Slideshow Tax Alpha: Making the Most of RMDs

Published
  • December 05 2015, 5:15pm EST

6 RMD tactics

For clients fortunate enough not to need to use income from qualified retirement plans in their 70s, required minimum distributions can sometimes amount to a taxable nuisance. There are ways, however, to get more mileage out of those required distributions, particularly with advance planning.

The first step, then, is to make sure the client knows they are at the age where they need to start taking RMDs – and then to see if any of the following tactics will work for them.


1. Purchase life insurance.

RMDs can be leveraged for the future generation through an insurance policy. Life insurance provides a potential tax-free death benefit to your clients’ heirs, and allows them through leverage possibly to pass on much more than the balance available in their IRAs today. This option is particularly attractive if clients’ beneficiaries are in a higher tax bracket than themselves.

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2. Purchase long-term-care insurance.

Another great way to leverage an RMD is through the purchase of long-term-care insurance. LTCI provides a way to protect clients’ assets should they ever need in-home or assisted nursing care. With the ever-growing cost of assisted living, this coverage can help clients preserve their estate for the benefit of their children and other beneficiaries.

3. Fund a 529 plan.

Funding a 529 plan is a great way for clients to leave a legacy. If they have an RMD that is more than the IRS annual gifting limit, using 529 plans allows them to gift five times the annual gifting limit in one year. This mega-funding strategy can only be used once every five years, but front-loading a gifted 529 could make a lot of sense, particularly for elderly clients.

4. Make a charitable gift using a donor-advised fund.

Charitably inclined clients can use unwanted RMDs to give money to their favorite charity through a donor-advised fund. A donor-advised fund allow clients to make a tax-deductible (up to 50 percent of adjusted gross income) contribution to the fund. The fund managers then manage the assets and make distributions to your charity of choice. The investments grow tax-free, offering clients the potential to give more over time.

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5. Pay the tax due on a Roth conversion.

Roth IRAs do not have an RMD requirement. Clients can use their current unwanted RMD to pay the taxes due to convert the traditional IRA to a Roth IRA. The amount converted would be subject to ordinary income tax, but once it is converted, there would no longer be an RMD requirement.

6. Just reinvest.

There is no law requiring clients to do anything with their RMDs. By reinvesting these dollars into a taxable account, they certainly can expect to recover the taxes they paid on the RMD over time.

Beyond the minimum

For more on ways to help your clients achieve their lifetime goals in a tax-effective way, visit the Tax Alpha tab on Accounting Today.

HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name. Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.