When does 70 ½ equal 2?

A picture!

Since a reader asked for pictures, here is this week’s photo and a question for you.  What is the furthest away license plate that you have seen driving near home?


Yes, you are correct, I got a picture of a license plate from Truk of the Federated States of Micronesia right here in Minnesota.  Truk is in the Pacific, north of Papua New Guinea and SE of Guam.  Anyone seen one from farther away near your home?

When is 70 ½ equal to 2?

We will be discussing RMDs here – Required Minimum Distributions.  RMDs are what the government requires for you to generate taxable income (and, likely, taxes!) on the untaxed income you put away in your IRA/401(k)/etc.  At some point (70 ½) they require you to take money out (or for most of us, we need to take money out…)

Remember that No Surprises Retirement’s goal is to help you not have bad retirement surprises.  A key element of many people’s retirement income plans is the use of funds from IRAs/401(k)s, etc.  Frequently those will be rolled into an IRA, so we’ll just use IRA as the example here. As always, please seek professional advice when you need it, because there are some wrinkles with defined contribution plans v. IRAs.

70 ½ equals two when you are required to take two RMDs in the same year!

As it happens, I will (hopefully) turn 70 in one calendar year and then (again, hopefully) turn 70 ½ in the year following.  I was planning to take my first RMD, by April 1st of the year following 70 ½th year (that April 1st thing is the ‘Required Beginning Date’), which is also my 72st year. Confused?  I sure was; it reminded me of algebra class.  Then I remembered a CRPC class I had taken which noted that in some cases two RMDs may need to be taken in the same calendar year!  Yikes, that has the potential to affect the taxation of Social Security benefits in the RMD year as well as Medicare premiums in the following year!

I went to my friends* at the IRS who have this covered.  They have a website that explains it all and it’s easy to understand, mostly.

Here’s a quote from the IRS RMD site (I added the bold italic underline):

“Date for receiving subsequent required minimum distributions

For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.

The first year following the year you reach age 70½ you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.

Example: John reached age 70½ on August 20, 2013. He must receive his 2013 required minimum distribution by April 1, 2014, based on his 2012 year-end balance. John must receive his 2014 required minimum distribution by December 31, 2014, based on his 2013 year-end balance.

If John receives his initial required minimum distribution for 2013 on April 1, 2014, then both his 2013 and 2014 distributions will be included in income on his 2014 income tax return.”

Now you know! Also, that’s why you should save your year-end statements and Form 5498s’.

Now that we all know the rules, we can plan on when we will take that first required distribution from our plans that require RMDs.  Good news, it won’t be a surprise.

Actions you can take include:

-Review the IRS RMD site and update your retirement income plan.

-Check out Volunteer Match https://www.volunteermatch.org/ for a volunteer opportunity that fits you.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here.

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

*  –  Seriously, I work with a number of IRS people when volunteering and they have all been professional and try very hard to get everything right for the taxpayer.

My daughter said…

My daughter told me that I should add some personal things into No Surprises Retirement to make me more human to my readers. I’m an IT guy who has expertise in insurance, annuities, mutual funds, tax reporting, and tax preparation. What could be more warm and personal than that?

Ok, so to try and warm you up to me some, we did vacation recently in a world capital with excellent public transportation, friendly people, great museums, and interesting food ranging from Korean fried chicken to handmade (in a window so we could watch!) Chinese noodles. Which capital? Not Ottawa or London, it was Washington DC. We went in November because we find ‘shoulder season’ travel to be uncrowded, generally OK weather (and almost never too hot), and the rates are usually much lower.

Since going to Bonchon for the Korean fried chicken in DC, I have seen a couple of articles on Korean fried chicken and am waiting for it to arrive here in the heartland. (p.s. – the spicy was SPICY.)

RIP – Retirement Income Plan

Failing to plan is planning to fail (old saying). You should have a retirement income plan (RIP) well prior to retirement and you should maintain it in retirement, because changes happen that can affect your plan. I drafted my initial plan when I was 59, even though I was (and still am) a few years out from retirement.

In my opinion, a ‘good’ RIP covers all the sources of retirement income you (and spouse, if any) will receive, shows them year by year, lets you know if they adjust for inflation, and compares them to a desired budget amount to let you know if you need adjustments. A ‘perfect’ RIP would also make inflation adjustments.

This episode of the blog will cover the RIP. A future episode will cover the other half of the equation, budgeting. Note – another name for the RIP might be retirement income cashflow because it shows you the flow of income cash over the years.

Sample RIP spreadsheet(s) – free!

I put a simplified version of my RIP spreadsheet out on Google Drive for you to download and modify to personalize as needed. I included Excel and Google Sheets versions (the Excel is a little nicer but Google Sheets software is free). Copy and paste this link:
into your browser (I primarily use Chrome) and you should be able to see them and download. Let me know at nosurprisesretirement@gmail.com if you have a problem.

TANSTAAFL* – The RIP will require work on your part!

The work:
-go to SSA.gov and get an updated ‘Your Social Security Statement’ for your Social Security income inputs.
-use an RMD calculator to calculate the RMD’s you’ll have to start taking at 70.5, but subtract out any funds from RMD’able accounts that you will take out prior to 70.5 Here’s a pretty good one from Schwab. You can also search ‘rmd calculator’.
-if you have a pension and/or annuity, figure out when you’ll be taking it and what the amount will be.

Use those numbers to complete the ‘Income Components’ tab of the RIP spreadsheet and enter the first year prorated amounts in the initial year.

Some of you may not be as familiar with Excel or Google sheets and may want your start year to be other than 2020. Two solutions; find a friend who can help or find an Excel or Sheets class at your local library or online. If you’re not a DIY’er on these things, a trusted financial professional most likely has retirement income planning software to use for your personal situation.

Actions you can take include:

-Develop and/or update your retirement income plan

-Don’t forget about your retirement activity plan – reach out to a friend and re-connect, especially now in the holiday season

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here https://nosurprisesretirement.com/2017/07/09/first-blog-post/

Questions, comments, or suggestions for retirement surprise areas you want to know more about?

-Leave a comment
-Use ‘Contact’, above, to send an email.
* – TANSTAAFL – There ain’t no such thing as a free lunch.