Required Minimum Distribution
The Required Minimum Distribution (RMD) is the amount you must withdraw from a traditional Individual Retirement Account (IRA), SEP IRA, or other qualified accounts when you reach age 72. The previous age for the Required Minimum Distribution was 70.5 years, but it was increased in 2019 with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE Act). Individuals who turned 70.5 in 2019 had to follow RMD, but those who turned 70.5 in 2020 could wait until age 72 to take their RMD.
Whether you have one IRA or 10 separate IRAs, the IRS will look at the total amount of your qualified accounts to determine your annual required minimum payment. Your RMD can be taken from one IRA or from multiple qualified accounts. You simply need to meet the dollar requirements set by the IRS.
Death Benefit Rider Strategy
Some IRA owners do not plan to access the funds in their IRA, other than the RMD. Instead, they plan to leave most of the IRA to beneficiaries as an inheritance. This can be accomplished by using a guaranteed death benefit rider linked to a fixed insurance contract.
A guaranteed death benefit rider costs an additional annual fee. In exchange for your fee, you will receive a guaranteed base interest rate.
Let’s say you have $300,000 in a traditional IRA, and you never plan to use those assets to live in retirement. You place this money into a fixed insurance policy with a contractual death benefit rider that guarantees 5% growth. The funds will grow and accumulate at that rate every year. This strategy allows you to take your RMDs while preserving the total initial amount of your IRA for your listed beneficiaries and heirs. The growth must exceed your RMDs.
You may have to pay taxes on insurance purchased with IRA funds, depending on whether you are using pre-tax or post-tax money. Consult a trusted financial advisor or accountant first so you know what to expect.
A RMD calculator can help you determine if this strategy is good for you. If this seems like a viable option for your investment goals, the sooner you start this strategy before you turn 72, the better. Your initial investment could grow by 5% annually before you are required to take your RMDs.
Maximizing Your RMDs with Life Insurance
Another creative strategy to maximize RMDs is to use the annual amounts to purchase life insurance or annuities. If you qualify for life insurance, this would be the preferred option as the death benefit will pass tax-free to your listed beneficiaries. It also leverages your money by allowing you to purchase a policy that pays out much more than the premiums you pay into it.
Determine the after-tax amount of your RMD. Then purchase a life insurance death benefit with that amount as much as possible. Term life insurance is a low-cost option, but it will either expire at the end of your term or require increased premiums if you have a renewable policy. Whole life insurance functions on its own if you qualify. You pay a single premium, and then the policy remains in effect for your lifetime, passing on to your beneficiaries upon your death.
Flexible Premium Insurance
If you are not eligible for life insurance, the same strategy can be used to purchase flexible premium fixed insurance linked to the policy. A flexible premium means you can add more money to the policy. This strategy for flexible premium insurance is a very effective way to use your RMDs. It should be noted that the death benefit will not pass tax-free to your beneficiaries, unlike life insurance.
Don’t
You should feel pain when you have to take the required minimum distributions (RMDs) – there may be insurance solutions that fit nicely into your comprehensive estate plan.
Source: https://www.thebalancemoney.com/annuity-rmd-strategies-145980
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