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January 19, 2016

Making the Most of Your Required Minimum Distribution

After age 70 ½, taxpayers are required to take a certain amount each year from their IRA and retirement plans.  This is known as a Required Minimum Distribution (RMD).  However, some taxpayers have sufficient assets outside of their IRA and retirement plans making the RMD unnecessary to live comfortably. These taxpayers are forced to withdraw more money than they need and then let the RMD sit in their bank account. However, below are several ideas on what to do with this withdrawn money in order to keep it growing for upcoming generations.

  • Buy Life Insurance: Life insurance can provide heirs more money than they would get by otherwise inheriting an IRA. Life insurance is a tax free death benefit to heirs and is more popular when the heirs are in a higher tax bracket than the taxpayer.
  • Purchase Long Term-Care Insurance: With the cost of health care and assisted living rising, taxpayers can protect their life savings by purchasing LTC Insurance to help ease the cost of long term health care.
  • Fund a 529 Plan: A 529 plan is an educational savings plan and is a great way to leave money to children and grandchildren. There are strategies that you can gift over the annual gifting limit in one year as well.
  • Make a charitable gift using a donor-advised fund: A donor-advised fund allows taxpayers to make contributions to a fund. The fund manager makes distributions to your choice of charities. These are tax-deductible up to 50% of your Adjusted Gross Income.
  • Pay the tax due on the Roth Conversion: RMD’s are not required for Roth IRAs. Taxpayers who do not need their RMD’s may use them to pay the tax for converting the traditional IRA to a Roth IRA (where an RMD is not required).
  • Re-Invest: A taxpayer’s RMD can also be reinvested into a taxable account. The purchase of securities held for the long term will defer gains on the assets.

As you can see, taking a RMD does not mean that a taxpayer needs to let the money sit in a checking account. There are many ways to benefit from taking these RMD’s out of an IRA. Each taxpayer’s situation is different so please contact an Anders advisor with any questions.

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