As a law firm owner, your financial independence hinges on how well you manage your retirement savings. One critical aspect you cannot afford to overlook is Required Minimum Distributions (RMDs). Missing an RMD deadline could cost you 25% of your withdrawal, a potentially hefty penalty. In this comprehensive guide, we’ll break down everything you need to know about RMDs—what they are, when to start, and how to avoid common mistakes.

What Are RMDs?

RMDs, or Required Minimum Distributions, are mandatory withdrawals you must take from certain tax-deferred retirement accounts once you reach a specific age. These accounts include:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k)s

The primary purpose of RMDs is to ensure the IRS eventually collects taxes on these accounts, which have grown tax-deferred during your working years.

Why Should Law Firm Owners Care About RMDs?

Failing to take your RMDs on time results in a significant penalty—25% of the amount you should have taken. Suppose your RMD is $20,000 and you miss it. You could face a $5,000 penalty. That’s a steep price to pay for an oversight.

Additionally, large forced withdrawals can push you into a higher tax bracket, increasing your federal and state taxes, taxes on Social Security benefits, and even Medicare premiums. Therefore, proper planning is essential to protect your hard-earned savings.

When Do You Need to Start Taking RMDs?

RMDs kicked in at age 70.5 for the longest time. However, if you were born between 1951 and 1959, your RMDs now start at age 73. For those born in 1960 or later, the starting age is 75. Your first RMD must be taken by April 1st of the year following the year you turn the required age.

Calculating Your RMD

Calculating your RMD may seem complicated, but it’s essentially a formula involving:

• Your account balance on December 31st of the previous year.
• Your life expectancy factor, as determined by IRS tables.

For example, the initial life expectancy factor at age 75 is 22.9. This essentially means you would divide your account balance by 22.9 to determine your RMD.

Key Exceptions and Considerations

There are some notable caveats and exceptions related to RMDs:

1. Still Working Exception: If you are still working and own less than 5% of your law firm, you may delay RMDs from your 401(k) until retirement. However, this exception does not apply to IRAs.
2. Roth IRAs: These accounts do not have RMDs during your lifetime, providing extra flexibility in retirement planning.

Advanced Strategies to Minimize Tax Impact

1. Qualified Charitable Distributions (QCDs): If you’re 70.5 or older, you can donate up to $100,000 annually directly to a qualified charity from your IRA. This satisfies your RMD and excludes the donated amount from your taxable income.
2. Roth Conversions: Gradually convert funds from your traditional IRA to a Roth IRA to reduce the amount subject to RMDs. This strategy is particularly effective during lower income years to avoid bumping into a higher tax bracket.
3. Preemptive Distributions: Start taking withdrawals before RMDs are required to spread out your tax liability over a longer period.
4. Beware the Double Distribution Trap: If you delay your first RMD until April 1st, you will have to take two distributions within the same tax year, potentially increasing your tax bill.

Taking Control of Your RMD Strategy

To avoid costly mistakes, it’s essential to:

1. Know Your Deadlines: Keep track of when your RMDs are due.
2. Plan Proactively: Work with a financial planner to develop a personalized strategy that aligns with your goals.
3. Consider Automation: Spread your RMDs throughout the year by automating monthly withdrawals.
4. Explore Tax-Saving Strategies: From QCDs to Roth conversions, plan ahead to minimize your tax impact.

Secure Your Financial Future Today

Managing RMDs is more than a compliance issue; it’s about making smart financial decisions to protect your wealth. At The Lawyer Millionaire, our mission is to help law firm owners like you build and secure a robust financial future. Schedule a free consultation with us today to create a tax-smart retirement strategy.

Resources:

• Schedule a Call with Darren
• Wurz Financial Services
• The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence by Darren Wurz
• LinkedIn: Darren P. Wurz
• The Lawyer Millionaire Podcast and Book Club
  To connect with podcast guests and other law firm owners, discuss these topics further, and access our quarterly book club, join our LinkedIn Podcast and Book Club

Transcript:

Darren Wurz [00:00:01]:
Missing an RMD deadline could cost you 25% of your withdrawal. Welcome to the Lawyer Millionaire, where we deliver financial planning and business strategy insights for ambitious law firm owners so you can enjoy more time, more abundance, and less stress, even if you’re still growing your practice. As a law firm owner, your retirement savings are a critical part of your financial independence. But did you know that once you reach a certain age, the IRS forces you to start withdrawing from those accounts? And if you don’t do it right, the penalties can be steep. In today’s episode, we’re tackling the ins and outs of RMDs required minimum distributions, what they are, when to start, and how to avoid mistakes.

Intro [00:00:48]:
We are on a mission to help lawyers and law firm owners maximize wealth and achieve financial independence. Welcome to the Lawyer Millionaire with Darren Wurz from Wurz Financial Services.

Darren Wurz [00:01:02]:
Did you know that failing to take a required minimum distribution or RMD on time could cost you a penalty of up to 25%? That’s right. Imagine building a solid retirement nest egg only to lose a chunk of it simply because you missed a deadline. And here’s the kicker, though the government isn’t going to remind you. Oh, wish they would. If you’re a law firm owner with tax deferred retirement accounts like a traditional IRA or 401k, understanding RMDs is critical not just to avoid penalties, but to protect your hard earned savings. In today’s episode, we’ll break down exactly what RMDs are when you need to start taking them, and smart strategies to minimize their impact. So what exactly are RMDs? Let’s start with the basics. RMDs are mandatory withdrawals that you must take from certain retirement accounts once you reach a certain age.

Darren Wurz [00:02:01]:
These accounts include your IRAs, your SEP IRAs, simple IRAs, and 401s, among others. Here’s why they exist. These accounts grow tax deferred, meaning you haven’t paid tax on the money yet. The IRS allows this during your working years. But once you hit a certain age, guess what? Uncle Sam wants his cut. And that’s where RMDs come in. They’re essentially the government’s way of ensuring that they get to collect tax. Okay.

Darren Wurz [00:02:37]:
One important exception to note here though. Roth IRAs. As we mentioned in a previous episode, I think it was the last episode or a couple ago, very recently, Roth IRAs do not have RMDs during your lifetime. So if you’ve been contributing to a Roth IRA, you’ve got some extra flexibility and A great reason why it’s great to have a Roth IRA and maybe consider some Roth conversions, as we have discussed. Now, you might be thinking, okay, I get it, but why should I care about RMDs right now? Well, the stakes are high. If you miss an RMD deadline, The penalty is 25% of the amount you should have taken, and that’s down from 50%. I think the Secure act changed that. And let’s you know, for example, if Your RMD is $20,000 and you forget to take it, you’re looking at a $5,000 penalty.

Darren Wurz [00:03:34]:
That’s a pretty hefty price for an oversight. And for law firm owners like you, if you’ve built up a significant amount in your tax deferred accounts, these RMDs can be a real tax bomb. A large forced withdrawal might push you into a higher tax bracket, increasing not only your federal taxes, but your state taxes, the taxes on your Social Security benefits, even your Medicare premiums. Without proper planning, this can erode your retirement savings and, and disrupt your financial independence. But don’t worry, we’ve got some great information for you on how to plan ahead and minimize the impact. All right, so RMD start based on when you were born. It used to be 70 and a half. It was 70 and a half for the longest time.

Darren Wurz [00:04:25]:
If you were born now, if you’re born between 1951 and 1959, your RMDs kick in at age 73. If you were born in 1960 or later, the starting age is 75. And who knows, maybe it’ll be more, maybe it’ll be long, you know, further out in the future when people are living to 150 or whatever, your first RMD has to be taken by April 1st of the year following the year you reached the required age. Okay, so now that your head’s spinning, say you turn 73 this year, your first RMD isn’t due until April 1st of next year, but then your second one is going to be due by December 31st. So if you wait until April 1st, you might have to take. Well, you will. You’ll have to take two RMDs in that following year, and that could increase your tax bill. So even though they let you wait until April 1, you might not want to.

Darren Wurz [00:05:24]:
Now, I think I know why they let you wait. Because if you’re working with a cpa, then your CPA can tell you, hold on, you turned 73, you forgot to take your RMD. Your CPA is preparing your taxes and they can be like, holy crap, you need to take your rmd. Right. So they’ve built in a little bit of a grace period. All right, how are your RMDs calculated? Well, it’s simple in theory, but it’s a little bit tricky. The formula is based on your account balance on December 31st of the previous year divided by your life expectancy factor, which is basically how many years the average person at your age is expected to live. And that’s outlined in IRS tables.

Darren Wurz [00:06:12]:
Okay. So they have. They have these factors to determine how much to take. And I’m just going to look it up right now while we’re on the show. Okay. And that determines how much you take. Now, it increases each year. It’s designed to spread out your withdrawals over your lifetime.

Darren Wurz [00:06:35]:
But what I have seen is that your accounts tend to grow initially faster than you’re taking these RMDs. And so what ends up happening is at a certain point, the amount catches up and then the amount starts growing. And so then the amount that you’re taking increases. And that can have an impact, a pretty big impact on your tax situation. Now, there is a little carve out for if you’re still working, even though you’re supposed to take RMDs at 73 or 75, whatever it is, if you’re still working and you own less than 5% of your law firm, you may be able to delay your RMDs from your 401K until you retire. This is called the still-working exception. But it only applies to employer plans. It doesn’t apply to IRAs.

Darren Wurz [00:07:28]:
Okay, so, but, and the other thing too is it’s less than 5%. So, you know, most of you listening to this show, you’re not necessarily a less than 5% owner. So even though you’re still working, if you’re more than 5% owner, RMDs are still going to apply to you. Okay. Oh, here I found it. 22.9. The initial life expectancy factor is 22.9 at age 75.

Darren Wurz [00:08:05]:
So the fraction is 1 22nd or 1 23rd basically would be your RMD at that age. And then that life expectancy factor goes down as you age. Right. So as you get closer to life expectancy. Right. All right, now that we’ve covered the basics, let’s get into some advanced strategies to minimize the tax impact. Okay.

Darren Wurz [00:08:29]:
One strategy you might consider is called a qualified charitable distribution or QCD. And we’ll talk more about these on our next show. So Stay tuned. If you’re 70 and a half or older, you can donate up to $100,000 annually directly to a qualified charity, directly from your IRA or your tax deferred retirement account. Not only will this satisfy your RMD if It’s under that $100,000, but it also excludes the donated amount from your income, which is even better than a charitable deduction, though it’s not even a deduction, it just excludes it from your income entirely. This is a win win for those who are charitably inclined. Next idea. Roth conversions.

Darren Wurz [00:09:21]:
This is a way to proactively kind of plan for these RMDs. We talked about this last time. Gradually converting funds from your traditional IRA to your Roth IRA can reduce the amount that will be subject to RMDs. This strategy works best if you plan it during your lower income years so you don’t bump yourself into a higher tax bracket. Okay? And we talked a lot about that last time. So you want to think carefully in that window between after you retire potentially, or when you have to take these RMDs, you know that you start looking at Roth conversions. Actually, you should be looking at Roth conversions every year no matter how old you are. Because if you have fluctuating income, this creates an opportunity for you to take advantage of those years where your income is lower.

Darren Wurz [00:10:16]:
Pay the tax on, do a Roth conversion and pay the tax now at a lower rate and get some money over into that tax free bucket. Another tip for you, start taking distributions maybe before RMDs are required. By spreading withdrawals over a longer period of time, you might be able to avoid large tax triggering distributions later on. Finally, beware of the double distribution trap. And I, we just mentioned this, but I’ll mention again, if you delay your first RMD until the following year, you’re going to have to take two RMDs in that initial year. So the year you turn 73, like I said, you can, you can delay it until April 1st, but if you do, then you have to take two in that taxable year. All right, so what can you do right now to avoid costly RMD mistakes? Know your deadlines. Number one, plan proactively.

Darren Wurz [00:11:16]:
Work with a financial planner or someone who understands the unique needs of law firm owners like us. Together we can help you develop a personalized strategy that minimizes your taxes and aligns with your goals. I’ve got a lot of clients that are taking RMDs, so we manage this for a lot of people. And you know, you can spread it out over the year. You can take your RMDs on a monthly basis, kind of automate it. I’ve seen that a lot of times. That’s the easiest thing to do. Or you can take them later on in the year.

Darren Wurz [00:11:51]:
I have one client, he takes, takes them in two chunks. Half his RMD at the beginning of the year and half mid mid year. And he lives off of that and his Social Security and that works pretty well for him. Or maybe what you do is you donate charity like we mentioned, a qualified charitable distribution or something like that. Maybe you don’t need the money and it doesn’t have to come out of the market by the way. You can keep the money invested, you just have to change what account it’s in. So maybe you take your rmd, you throw it over into your taxable account and then you let it grow. There one thing I gotta caution you on, you can’t take your RMD and then use that to make a Roth IRA contribution or traditional IRA contribution.

Darren Wurz [00:12:39]:
You can’t do that. Oh, that it were. So explore tax saving strategies like we mentioned, the QCDs, the Roth conversions, and start early with those. You know, don’t wait until it’s RMD time. Start planning early about Roth conversions and maybe even planning withdrawals strategically ahead of time. And if you’re ready to take control of your RMD strategy, of course we would love to help you. Let’s make sure your retirement is on solid footing. Now this might just sound like another tax rule, but here’s the truth.

Darren Wurz [00:13:14]:
This can make a huge. You know, getting this right is a. Is a really big deal and it can make or break your retirement strategy. If you’re a law firm owner, these required withdrawals from your retirement accounts aren’t just about compliance. It’s about being smart with your taxes and your timing and protecting the wealth that you have worked so hard to build. Why give more to Uncle Sam than Uncle Sam needs, right? So let’s talk about that here at the Lawyer Millionaire. Our mission is to help law firm owners like you create wealth and build a secure financial future. RMDs are a critical part of that picture.

Darren Wurz [00:13:52]:
Without a plan, you can have unnecessary taxes, penalties, and all of that can eat into your savings. So let’s take the stress out of RMD planning. Schedule a free call with me today at thelawyermillionaire.com or jump down in the show notes. My calendar link is there and I’ll walk you through how we can help you create a tax smart retirement strategy. Don’t let your RMDs catch you off guard. Take the first step towards financial confidence. This has been the Lawyer Millionaire podcast. I’m your host, Darren Wirtz.

Darren Wurz [00:14:27]:
Thank you so much for joining me on this journey to expand your business, maximize your profits, and secure your financial future. I can’t wait to connect with you again next time. Until then, take care and keep pushing forward.

Outro [00:14:48]:
Thank you for listening to the Lawyer Millionaire. Click the Follow button below to be notified when new episodes become available. This content has been made available for informational and educational purposes only. This content is not intended to represent investing or tax advice. Always seek the advice of a qualified investment or tax advisor with any questions you may have regarding your own financial circumstances.