What Is RMD and Why Is It Important to Me?

If you start to consider retirement planning, you will inevitably run across three important letters: “RMD”. Understanding what they mean and how they can affect you is important. Here’s a basic primer to help:

Why is it called RMD? RMD stands for “required minimum distribution”. Just to make things more complicated it is sometimes referred to as MRD, which is simply “minimum required distribution”. Regardless of the sequence of those letters, they represent the IRS rule on the minimum annual taxable distribution that needs to be withdrawn from a tax-deferred retirement plan such as a traditional IRA, 401(k), etc.

When do I have to start taking RMD out of my own IRA or 401(k)? The age at which you need to begin taking RMD has changed over recent years. Currently, the age is 73, but if you were born on or after January 1, 1960, your RMD age will be 75. There are some exceptions to taking RMD, primarily for those who are still working in companies that they do not have an ownership interest in.

Is RMD different if I inherited the IRA from someone else? Yes, the rules are substantially different when you inherit an IRA from someone else. Generally speaking, you have to fully distribute the inherited IRA and pay the taxes by December 31^st of the year that includes the 10^th anniversary of the original owner’s death (Short answer-you have 10 years to completely withdraw the inherited IRA). You may also have to take required minimum distributions in years 1 through 9 as well, but only if the original owner was required to take RMD before his or her death.

How is RMD calculated? RMD is calculated annually. There are two moving parts: the value of your IRAs on December 31^st of the previous year and your age this year. The value of all of your IRAs on December 31^st of the previous year is divided by the number corresponding to your age in the IRS tables. The result is your RMD for the current year.

When do I have to take RMD during the year? The only requirement is that you fully take your RMD by December 31^st of that year. You can take it all at once or spread it out over the year as long as the total amount distributed by the end of the year is equal to or greater than your RMD number. The reason I underlined “greater than” is because RMD is simply the minimum amount you need to take. You can always take more if you have the need or the desire.

Do I have to take RMD out of each of my IRAs? Generally speaking, no. Although you typically will receive a statement from your financial institution showing what your RMD is from each IRA, you can usually satisfy it from any one or more of your IRAs. It’s the total amount of RMD withdrawn that the IRS is interested in, not that the RMD comes out proportionately from each IRA.

How does RMD affect my taxable income? The effect can be substantial. Every dollar withdrawn from the IRA is considered a dollar of taxable income, just as if you earned it by working. Most people will set up withholding, both Federal and State of Michigan, for each withdrawal they make so taxes are addressed immediately upon withdrawal. One way to minimize the tax impact of RMD is through the use of a Qualified Charitable Distribution (QCD). That IRS rule allows people over 70 ½ to donate directly from the IRA to a charity without the donation being considered taxable income. The limit on a QCD for 2025 is $108,000, and you don’t have to itemize to take advantage of this rule.

This is a basic description of what RMD is and how it works. The rules are extremely complex so don’t just rely on the statements above in your tax planning and RMD withdrawals. Give me a call or talk to your tax preparer before making any important decisions related to withdrawals from your own tax-deferred retirement plans or any IRAs that you inherit.

Fun fact: As we head into the heart of August and late summer, you might be interested in knowing that the month of August is named after the Roman Emperor Augustus Caesar. It marks the last month of summer (ugh!), which is often referred to as the “Dog Days of Summer” with the most hot and humid weather of the season.

Who Should Know About Your Net Worth

I recently came across Dave Ramsey’s “Millionaire Theme Hour” on YouTube. For those of you who don’t know, Dave Ramsey has a very popular financial planning show, and the “Millionaire Theme Hour” is a segment where “common” people announce their net worth and then answer Dave’s standard questions to explain how they managed to save so much on relatively normal incomes. I went back to review a recent segment to write this piece and up pops a picture of Glenn and his wife from Oklahoma City, Oklahoma with the clear heading that their net worth is $5.5 million. The 8-minute segment is inspirational as Glenn explains the saving and discipline it took to create a net worth that large, but I can’t help but think it is a bit dangerous. In my mind, when it comes to finances, it’s best to keep things close to the vest. Your view may differ, and I respect that, but let me explain my concerns.

First, just to be clear, a person’s “net worth” is the total fair market value of all of a person’s assets (e.g., bank accounts, real estate, investments, retirement plans, etc.), MINUS all outstanding debt. If someone owned nothing but a $300,000 house with the mortgage paid off and a bank account with a $20,000 balance, then their net worth would be $320,000. If that person still owed $100,000 on their mortgage, then their net worth would be $220,000 ($300,000+$20,000-$100,000). It’s natural to work toward increasing your net worth, and crossing the one-million-dollar mark is a big accomplishment, as are all the subsequent million-dollar thresholds.

My first problem with sharing this information concerns relationships. You never know how someone will react once they compare what you really have with what they guessed you have. I’ve seen children drastically change expectations regarding all sorts of things after they become aware of the large amount of wealth their parents have accumulated. The same holds true of friends and more distant relatives. I’ve also seen friends and relatives assume a much larger net worth then really exists. Money, or more importantly, information about someone’s money, can change people.

My second problem concerns fraud. We all know there are some terrible people lurking out there just looking for opportunities to cheat, steal or otherwise swindle. Announcing an impressive net worth on the internet, along with your picture and the city you live in, seems to me to be a recipe for problems. These days that is enough for a determined crook to figure out exactly where you live and who you and your family members are. In my book, that’s not a good idea.

I’ll share with you a personal change that has occurred for me over the span of my professional life. I worked very hard and built two successful businesses that I still love to work in. I have been rewarded in immeasurable ways by having wonderful client relationships. I will tell anyone who asks about the personal rewards of a holistic estate planning/financial planning practice. But our net worth will always stay private. In part, the more my wife and I have accumulated, the less we seem to care about what we’ve accumulated (isn’t life funny!).

I certainly don’t want strangers to know what I make or what I’m worth. When I financed my last car because of the great interest rate, I had to fill out a loan application. I put down the absolute minimum income level and net worth I thought would get me accepted for the loan instead of the actual numbers. Who knows where that information ends up?

Someday I’ll probably share all the details of our investments and net worth with my two sons, but the goal there will be to make sure they help my wife with it after I’m gone. They’re both in finance and my wife has little interest in investing. But other than that future event, I’m not comfortable sharing much information in that regard. I think it can do more harm than good.

Side Note: Please don’t confuse what I stated above with not keeping clear records with instructions and details on assets. We all should strive to make things as easy as possible for our loved ones if something unexpected happens. Once you are gone, your family should have a clear roadmap concerning all of your finances.

Fun Fact: YouTube was created in 2005. The first video uploaded on YouTube was titled “Me at the Zoo” and was posted by co-founder Jawed Karim on April 23, 2005. Today there are 4.3 billion videos on YouTube. It is estimated that every second, 6 hours of videos are uploaded to YouTube.

I Found a Bubble While Getting an Oil Change

Last week the computer system in my car “reminded” me (under no uncertain terms) the I was due for an oil change. The timing was perfect as I was literally driving to drop off my car at the dealership for just that scheduled maintenance. My service guy—we’ll call him Heinz—is the greatest. He treats me like a king (I highly recommend finding a service guy who is a big golfer and then dropping off a sleeve of balls every service visit 😊).

Heinz and I were shooting the breeze a bit while he was waiting for a service ticket and out of the blue he asked “the question.” Well, first he said: “Hey Jeff, can I ask you about something unrelated?” My mind always goes completely blank for a millisecond when I hear that question. Then, I check my watch to start billing my time (kidding). I replied the only way I could to the world’s greatest service guy: “Sure!”

Here was the question: “If a person’s crypto (digital currency) takes off and they suddenly have $30 million, what should they do?” Well, I admit that I didn’t see that coming…at all!! My first reply was a question back: “Has that happened to you, Heinz?” “Oh no,” he said, “but me and my friends have been investing in crypto for a long time, and we just started wondering about that question.”

Pretend you hear a big buzzer, and there is graffiti dropping from the ceiling right now, because that, my friends, is how you start to identify an asset bubble. When people who are investing in an asset start to daydream about the perceived problem of what to do with the $30 million they will make off that asset, then you know the asset is starting to stoke irrational excitement that will create irrational behavior. When they think it is important enough to run it by a financial advisor who is getting his oil changed, your eyes should pop wide open.

“Bubbles” are best thought of as a period when the value of an asset rises substantially above its fundamental value. Trying to determine something’s fundamental value is a challenge in and of itself, but when it comes to a bubble, I’m reminded of the famous quote from Supreme Court Justice Potter Stewart in the renowned Jacobellis v. Ohio obscenity case. Justice Stewart acknowledged the difficulty in defining the word “pornography,” but famously stated “I know it when I see it.” The same holds true for me and asset bubbles. It is speculation at its highest level.

There have been many asset bubbles in financial history, one of the first being The Dutch Tulip Bulb Market Bubble in Holland in the 1600s. The rarest tulip bulbs traded for as much as six times the average annual salary in Holland. Needless to say, it ended badly for many who eventually lost it all, probably not long after they were daydreaming about what to do with their $30 million.

Now, I don’t know for sure if crypto is in bubble range, and/or when the bubble will burst if it is. I do know that the bitcoin I inherited from my 86-year-old mother (that still amazes me) has grown in value by almost 75% in the last year. I don’t own enough to start daydreaming, but if I did, I would think strongly about cashing a lot of it in to diversify. As Kenny Rogers famously sang about poker and life: “You got to know when to walk away, and know when to run.”

The stock market also seems to be going nowhere but up in recent months. While I wouldn’t attach the phrase “bubble” to the general market (yet), I would caution you to be ready for a pullback sometime soon. It may not happen this year, but a stock market pull back is and always will be inevitable.

I have a hard time getting my arms around crypto. I think it’s here to stay, but I don’t know how to value it because it doesn’t produce anything I can identify except convenience. That hasn’t stopped Heinz and his friends from piling more and more money into it as it continues its dramatic rise. Sounds like a mistake to me, but I hope I’m wrong because Heinz is a great guy and I know he’s had some health problems so he could use a windfall. If he gets it, my only regret will be that I’ll have to find another service rep who really appreciates a sleeve of golf balls.

Fun Fact: The Dutch Tulip Bulb Market Bubble saw tulip bulbs selling for about 10,000 guilders at its peak. That equaled the value of a mansion on Amsterdam’s Grand Canal at the time. Tulip bulbs were bought on credit under the assumption that when the tulip bulb was sold the loan could be repaid. When a few loans defaulted, everyone headed for the door and the price of tulip bulbs crashed. Since then, history has repeated itself over and over with different assets rising into bubble range, only to come tumbling down to earth.