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. However, a few annuity strategies exist which may address your eventual RMD issue. Some you may be aware of, others may 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
Required Minimum Distribution (RMD) is the amount of money you must 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 will look at the total dollar amount of your qualified accounts in order to calculate your RMD annual payment. RMD can be deducted from one IRA, or from multiple qualified accounts, just as long as the IRS dollar requirement is met.
Annuity Death Benefit Rider Strategy: Principal Protection, Lasting Legacy
Some IRA owners don’t plan on ever accessing that money, aside from the RMD, instead choosing to leave the bulk of that asset to beneficiaries as a legacy. This can be accomplished by utilizing a contractually guaranteed death benefit rider attached to a fixed annuity.
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. This offset strategy allows you to take your RMDs while keeping your initial IRA total dollar amount intact for your listed beneficiaries and heirs.
If this seems like a feasible option for your investment goals, the sooner you start this strategy before you turn 70 ½ the better - your initial investment will grow by an annual 5% before you are required to take your RMDs.
Stretch IRA Strategy: IRS-Approved, Allows Continual RMD Payments Across Generations
If structured properly, RMDs can be taken by numerous generations (spouse, children, grandchildren), providing a legacy income while lessening 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.
Life Insurance vs. Annuity
Another creative strategy to maximize RMDs is to apply those annual dollar amounts to purchase of an annuity or life insurance policy. If you qualify for life insurance, this would be the first choice because the death benefit would pass tax-free to your listed beneficiaries.
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, the same strategy can be used 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 another very effective way to utilize your RMDs, but the death benefit will not pass tax-free to your beneficiaries, as with life insurance.
Having to take your Required Minimum Distributions (RMDs) need not be painful -- an annuity solution may exist which will fit your overall legacy plan beautifully.