Making the most of required minimum distributions

RMDIf you’re a retiree that has sufficient assets and doesn’t need to spend the required minimum distributions from your retirement plans, you might be frustrated by being forced to take them and incur the associated tax liability. Here are several ideas from the professionals at HD Vest Financial Services:

  • Buy life insurance:Life insurance provides a potential tax-free death benefit to heirs, and lets the retiree, through leverage, possibly give those heirs more than they would wind up with by inheriting what remains of the IRA. This option is particularly attractive for those whose beneficiaries are in a higher tax bracket than themselves.
  • Purchase long-term-care insurance:Long- term-care insurance can provide you a way to protect your assets should you need in-home or assisted nursing care. With the ever-growing cost of assisted living, it will be important to have this coverage.
  • Fund a 529 plan:This can be a great way to leave a legacy for children or grandchildren. If you have an RMD that is more than the IRS annual gifting limit, using 529 plans allows you to gift five times the annual gifting limit in one year. Keep in mind that strategy can only be used once every five years.
  • Make a charitable gift using a donor-advised fund:If you’re charitably inclined, you can use your unwanted RMDs to give money to your favorite charity through a donor-advised fund. A donor-advised fund allows you to make a tax-deductible (up to 50% of adjusted gross income) contribution to the fund. The fund managers then manage the assets and make distributions to your charity of choice. The investments grow tax free, offering the potential to give more over time.
  • Use the RMD to pay the tax due on a Roth conversion:Roth IRAs do not have an RMD requirement. Retirees can use their current unwanted RMD to pay the taxes due upon converting their traditional IRA to a Roth. The amount converted would be subject to ordinary income tax, but once it is converted there would no longer be an RMD requirement.
  • Re-invest:There are worse things you can do than simply to re-invest unneeded RMDs in taxable accounts. If you are invested in individual securities and held for the long term, taxation of gains on those assets (assuming they do indeed gain in value) can be deferred for a long time.

This article appeared in Accounting Today.