Episode #66: What To Do With Required Minimum Distributions

Today’s Smart Money Question:

Required minimum distributions (RMDs) are an inevitable part of retirement, but what should you do with that money? Matt explains.

(Click the featured times below to jump forward in the episode)

Here Are Just A Handful Of Things You’ll Learn:

1:48 – What Are Required Minimum Distributions?

Required minimum distributions are dollars you’ll have to withdraw from your retirement accounts based upon those accounts’ values when you hit the age of 70 and 1/2. This is a federal mandate, and it includes IRAs and other types of qualified retirement accounts. It’s important you take your RMDs. If you don’t, the IRS can penalize you a tax equal to 50 percent of whatever the amount you’re supposed to withdraw is. As an example, if your RMD is $10,000, and you don’t take it, then the IRS can fine you $5,000.

2:37 – An RMD Case Study.

We have a client we’ve worked with for seven or eight years, and now it’s time for them to withdraw their RMD. However, they’re fortunate in that based upon other income, they don’t really need the money. As a result, we’re working with them to determine the best use of that money. We initially discovered they wanted to use their RMD to leave a legacy to their children. Then we set to work giving them options to do so. One option included paying the tax on the RMD and then creating a joint-life or survivorship life insurance policy. This would create a tax-free benefit for their heirs. Another option could include funding a Roth IRA in their children’s names. Finally, we also determined we could do both. We could decrease the amount of money put into a life insurance policy and use the extra for the Roth IRA. All of these options could work, but we worked to determine the best solution for their unique situation. Remember, your retirement isn’t derived from a cookie cutter.

8:00 – Additional Questions Surrounding This Case Study.

8:00 – How long should we fund this life insurance policy?
10:04 – How could they fund the Roth IRA for their heirs?
11:30 – How could they fund a life insurance policy and invest in a Roth IRA?
12:20 – Could you use the money for a family vacation or event?

The Answer:

Give your required minimum distributions a purpose. Work with your advisor to set tangible goals and develop a strategy to accomplish them. - Smart Money Questions

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