How to Plan for RMDs From Different Retirement Accounts

On this episode of The Long View, Ed Slott, president and founder of Ed Slott and Company, shares his advice for tax planning in retirement at year-end, new rules for inherited IRAs, and how to deal with RMDs from different retirement accounts.

Here are a few highlights from Slott’s conversation with Morningstar’s Christine Benz.

How to Plan for RMDs From Different Retirement Accounts

Christine Benz: Sticking with my punch list of things that we want people to knock out at year-end 2024, let’s talk about required minimum distributions. Maybe you can talk about how much latitude people have to pick and choose where they go for those distributions. If I have various types of accounts, how much leeway do I have to pull all from one and leave another one alone?

Ed Slott: Well, with IRAs, you can take your RMD. But let’s say even if you have several IRAs, the tax law considers your IRAs as one; even if you have 10 IRAs, they’re considered one IRA. And you have to calculate the RMD for each one. But the actual RMD can be taken from any IRA or combination of IRAs as long as you hit the minimum that you’re required to take out. But let’s tie this back into something you were talking about. You were talking about the tax-loss harvesting. And you mentioned getting some long-term capital gains out at 0%. Remember you were talking about that? That almost never happens. I know if you look at the tax tables, I’m looking at them right now. Well, you can go married filing joint for 2024, $0 to $94,050, 0% long-term capital gain rates. But the tax law works a little strange in that area purposely. Ordinary income cuts into that first. When you take an RMD—and here’s the connection back to that 0%—that RMD cuts it. Let’s say that the RMD is $100,000. Well, now you’ve just wiped out your 0%. None of your capital gains will be taxed at 0%. Most people end up at 15%. I only mentioned that because ordinary income, like Roth-conversion income or RMD income, eats up the lower capital gain, basically the 0% bracket in a lot of cases. But you can take the RMD from any place, any IRA you wish.

Why RMDs From 401(k)s Are Different From IRAs

Benz: How about if I have a company retirement plan? I’ve got assets in that. I have to take an RMD from that, separately from the IRA, right? They can’t be commingled from the standpoint of RMDs?

Slott: That’s exactly right. The IRAs are the only ones that have this aggregation rule, actually 403(b) plans have that same aggregation rule, which means you could take the RMD from any type of similar account in the basket of IRAs. But you can never satisfy an RMD from one type of account, like an IRA, from taking from a 401(k). The RMD from the 401(k) has to be taken only from that 401(k). Even, let’s say you had three 401(k)s from other employers or whatever, and they were all subject to RMDs, probably not likely, but let’s say you had that. You would have to take the separate RMD from each 401(k), even though you have a basket of three 401(k)s subject to RMDs, you can’t do the same thing you can do with IRAs and aggregate them because they’re separate company plans. The RMD has to be taken from each one separately. So, by taking a lot from a 401(k), you can’t satisfy what would have come out of the IRA.

Here’s an error because of logic, and any time you try to mix logic with tax law, that’s when errors happen. This is a common theme. You have a husband and wife. They both have IRAs, very common, right? And they’re both subject to RMDs. Maybe the husband says, “You know what, I have a much larger IRA. Why don’t I take the RMDs for both of ours, mine and my wife’s, from my IRA to kind of even the balances.” You can’t do that. Well, you can do that. But remember, when anybody asks this, and I get this from advisors a lot, too, because here’s where logic comes in. The client or even the advisor might say, “Well, what’s the difference? It goes on the same return. The income will be exactly the same.” And that’s right. But here’s what actually happened. The I in IRA stands for Individual Retirement Arrangement, actually, Individual Retirement Account. Not joint. There’s no such thing as a joint IRA. So, if the husband took both his and his wife’s from his own IRA, he more than satisfied his RMD from his own IRA. But now the wife is subject to a penalty for not taking her RMD. She can’t get credit even though it goes on the same tax return. And when the smoke clears, they’re reporting the right income. But technically, she didn’t take her RMD and can be subject to a penalty of 25%, or 10% if they catch it in time. That’s a common mistake we see.

Changes to Penalties for Missed RMDs in 2025

Benz: I wanted to ask about those penalties, Ed, because this is part of Secure 2.0 where the penalties are lower now than they once were. They were, what, 50% of what you should have taken but didn’t. Let’s talk about that because I believe some tax experts think that people are more likely to get hit with these extra taxes if they miss their RMDs.

Slott: I may be one of those people and we don’t know yet. See, when it was 50%, I believe even the IRS felt that that’s crazy. That’s egregious. We’re not going there. We’re not taking 50% of somebody’s IRA because they missed an RMD. And they would waive, they have the power to waive that penalty just because somebody didn’t take the right amount of RMD or RMD at all. And for just about any excuse—the dog ate my homework—as long as you file Form 5329 and put an excuse there, they waive the penalty. In all my years, I only saw one case where the penalty was paid. And that’s because in an oddball case where an advisor didn’t know the tax rules, asked IRS to assess the penalty. IRS said, “Well, OK, if you insist.” And they asked them to assess the penalty because they didn’t understand, without getting too complicated, the old stretch IRA rules. They had a client that was subject to RMDs, a beneficiary on the stretch IRA, and they missed the first three years. So, they filed, they paid all this money, tens of thousands for the filing of a private letter ruling to ask the IRS, “If you will let us pay the penalty for the first three years, can we still get the stretch IRA?” And the IRS said yes. You asked the wrong question. If they asked the right question, say, “do we have to pay the penalty?” They would have said no. That reminds me of that.

You got to ask the right question. That reminds me of this movie. Oh, the Pink Panther with Peter Sellers. Remember those nutty movies? And he’s Inspector Clouseau. And he comes across a man, he’s walking down the street with a dog, and he says, “Does your dog bite?” And he said, “No, my dog doesn’t bite.” And he goes to pet it, and the dog eats his arm off and it’s blood splattering everywhere. And he says, “I thought your dog doesn’t bite.” He says, “That’s not my dog.” He asked the wrong question. So, it’s the same thing. So that was just one oddball thing. IRS actually said all you did was miss RMDs that didn’t affect the stretch situation. They didn’t know the rules. That’s the only time I ever saw the penalty assessed. And that’s because the taxpayer through their advisor asked IRS to assess it thinking that would help, but it didn’t. Anyway, that’s when it was 50%. Now they lowered it all the way down to 25%, which almost nobody will pay, or even 10% if you catch it in two years and pay the penalty. But still, even with all of that, you still have the ability to have it waived.

This gets back to the original question: Will IRS be as liberal and generous about waiving the penalty on an RMD not taken or if you didn’t take the right amount? It’s too soon to know because we haven’t seen anything on this. But I think they kind of will be because they do help seniors. And this is who it applies to—people 73 and older who are being asked to calculate, and it gets complicated. They have a few accounts. Maybe they didn’t take the right amount, or they had that husband and wife issue that I talked about, or their advisor gave the wrong amount. I saw a situation recently where the investment—I forget what custodian it was—but it’s one of those situations where they moved their IRA from one custodian to another. And when they entered the new information—this is why you have to keep track of this stuff—at the new custodian, they put the person’s birthday as the date they moved the money rather than the date they were born, which was 66 years earlier, so they were way off on RMDs. So, I think IRS understands that if you have a legitimate reason why you had the wrong calculation.

I wasn’t aware of the rules, I’m 73 years old, I didn’t know. That’s good. My advisor made a mistake. I went to the bank. The bank, the custodians are supposed to give you your RMD if you ask for it, but there’s no requirement for them to give you the correct one. You don’t know if they’re giving you the right amount or with the aggregation rule we talked about before, they don’t know you may have taken the right amount from some other IRA, and now you don’t have to take from this. This is why you have to look at all these IRAs. Or you had a medical situation or a death in the family. So any of those reasons are fine, but you have to ask for a waiver by filing Form 5329 and attaching it to your tax return. And I think for most of these cases, if they’re legitimate, good-faith reasons, the IRS, I believe, I don’t know for sure, but being the population of people, seniors, starting this new phase of RMDs, I hope they’ll be more liberal.

And I’ve seen people in my career, even doing tax returns, I remember having a new client one time doing taxes as my first return with him. He was 80 years old, and I said, “What about the RMDs?” “What are those?” he said. I said, “What do you mean, what are those?” This is when it was 70.5. I said, “For 10 years you haven’t taken these things?” “Nobody ever told me,” he said. Well, he filed a waiver. You have to make up the missed RMD and file the waiver, and with a little explanation, which we did and that was fine. It happened on my mother, actually.

Benz: Oh dear. I don’t believe it.

Slott: She had a financial advisor. Remember, I’m a tax advisor. I don’t do investments or anything like that. But it was the end of December, and never do this the last week. Here’s the best tip I can give you. The last week of December, you don’t want to do any of these transactions because anybody who knows what they’re doing at the custodians knows to be off that last week of December, because that’s when everybody hits with RMDs and Roth conversions, and it all hits the fan. Anyway, so this broker of hers called me sheepishly knowing that I specialize in IRAs. He said, “Ed, I don’t know how to say this, but I miscalculated your mother’s RMD and I’m short. I forgot that she got older.” That was such a lame excuse. Well, every year you do get older. And I said, “Don’t worry about it. I’ll file the 50.” Even on the phone, I could tell how relieved he was. Here’s another tip: The makeup distribution, which gets you out of the penalty, you first have to make it before the IRS will waive the penalty. It’s first thing you have to do that you made a corrective distribution. That shows good faith: We caught it, and we made it up. I always have the broker in this case, or whoever it is, take a separate distribution for the makeup distribution. Don’t tie it in with her regular RMD because it’s easier to trace if it’s questioned. Yes, this was her RMD. You don’t have to do it. This is just a practical tip. This is our RMD, and this was a makeup distribution of last year where she was short, something like that.

How to Avoid RMDs Through Roth Conversions

Benz: People love to hate these RMDs. And one workaround is if you can convert some of those traditional IRAs or traditional tax-deferred company retirement plan assets to Roth, then you can avoid required minimum distributions. Can you talk about that, Ed? And I often hear that this is a particularly fruitful strategy in the early years of retirement when maybe your income is at a low ebb because you’re not working, and you may not have filed for Social Security and you’re not yet subject to RMDs. Can you talk about converting during that window of time and the benefits of that and what people should bear in mind if that’s one of their strategies?

Slott: Christine, you know me well enough to know exactly what I’m going to say. I love Roth conversions. I think everybody should at a minimum look at these things. The benefits are off the charts, especially now while rates are low, historically low. We don’t know what they’ll be and the big benefit, obviously, you pay the tax upfront, but the big benefit is no RMDs for the rest of your life and 10 years beyond to the beneficiaries, even other than the Secure Act. I’ve had several clients that converted everything because they couldn’t stand RMDs. “I hate these things,” they would say. “I can’t calculate them. Just convert everything.” And it’s a little more expensive if you convert once you start RMDs because the RMD amount, required minimum distribution amount, itself cannot be converted. And the first dollars out of an IRA are deemed to go toward satisfying the RMD, and that amount cannot be converted. Once that’s satisfied, then yes, you can convert all or any part of the remaining balance for that year, but you paid more to do it because you had to pay tax on an RMD, which couldn’t be converted. So, a better plan is to think more long-term and start earlier and do a series of maybe smaller conversions over time each year using up low brackets, which we have now incredibly low brackets.

And what a great goal it would be to have no IRAs at RMD time. But it’s not for everybody. Not everything I’m saying is for everybody. There are some people who might like to keep some traditional IRAs. For example, maybe they’re using qualified charitable distributions to lower their IRA balance. What a great tax move if you already give to charity, IRAs are the best assets to give. So you might want to keep some IRAs to do your charitable giving with or maybe you’re anticipating heavy medical expenses. IRAs would be a good source to take down and get somewhat of an offsetting deduction. But other than those two scenarios, you’d like to really empty out IRAs before RMDs begin and especially before they may go to beneficiaries. Because now with this 10-year rule, Congress, what they really did with the Secure Act, they made IRAs the worst possible asset to inherit. It’s absolutely the worst asset. It was always complicated before the Secure Act. But at least the beneficiaries put up with all the complicated rules because they got the benefit of the long extension deferral, the stretch IRA, to extend distributions over their lives 30, 40, 50 years, having all that growth extended and the tax deferred.

That isn’t the case anymore. Now all of those funds must come out by the end of the 10th year after death for most beneficiaries other than mainly spouses. So Roth IRAs work beautifully for beneficiaries because not only are there no RMDs during the person’s lifetime, which gives you total freedom to do whatever you want for the rest of your life and keep your income low. Even if you need the money, it’ll be tax-free. But you’re in control. You can take the money out on your terms. But even under the 10-year rule, beneficiaries who inherit a Roth IRA don’t have to touch it till the end of the 10th year after death. There are no RMDs, like if they inherited traditional IRAs in certain cases for years one through nine of the 10 years. So, the beneficiaries can keep that growing, building, and compounding for the full 10 years, absolutely income tax-free. And that may work out really well for beneficiaries who may be in their own highest tax bracket in earnings years. I just had a seminar last week where an older woman came up to me. She was, I guess, around 80. She said, “Ed, should I convert?” And I said, “Well, it depends who you’re doing it for. If you’re doing it for yourself, the cost to pay tax upfront, given, sorry to say, your shorter life expectancy may not be worth the benefit. But if you’re doing it for the kids or grandkids, it’s a great estate planning move. The Roth is a great asset to leave to kids.” And what she said was, “Well, I’m doing it for myself. Forget the kids, let them pay, you know, whatever it is. You answered my question.”

So she was going the other way. But if you want to look long term, paying the tax now is really not only a great tax deal, but what you do when you pay tax on a Roth conversion before RMDs begin, you control your own tax rates. You can’t do that once RMDs begin. You’re locked into taking a certain amount that might push you into a certain bracket. It’s out of your control. When you convert, say, in your late 50s or early 60s, like you set up until retirement, you can say how much you want to pay. You control your own tax bill. You can say, well, I want to use up the 22% bracket or something like that. So you can control how much tax and to keep the tax bill as low as possible but do it over many years. That’s the big benefit of Roth conversions, you being in control of your tax planning.

Benz: That’s helpful. I’m glad you addressed the inherited IRA thing, because I sense there’s mass confusion there.

Slott: I’ll tell you why there’s mass confusion, because if you inherit an IRA in these just recently released IRS regulations, if you’re inheriting traditional IRA, which we know is subject to tax, from somebody who already began taking RMDs, then you must take RMDs for years one through nine of your 10 years. On a different schedule based on your old stretch IRA. It’s so complicated. With Roth IRAs, it doesn’t matter who you inherit from, you can inherit a Roth IRA from somebody 100 years old. Now you might say, but they have already passed their required beginning date. No, under the tax law, anybody who dies with a Roth IRA is deemed to have died before reaching RMDs, because Roth IRAs during your lifetime are not subject to RMDs. That’s a great benefit. And that’s why there’s confusion.