Required Minimum Distributions | Legacy for grandchildren & charities
November 8, 2022
2 minute read – 72 years old? Receiving RMD notices from your IRA, and wondering what to do with this money?
What are Required Minimum Distributions (RMD’s)?
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70 ½ if you reach 70 ½ before January 1, 2020), if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 72 (70 ½ if you reach 70 ½ before January 1, 2020), regardless of whether he or she is retired.
Retirement plan participants and IRA owners, including owners of SEP IRAs and SIMPLE IRAs, are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.
Taking a quick show of hands we find not many people really want to take this required distribution. They would rather keep deferring it. So what are we to do with this annual RMD (once hitting 72 years old, and possibly the years to follow)? How about purchasing life insurance with cash value build-up?
It makes sense. Use the money you must take, but don’t need, and leverage an eventual death benefit to grand-heirs, or a favorite charity…..with life insurance coverage. The “magic” of life insurance is taking dollars and multiplying them into multi-thousands of dollars called the death proceeds, tax-free if done correctly. But, if this concept makes sense let’s make sure we have an insurance company that wants to be that carrier. Remember, you are 72 or older. Healthy? You may have issues, possibly something the underwriter has seen and experienced in underwriting. We find as America has aged gracefully over the past fifty to sixty years underwriting has grown with the changes. Insuring a 72 year old for $2 million death benefit today happens often.
In these situations it is important to know the carriers who are sympathetic to and will underwrite reasonable amounts of coverage if other facts about the case are in order.
One more thing before we decide to apply for a nice policy with a destination aimed to make an impact on a grandchild’s or charity’s life, financial justification. The insured is 72 (or 70-1/2) and, possibly now has no newly earned income (other than investment income). Consequently, coverage can’t be justified for income replacement purposes. And more often then not the proposed insured doesn’t have federal or state death tax concerns.
Well Thought Out Solutions:
First, what percentage of your (the insured’s) annual income is being used for premiums? The acceptable amount could be larger in cases where it is adequately demonstrated that living expenses will be met with what remains. Second, the amount of death benefit will usually be limited by a formula that ties the face amount to certain financial criteria. A common example would be: Permissible coverage = 50% of the net worth attributable to investment assets + FMV of residence – coverage in force. Because insurance is often purchased in situations where no death tax is anticipated, I’ve found that clients overlook the advantages of purchasing the policy in a trust.
A living trust will keep the proceeds away from the exposure and expense of the probate court while allowing for their distribution according to a testamentary pattern not practical through a simple beneficiary designation. An irrevocable trust will protect the proceeds from creditors as well.
By now if you’re in the 70 1/2 or 72 years old ‘zone’ (see IRS guidelines: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions ) you are receiving that notice to take you RMD’s. Consider next steps like this towards building a unique legacy.