Mark D. Goldstein, CFP®
Certified Financial Planner
NEW MEXICO OFFICE
Pueblo Plaza Executive Suites
1100 S. Main, Suite 10
Las Cruces, NM 88005
Intelligent Office Complex
7362 Remcon Circle
El Paso, TX 79912
3701 Algonquin, Suite 150
Rolling Meadows, IL 60008
(877) 442-0698 Toll-Free
"Guaranteed SAFE-Money Solutions for a Successful Retirement!"
My goodness, how time flies!
It's hard to believe, but the very first Baby Boomers turned 70 and a half on July 1st of 2016... the first of more than 3 million every year who will become subject to those dreaded Required Minimum Distributions (RMDs) from their IRAs and company retirement plans.
As free Americans, the word "required" is quite upsetting to a lot of us, because it means we're now being forced to do something we don't want to do: siphoning from and depleting our IRAs.
The actual percentage of required withdrawals starts out relatively small (3.65% of the total IRA balance), but gradually increases each year (3.77% at age 71, 3.91% at 72, 4.05 at 73... 8.77% at 90... 15.87 at 100, etc., etc.).
What really ticks off most of my clients is that they don't need the money... and it INCREASES their tax bills every year.
So, what are some possible solutions? Well, since you've got to take 'em anyway, why not put those nasty RMDs to good use... like maybe creating future tax-FREE benefits!
WARNING: A lot of folks (including their financial advisors!) mistakenly believe that you can convert your RMD to a Roth IRA.
Doh! Under the tax law, an RMD cannot be rolled over... and a Roth IRA conversion IS a rollover from a traditional IRA to a Roth IRA.
But don't despair. Assuming the RMD is not needed for retirement income (which, like I said, is often the case), it can be used to pay the conversion taxes that are created by converting other IRA funds into a Roth. Now, those newly created Roth funds can grow tax-free and also be free of future RMDs.
Example: Joe, age 70, has a $500,000 IRA that will be subject to an RMD of $18,250 in 2018. Joe must withdraw that $18,250 (or be subject to a 50% penalty of $9,125... in addition to ordinary income taxes on the $18,250!).
And, to repeat, that $18,250 required distribution cannot be rolled over or converted to a Roth IRA.
Yes, Joe will owe taxes on the $18,250 RMD, but now he can use the money to convert part of the remaining IRA balance to a Roth IRA (ask me about my secret [and perfectly legal] "Zero Out-of-Pocket Roth IRA Conversion Strategy")!
In effect, Joe is using the RMD money to build a Roth IRA which will grow tax-free, never be subject to RMDs (during Joe's lifetime) and will lower his future RMDs from the remaining IRA balance.
Hey, don't forget the Grandchildren! How about gifting the RMDs to the children or grandchildren? They can use that money to contribute to their own Roth IRAs... or pay the taxes on converting their own traditional IRAs to Roth IRAs!
Think about it, gang. Those youngsters may be in a lower tax bracket, in addition to having a much longer time horizon to create lots more tax-free wealth. Plus, they WON'T be subject to RMDs on their own Roth IRAs as they would be if they inherited a Roth IRA from Papa or Grandpa Joe!
Listen, there's no avoiding the fact that Joe's RMDs are going to be subject to taxation. Period. But those RMDs can be put to GREAT use in building more tax-free savings for his children and grandchildren. And he'd be taking the risk of future tax INCREASES out of the equation for the next generation or more!
The Power of... LEVERAGE! Joe could also use that $18,250 RMD... or the amount that's left after taxes... to fund a permanent life insurance policy that can double as a source of tax-free retirement funds during his lifetime. Many of these policies even come with built-in long-term care insurance benefits, in case that becomes an issue.
And, if it turns out that Joe doesn't need to tap into the insurance funds for retirement income or long-term care coverage... the policy can provide a tremendously leveraged TAX-FREE windfall for his loved ones.
All the above, my friends, from the once dreaded RMD!