The requirements for the Required Minimum Distribution (RMD) irritate a lot of individuals, particularly when they don't truly need the money and don't want to pay the extra taxes. Because obeying it is required by statute, you do not have a choice in the matter. As a result of this reality, there are a few different annuity options that may manage the RMD problem that you will eventually face. It is essential to have a thorough understanding of all of your choices in order to make an informed decision on the RMD approach that will best suit your needs, regardless of whether or not you are already aware with any of them.
Minimum Distribution Amount That Is Required
Required Minimum Distribution is what the letters RMD stand for in the acronym. When you reach the age of 70 and a half, you are required to withdraw this sum of money from your conventional individual retirement account (or other eligible account).
When determining the amount of your required minimum distribution (RMD), our colleagues at the Internal Revenue Service are going to take into consideration the entire dollar value of all of your qualifying accounts, regardless of whether you have one IRA or 10 individual IRAs. The Required Minimum Distribution (RMD) might come from a single Individual Retirement Account (IRA) or from numerous qualifying accounts, as long as the monetary amount specified by the IRS is satisfied.
The Internal Revenue Service is tapping you on the shoulder to "remind" you that it is time to start paying your fair share of taxes, regardless of whether or not you need the money that is being taken out of your IRA.
A Death Benefit Included in an Annuity Protection for the Principal and an Enduring Heritage are Provided by Rider Strategy
Some people who have IRAs have no intention of ever touching that money, with the exception of the annoying RMD.
They want for their beneficiaries to get the majority of that asset in their will. They want, in essence, to leave something behind for future generations. This may be done via the use of a rider that is tied to a fixed annuity and provides a death benefit that is legally guaranteed. The following is an explanation of how such tactic might work:
Let's imagine you have $300,000 in a standard Individual Retirement Account (IRA), and you have absolutely no intention of using any of that money to support yourself in retirement.
If you invest that sum of money in a fixed annuity that includes a contractual death benefit rider and guarantees an annual growth rate of 5 percent, then your initial investment of $300,000 will increase and compound by that rate each year. When you take your RMDs, the increase of your death benefit at a rate of 5 percent will cancel out the dollar amount of the Required Minimum Distribution (RMD). Because the $300,000 will be increasing by an annual 5 percent before you are forced to start withdrawing RMDs, the sooner you start using this plan before you age 70 and a half, the better off you will be.
With the use of this offset method, you will be able to withdraw your RMDs while still preserving the whole original dollar amount of your IRA for the benefit of your beneficiaries and descendants.
The Stretch IRA Strategy Is Accepted by the IRS, and It Gives Your Heirs the Ability to Receive Continuous RMD Payments.
RMDs are transferable from one generation to the next provided that they are organized correctly (spouse, children, grandchildren). This will reduce the amount of money that will be owed in taxes over time while still leaving an income for your heirs. You don't need an annuity to extend your IRA, but a fixed annuity does work well with this plan since it completely protects the principle from market volatility and gives contractual assurances. Although you don't need an annuity, a fixed annuity does work well with this method.
You Don't Think You Need the Protection That Life Insurance Provides, Do You? Instead, you should buy an annuity.
The use of that yearly dollar amount toward the acquisition of an annuity or life insurance policy is yet another ingenious approach you may use to make the most of the Required Minimum Distributions (RMDs), which you are obligated to take out of your retirement account.
If you are able to meet the requirements for life insurance, this should be your primary consideration since the death benefit will be sent to your beneficiaries free of any applicable taxes. You first calculate how much money is left over after taxes from your RMD, and then you use that money to get as much life insurance with a death benefit as you can afford. The most practical and economical option available is term life insurance, which also has the potential to optimize the total amount of money contributed.
You may use the same method to purchase a flexible premium fixed annuity which has a guaranteed death benefit rider attached to the policy even if you do not qualify for life insurance. The term "flexible premium" refers to the fact that you are able to add more funds to the coverage. This annuity method is also a highly effective way to make use of your RMDs; however, the death benefit will not be passed on to your heirs tax-free, as it would be with life insurance.
Therefore, the next time that you begin to feel irritated about the fact that you are required to accept your Required Minimum Distributions (RMDs), you should consider the possibility that there is an annuity option that may be a great match to your entire legacy plan.