Are you nearing age 70½? If so, you have an important retirement milestone approaching. Age 70½ is when you have to start taking required minimum distributions (RMDs) from your traditional IRA. For many retirees, this isn’t an issue. They’re already taking income from their IRA, and possibly even meeting their RMD requirement.
However, some retirees have other income sources, such as a military or company pension, business income or maybe even income from other investment accounts. If you already have plenty of retirement income, you may not be thrilled by the idea of taking mandatory distributions.
Your RMDs are mandatory because of your IRA’s tax benefits. You may have received a tax deduction when you made your contribution and your earnings have grown tax-deferred ever since. At some point, the IRS wants you to take distributions so they can collect taxes. Thus, the requirement to take distributions at age 70½.
There’s good news, though. While you can’t avoid paying taxes on your traditional IRA funds, there are steps you can take to make good use of your RMDs, or possibly avoid them altogether. Below are three tips on how you can make the most of your RMDs.
Convert your IRA to a Roth.
If your goal is to keep accumulating assets in your IRA and leave those assets for your heirs, you may want to consider converting the IRA to a Roth. When you do a Roth conversion, you pay taxes on the distribution in one lump sum.
After you pay the taxes, the remaining balance is put into a Roth, where it can grow tax-free for as long as you like, with no mandatory distributions. If you do decide to take withdrawals, those distributions are tax-free.
Give it away.
Perhaps your goal is to transfer your IRA assets to your children or other loved ones. Just because you are forced to take RMDs doesn’t mean you can’t still pass on your legacy. You can gift your distributions to your heirs on an annual basis.
There are two benefits to doing this. One is they are able to use the money right away, perhaps to take care of urgent needs they have. Another is you’re able to see them benefit from your legacy while you’re still alive. You may help them go to college, start a business or achieve some other major goal. That experience may help you turn your RMDs into a rewarding and fulfilling experience for someone else.
Buy life insurance.
You can also leverage your RMDs to enhance the size of your legacy. For instance, if you’re in good health, you may consider using the RMDs to pay for life insurance. Then, when you pass away, your beneficiaries will receive the life insurance death benefit in addition to the rest of your estate. You may be able to leverage your RMDs into a substantial death benefit for your loved ones.
Need a strategy for your RMDs? Contact us at Gallagher Financial. We would be happy to analyze your needs, and help you find a strategy that meets your goals. Let’s start the conversation today.
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