Taxes & Investments:
Timely and Timeless Strategies
Getting the Most Out of Your Required Minimum Distribution
With the ever-changing landscape of taxes, it is growing increasingly difficult to understand how
legislation affects clients and could possibly impact their financial future. As a leader in the financial
services industry for over 30 years, we get it. That’s why HD Vest Financial Services® is constantly
seeking ways to share the latest knowledge we acquire with you. We’ve created the Taxes &
Investments: Timely and Timeless Strategies series to share timely information and provide our
Advisors and their clients with practical information and ideas they can build on.
By April 1 of the year following turning 70½, taxpayers must begin to take a required minimum
distribution (RMD) from their IRA accounts1. Business owners who own 5% or more of a business
must also begin to take RMDs from that business’s qualified retirement plan2. Many times individuals
don’t want or need to take these RMDs, so how do you turn this requirement into an opportunity?
There are several ways to maximize the potential of your RMDs.
Purchase Life Insurance
One of the best ways to leverage an RMD for the future generation is through an insurance policy.
Life insurance provides a potential tax-free death benefit to your heirs3 and allows you through
leverage to potentially give them much more than the balance available in your IRA today. This option
is particularly attractive if your beneficiaries are in a higher tax bracket than you are.
Purchase Long-Term-Care Insurance
Another great way to leverage an RMD is through the purchase of long-term-care insurance. Longterm-care insurance provides a way to protect assets should you ever need in-home or assisted
nursing care. With the ever-growing cost of assisted living, it is important to have this insurance.
Fund a 529 Plan
Funding a 529 plan is a great way to leave a legacy with your children or grandchildren. If you have
an RMD that is more than the IRS annual gifting limit, using 529 plans allows you to gift five times the
annual gifting limit in one year. Keep in mind that strategy can only be used once every five years4.
Make a Charitable Gift – Donor-Advised Fund
Charitably-inclined individuals can use their unwanted RMDs to give money to their favorite charity
through a donor-advised fund. A donor-advised fund allows you to make a tax-deductible (up to
50% of adjusted gross income) contribution to the fund5. The fund managers then manage the
assets and make distributions to your charity of choice. The investments grow tax free, offering you
the potential to give more over time5.
Use the RMD to Pay the Tax Due on a Roth Conversion
Roth IRAs do not have an RMD requirement. Individuals 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 tax1, but once it is converted there would no longer be an RMD
requirement.
Reinvest
If you have an unwanted RMD, keep in mind that you can simply reinvest it into a non-qualified
account. By reinvesting these dollars, you have the ability to potentially grow these assets over the
long term.
RMDs are a part of retirement and they are unlikely to go away any time soon. Just because you
have to take it every year doesn’t mean that it cannot be put to good use. Your HD Vest Advisor
can show you ways to create financial opportunities with your unwanted RMD that optimize your
individual retirement plan.
Sources:
1. IRS Publication 590 http://www.irs.gov/publications/p590/
2. IRS Publication 560 http://www.irs.gov/pub/irs-pdf/p560.pdf
3. IRS Publication 525 http://www.irs.gov/pub/irs-pdf/p525.pdf
4. Internal Revenue Bulletin: 2008-9 http://www.irs.gov/irb/2008-09_IRB/ar17.html
Donor-Advised Funds Guide Sheet Explanation July 31, 2008 http://www.irs.gov/pub/irs-tege/donor_advised_explanation_073108.pdf
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