RMDs: Burdens to Benefits

People in their late 70s and beyond often find that the RMDs increase over time and create higher income tax burdens for them. Fortunately, there are strategies for those who don’t want that steady increase of distributions during their lifetimes.

l Take money out of the IRA before you are required to, and the earlier the better. When a traditional IRA is primarily emergency savings or intended for heirs, it might create more after-tax wealth if all or a large portion of it is taken out early, the taxes paid, and the after-tax amount invested for the long term in tax-advantaged ways. I discuss the details in my book, The New Rules of Retirement and in articles in the IRA Watch section of the Archive on the members’ web site.

l Convert the traditional IRA to a Roth IRA. Pay the taxes now, avoid the future RMDs, and have the benefit of tax-free investing and future tax-free distributions from the Roth IRA. We discussed IRA conversions in detail last month.

l Let the RMDs happen, but use the after-tax amount to purchase permanent life insurance. Your heirs inherit the insurance benefit tax-free, and it is likely to be much higher than the after-tax amount of the IRA would be. We discussed this in the August 2013 visit, available on the members’ section of the web site.

l Use the Family Bank Strategy. Draw down the IRA early, pay the taxes, and use the after-tax amount to buy a permanent life insurance policy that will serve as a family bank. You can tap the cash value for tax-free loans if you need cash. Otherwise, your heirs inherit the life insurance benefit. We discussed this in detail in the January 2015 visit. Learn more by purchasing the book The Family Bank Strategy by David Phillips for $9.95 (it’s $19.95 on Amazon). To buy the book, call David’s office at 888-892-1102.

RW March 2015.