Required Minimum Distributions (RMD’s) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age. In the year you turn 70 ½ you have until April 1st of the next year to take your distribution. If you do that, you still need to take out a distribution again by December 31st for the current year. Moving forward, you must take your RMD by December 31st each year.
Why are there RMD’s? In a tax qualified retirement account, the government allows you to grow your money tax free. However, Uncle Sam will eventually want their money. That’s where RMD’s come in. Each year there is a minimum amount you need to take and that full amount is taxed as earned income.
What do you do with your RMD’s? Well, many people use them as supplemental income in retirement. Combined with social security and other assets retirees pay their bills, go on vacation and pay for other leisure items. If needed, you can take more than the required minimum distribution. This is just the minimum you have to take.
What happens if you don’t need the distribution? Unfortunately, the “R” in RMD stands for required. I work with many clients that do not need it for income. Typically, the RMD (after paying taxes) is invested back into a taxable investment account. Many of my clients who are doing this tell me the same thing. They say they do not need the income and wish they didn’t have to take it out and pay taxes. This decreases the amount they will leave to their kids, grandkids or favorite charities.
Is there a better way to leave more money? I thought you’d never ask! A popular strategy we often implement is taking all or part of the after tax RMD each year and purchase a life insurance policy. When working with a husband and wife we will use a survivorship (aka second to die) policy. The benefits of life insurance is the great leverage you receive. If you do not need part or all of your RMD, this is a great way to leave more to the people you love!
We can provide a free quote and show you how this type of planning can provide better opportunities. David Prensky, our Life Insurance Consultant can be reached at 443-321-0187 or email@example.com.
IRA distributions and RMD’s are governed by the IRS. Please consult a tax advisor regarding rules and how it will impact your particular situation.