Many people are annoyed by IRA required minimum distribution (RMD) rules. They may not need the money or want to pay the additional taxes. The law is the law, though, so compliance is not a choice. A few annuity strategies exist that may address your eventual RMD issue. It’s important to know all of your options to properly choose your specific RMD strategy.
Required Minimum Distribution
Required Minimum Distribution (RMD) is the amount of money you must to remove from a traditional IRA, SEP IRA, or other qualified accounts when you reach the age of 72. The previous age for RMDs was 70½, but that was increased with the passing of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) in 2019. People who turned 70½ in 2019 still had to take their RMD, but those who turn 70½ in 2020 can wait until age 72 to take their RMD.
Whether you have one IRA or 10 separate IRAs, our friends at the IRS will look at the total dollar amount of your qualified accounts to calculate your RMD annual payment. Your 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
Some IRA owners don’t plan on ever accessing the money in their IRA, aside from the RMD. Instead, they plan to leave the bulk of their IRA to beneficiaries as a legacy. This can be accomplished by using a contractually guaranteed death benefit rider attached to a fixed annuity.
A guaranteed death benefit rider costs an additional annual fee. In exchange for your fee, you receive a minimum interest rate guarantee.
Let’s say you have $300,000 in a traditional IRA, and you never plan on using that asset to live on in retirement. If you placed that money in a fixed annuity with a contractual death benefit rider that guarantees 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. Your guaranteed growth should outpace your RMDs.
You may have to pay taxes on an annuity purchased with IRA funds, depending on whether you use pre-tax or after-tax money. Consult a trusted financial advisor or accountant before making a purchase so you know what to expect.
An RMD calculator can help you determine whether this is a good strategy for you. If this seems like a feasible option for your investment goals, then the sooner you start this strategy before you turn 72, the better. Your initial investment will grow by an annual 5% before you are required to take your RMDs.
Maximizing Your RMDs With Life Insurance
Another creative strategy to maximize RMDs is to apply those annual dollar amounts to the 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. It also leverages your money by allowing you to purchase a policy that's significantly more than the premiums you paid into it.
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 an efficient and low-cost option, but it will either stop at the end of your term or require increased premiums if you have a renewable policy. Single-premium whole life works well in these scenarios if you qualify. You pay a premium once, and then the policy is in effect for your lifetime, passing to your beneficiaries when you die.
If you do not qualify for life insurance, the same strategy can be used to buy a flexible-premium fixed annuity that has a guaranteed death benefit rider attached to the policy. A 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 that will fit your overall legacy plan beautifully.