RMD to Fund Life Insurance Policies

After turning 70 and a 1/2, the Internal Revenue Service (IRS) begins to require that individuals start making taxable distributions from their tax protected 401(k) and IRA retirement accounts to their personal account.  These required minimum distributions (RMDs) can be useful for funding food costs, medical costs, housing costs or lifestyle expenses. However, many people do not necessarily need to utilize these RMDs, instead they prefer to migrate those RMD funds to a life insurance policy that can benefit their estate and is tax protected.  In fact, this creates a lot of value as the life insurance policy can leave a large cash payment behind for your spouse and decedents.

The RMDs should be taken because a failure to do so results in a 50% tax bill on funds the retiree failed to withdraw.  So in either case the retirement account owner has a large tax bill.  At least the payment for the tax can be made with the RMDs. However, there are still net proceeds that the must be allocated.

*For example, imagine that an individual must withdraw $30,000 as an RMD from their IRA.  If they are already retired, that may be their sole source of income, which would mean around a 15% tax on the earnings. That would leave them with $25,500. The individual may also have non-IRA bonds and dividend issuing investments. Further, they may have already paid off their home and no longer have a mortgage.  So, of the $25,500 perhaps they only need $13,500 to fund their lifestyle in addition to the other money they receive.

*As an option for the remaining $12,000, the individual can sink it into a number of different products for $1,000 per month.  They may invest in low-cost index funds or stocks, they may buy real estate or bonds.  However, these are all tax inefficient because they have a capital gains tax when they are liquidated. They also provide less of a fee structure for the advisor to continue closely monitoring the investment to let the client know when to alternate out of the fund. Finally, they can be more complicated to manage after you are gone.  It is a potentially simpler option to leave a cash payout to family members rather than a complex asset that has to be liquidated.

Instead, the individual can put the funds towards a life insurance policy thatmune from tax payments. The value of the funds can grow significantly over time. Even if you buy a policy at 70 and make contributions for 10 years, the total value could grow quickly. It will be immune from the ups and downs of the market. These funds will be much appreciated by your beneficiaries when you are gone and help them fund their future.

The CapTran tool is a financial calculator that helps individuals understand the value of putting their RMDs into a life insurance policy.  It calculates thethe initial premium into a tax protected life insurance policy vs. investing in the stock market that can be inefficient from a tax perspective. It also calculates what thealue of your monthly premium payments are, discounted at an appropriate market rate.  That puts the value of your policy into perspective so that you know the true worth before buying the policy.

Contact a dedicated IFN representative if you’d like more information. 800.921.3100.






The information contained herein is for general information purposes only. Imeriti, Inc. is not to be held responsible for the accuracy of this information. Neither Imeriti, Inc. nor its employees provide tax or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax adviser.

The information, statistics, and opinions reported herein are from sources believed to be reliable. However, Imeriti and the author of this blog do not guarantee the truth, accuracy, and reliability of any source, fact and/or statistic cited and no do necessarily agree with any opinions expressed by such sources.

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