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Advanced Required Minimum Distribution Planning

I doubt the main point post will apply to many people reading this blog, but as I stated this blog was also started to highlight some of my research and planning experience.

This idea may seem foreign to many, but I’d love to discuss it with anyone and everyone.  This post is for those that don’t need their Required Minimum Distribution.

Brief Introduction to Required Minimum Distributions

As you may or may not be aware most retirement and qualified account have Required Minimum Distributions sometimes referred to as Minimum Required Distributions (MRDs).

Since this is a brief introduction to RMDs I will let the people who make the rules (i.e. IRS) provide us with their definition,

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 70 ½ years of age or, 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 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners 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.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death. See Publication 590 , Individual Retirement Arrangements (IRAs), for complete details on when beneficiaries must start receiving RMDs.

I have written about What to do If you Forget your RMD? and How 2009 RMDs are suspended, but if you have any questions please leave a comment.

But I am Turning 70 1/2 and Don’t Need my Required Minimum Distributions – What do I do?

As I stated earlier, this is used just for those seniors who do not need their RMDs.  In my example we had a 70 year old female in good health (great woman!).  She has plenty of assets and income, but now she has a $400,000 IRA which is now going to start throwing off forced income.  I used the handy tool at to get her RMD Schedule assuming a 5% growth rate.

This Woman will have an RMD of almost $16,000 and will slowly increase to $32,000 at age 89.  Remember she does not need this additional income, so it will go into a savings account or investment account paying taxes every year.  So what did I  recommend?

I took a net of $10,000 and purchased a Guaranteed Universal Permanent Life Insurance Policy.  This policy does not have any cash value but purchases a guaranteed death benefit of almost $400,000.  Why did I use $10,000? Because our lady will have to pay taxes on her RMD at ordinary income rates so we don’t really have $16,000; further, her account may go up or down and I am not trying to be aggressive.

This policy can be owned either by the decedent (but it will be included in her taxable estate) or by Irrevocable Life Insurance Trust (ILIT – which allows the Death benefit not to be included in her estate and gives control way past after death).  This flies right in the face of those term and invest the difference people because in most states (in NY specifically) you can only sell a term policy to age 80.  What happens if she lives to 81?  I have left off the math so far, but happy to break out the math if anyone has an interest.

This estate plan was not sold yet, but was one of many we discussed with her.  Before trying anything this sophisticated check with your legal or financial professional.

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