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What To Do If You don’t Need Your Required Minimum Distributions (RMDs) For Now

What To Do If You don’t Need Your Required Minimum Distributions (RMDs) For Now

A common line says, "Seventy may be the new 40" but, the Internal Revenue System or the (IRS) have so many things to say about it especially for the older Baby Boomers who are in their 70s. At this stage, (70-½ to be exact), they start taking their Requited Minimum Distributions (RMDs) from their retirement accounts. This is because they are taxable distributions that can drive up their tax bills, many scrupulous savers dread these withdrawals.

The points below may not be applicable to you if you are already taking out more than the RMDs from your accounts.

But, if you really want to put the money to good use, well… there are some great strategies for it. This will be the best thing for people who don’t need to use their funds right now and can hang on a bit longer.

Below are the questions you frequently hear from pushing-70 Baby Boom clients about their RMDs:

Is converting my RMD to a ROTH IRA possible?

The answer is No. This is a fairly common question that has a sad answer because there is no way to rollover your RMD into a ROTH IRA and this is under the current tax laws. 

But all is not lost, don’t be in despair. You can still potentially do a ROTH conversion on your remaining IRA funds if the money is not needed now. You can also use the RMD in the due of some or all of the taxes. You will pay taxes on all of the IRA money you are converting if you want to convert your IRA to a ROTH IRA since this is a taxable event. In the fact that you don’t have to take RMDs from a ROTH IRA, there lies a benefit in it since money can continue to grow in a tax-free. Good thing it can also be withdrawn tax-free if you end up needing the money later. 

Can I give my RMD to another person as a gift?

Sure. You can freely do whatever you want with it because the money is yours. But please do assume since you said ‘GIFT’ that you are also looking for a way to give away the money in a tax-advantaged manner. 

You may want to consider also passing along some assets to an heir in the form of an outright gift while you are still breathing, you can reap the benefits of your heirs’ gratitude for being generous.

This is an ideal gift that really has legs for people who want to pass assets to loved ones since your RMD could be a gift to your children and grandchildren. This will help them fund their own retirement accounts or to offset taxation of their own ROTH IRA conversions. With this, if they happened to inherit the ROTH IRA of someone else, they will not be forced any longer to take RMDs from their own ROTH IRAs. Hence, there is potential for them to create even more tax-free wealth since they have a longer time frame for investing than you do. They will be in a lower tax bracket than you are.

Can RMD’s fund my life insurance?

Absolutely. Another way to build tax-free wealth is by funding life insurance with an RMD since you are in good health. This will also allow you to pass assets to another generation. Please check out the previous article “3 Ways to Cash in on Insurance for Retirement” for more specific details on cash value life insurance. Life insurance can do double or even triple duty if you choose the right policy. 

  • If handled properly, the cash balance will grow and can be taken out tax-free. RMDs can function as a “Rich People’s ROTH”.
  • Serious life events like terminal, chronic, and critical illnesses, long term care, or even critical injuries coverage comes in many policies today.
  • This is true. It may not be funny for you but could be a nice financial payday for your heirs since they will be having also a death benefit when you pass away.

Can I use my RMD’s to fund my Long Term Care Insurance?

Sometimes. A long term care benefit or rider is included in the permanent life insurance policy mentioned above. This can potentially help protect the rest of your life savings. Knowing that you have coverage for LTC, it can free you up and spend a bit more of your retirement assets. A highly leveraged tax-free death benefit to your heirs will be provided by the insurance company if you die quietly at home 

(Note to self: This is how to go on your own luxury bedding).

On the other hand, you will get the benefits provided in the long term care benefits if you do need LTC care.

Can I donate my RMD’s to charities?

Donating someone’s RMD to charity is also a perfect choice for those who are really generous. Keep in mind that the Qualified Charitable Distribution has already been made permanent. The use of the QCD provision makes it a tad bit more efficient when you happen to give to charity regularly. Your tax cost is lower for you and at the same time, the charitable organization still gets the funds.

You may want to consider looking for a financial professional to discuss important financial matters. This will further make things clear and less complicated for you.

Unifirst Financial & Tax Consultant
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