Annuity RMD Strategies
Many people are annoyed by the Required Minimum Distribution (RMD) rules, and really don’t need the money or want to pay the additional taxes. The law is the law, so compliance is not a choice. Because of this fact, there are some annuity strategies that can address your eventual RMD issue. Some you might be familiar with, and some might be new to you, but it’s important to know all of your options in order to properly choose your specific RMD strategy.
Required Minimum Distribution
The acronym “RMD” stands for Required Minimum Distribution. This is the amount of money that you have to remove from your traditional IRA (or qualified account) when you reach the age of 70 ½.
Whether you have one IRA or ten separate IRAs, our friends at the IRS are going to look at the total dollar amount of your qualified accounts in order to calculate your RMD annual payment. You can take that Required Minimum Distribution (RMD) from one IRA, or from multiple qualified accounts, just as long as the IRS dollar requirement is met.
Whether you need the money out of your IRA or not, the IRS is tapping you on the shoulder to “remind” you that it’s time to start paying your fair share of taxes.
An Annuity Death Benefit Rider Strategy Provides Principal Protection and a Lasting Legacy
Some IRA owners don’t ever plan on accessing that money, except for the pesky RMD. They want to leave the bulk of that asset to their beneficiaries. They want, in essence, to leave a legacy. This can be accomplished by utilizing a contractually guaranteed death benefit rider attached to a fixed annuity. Here’s how that strategy would work:
Let’s say you have $300,000 in a traditional IRA, and you never plan on needing that asset to live on in retirement. If you placed that money in a fixed annuity with a contractual death benefit rider that guarantees a 5% growth, then the $300,000 will grow and compound by that amount every year. When you take your RMDs, the 5% death benefit growth will offset the dollar amount of the Required Minimum Distribution (RMD). The sooner you start this strategy before you turn 70 ½, the better because the $300,000 will be growing by an annual 5% before you are required to take your RMDs.
This offset strategy allows you to take your RMDs while keeping your initial IRA total dollar amount intact for your listed beneficiaries and heirs.
A Stretch IRA Strategy Is IRS Approved and Allows Your Heirs Continual RMD Payments
If structured properly, RMDs can be taken by numerous generations (spouse, children, grandchildren). This will provide a legacy income to your heirs while lessening the tax liabilities over time. You don’t need an annuity to stretch your IRA, but a fixed annuity does work well with this strategy because it fully protects the principal from market volatility, and provides contractual guarantees.
Don't Qualify for the Protection Life Insurance Affords? Buy an Annuity Instead
Another creative strategy to maximize the Required Minimum Distributions (RMDs), which you have to take, is to apply that annual dollar amount to a purchase of an annuity or life insurance policy. If you can qualify for life insurance, this would be the first choice because the death benefit would pass tax-free to your listed beneficiaries. You figure out what the after tax dollar amount would be from your RMD, then buy as much life insurance death benefit with that as possible. Term life insurance is the most efficient and lowest cost choice available, and would maximize the dollar amount applied.
If you do not qualify for life insurance, you can use the same strategy to buy a flexible premium fixed annuity which has a guaranteed death benefit rider attached to the policy. Flexible premium means that you can add money to the policy. This annuity strategy is also a very efficient way to utilize your RMDs, but the death benefit does not pass tax-free to your beneficiaries as life insurance does.
So the next time you start getting perturbed about having to take your Required Minimum Distributions (RMDs), there might be an annuity solution that could be a nice fit to your overall legacy plan.