When my Dad hit age 70-1/2, the government forced him to take money out of his IRA and pay tax on it. He didn’t need the money for lifestyle purposes, so the forced tax didn’t sit well.
Required Minimum Distributions (RMD’s) – force roughly 4% of his IRA balance to be distributed and taxed each year – and that causes two common problems.
First, RMD’s can push you into a higher overall tax bracket – meaning higher taxes on income from other sources. Second, RMD’s can trigger income tax on up to 85% of Social Security Benefits – a double tax penalty.
Here’s a way around it all. Consider taking all the money out at one time. I know – the tax bill could choke an elephant. A $1,000,000 withdrawal could trigger taxes of up to $400,000. Bite the bullet and deposit the remaining $600,000 into a single premium, guaranteed life insurance policy. Here are the benefits:
- Depending on age and health, you’ll get a life insurance benefit of $1,000,000 – $2,000,000 (1-1/2 – 3X) – as much – or more – than the original IRA balance.
- The life insurance benefit will pass to your heirs tax-free. Die with $1,000,000 in an IRA, and it will get ravaged by both income taxes, and potentially – estate taxes.
- Many life insurance policies contain a feature that allows a tax-free drawdown of the death benefit for long-term-care needs
- Other than the year of distribution, there will be no further tax impact on Social Security benefits
- The policy will have a large amount of available cash should an emergency or opportunity arise.
Get smart about RMD’s – don’t let them ruin your day.