money to a qualifying charity that means something to you and to still get a benefit from it even though the Tax Cuts and Jobs Act had lowered that. So, that is the qualified charitable distribution. If you have questions on how that fits into your strategy, do not hesitate to reach out to us at questions@bayntree. We can talk through it specifically on your situation and help you make good decisions.

The last strategy, the fifth strategy, that we can look at and again it’s all in relation to when you retire but we think in terms of, I mean, we just did a wonderful episode on Social Security the benefit of delaying, maximizing your benefit. So, if you retire in your mid-60s, one strategy that really works in favor of you if you lived to your current life expectancy is to delay your Social Security benefit. By delaying the benefit and turning that on and collecting at 70, you get the maximum amount, the 8% increase each and every year. Also, that Social Security benefit amount will go when you pass away to your surviving spouse if it’s higher. So, we’re also protecting the surviving spouse. And in the meantime, to bridge that gap, rather than do Roth conversions, if you need money to live because you don’t have it coming from Social Security, well, now what we utilize are the IRAs and we take distributions from the IRAs in conjunction with some of your after-tax accounts let’s say and we’re getting income to live while we’re waiting to take out Social Security later.

[00:18:42] Andrew: So, by pulling out the IRA now, we’re going to pay some taxes on that but by then having the ability because of that bridge to have your Social Security delay you’re maximizing Social later, you’re minimizing your future required minimum distributions because you’ve obviously started withdrawing money from the IRA earlier than if you had taken Social now you may not have the need for the IRA distribution and thus you’re kicking the can down the road. So, this is where the proper planning and guidance isn’t about waiting until your 68 or 69. The proper time to plan and look at what an income plan and a tax strategy and laying it all out is to look as early as possible. We work with our clients even in their mid-50s to start gauging out what these type of income numbers will look like if they retire at 65, at 67, at 68. So, you really want to be proactively planning to help eliminate and reduce the potential and eventual ticking tax timebomb that many of us have.

So, those are five strategies that we have utilized with our clients to help reduce the amount of minimum distributions in the future and as you can see it’s the one strategy for one person may not be right for the other. So, if you want to reach out to us, have a candid conversation, just shoot us an email, click on the Contact Us. We also can get you a copy of one of my two books, Climbing the Retirement Mountain: And Getting Safely Down the Other Side. That book is full of tips and strategies on helping you build the right retirement plan. And then the other book, The Heartful Retirement, which is really more of aligning the purpose of retirement, what it will look like along with the financial security of what retirement will look like. At Bayntree, we say, “You dream. We plan.” That’s our tagline and that’s what we’re here about.

[00:20:40] Andrew: So, hopefully, you found today’s episode and the supporting documents of value. If you want to have specific conversations with us, just let us know. Thanks so much. Please forward this podcast on to anybody that you think would benefit from learning on how to reduce their mandatory distributions. Happy planning, everybody. Andrew Rafal signing off. We’ll see you soon with our last episode of mandatory distributions and, in this case, it will be what do you do when you inherit an IRA retirement account, what are some of the things that you can do, and things to avoid when inheriting retirement money. Thanks again, everybody.

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Thank you for joining me for today’s episode of Your Wealth & Beyond. To get access to all the resources mentioned during today’s podcast, please visit Bayntree.com/Podcast, and be sure to tune in later this month for another episode of Your Wealth & Beyond.

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Investment advice is offered through Bayntree Wealth Advisors, LLC, a registered investment advisor. Insurance and annuity products are offered separately through Bayntree Planning Group, LLC. Bayntree is not permitted to offer and no statement made during the show shall constitute legal or tax advice. You should talk to a qualified professional before making any decisions about your personal situation.