If the “deferred” stage of your tax-deferred retirement account has ended or will be ending soon, you’re probably learning about required minimum distributions (RMDs). In most cases, shortly after you reach 70 1/2 years of age, you must begin taking distributions from qualified retirement plans such as a 401(k) or an IRA. If you don’t take the minimum distribution the IRS requires, you could pay a penalty of 50% of the amount you should have withdrawn.
If you’ll be withdrawing at least the RMD amount each year to pay for living expenses, this isn’t an issue for you. You’ll pay your regular income tax rate on the distributed funds (unless they’re from a Roth IRA). However, if you have sufficient income from other sources, consider these options for putting your RMD money to good use:
Buy life insurance
Even up to age 80, you may be eligible to purchase a single premium whole life (SPWL) policy. As the name implies, you make one payment to purchase a death benefit that will be passed to the beneficiary. One advantage of an SPWL policy—as with any Knights of Columbus life insurance policy—is that the benefit will be paid tax-free to the beneficiary without being subject to the probate process. Also, as a whole life (also called “permanent” life) policy, cash value begins accumulating immediately. You can withdraw some of the accumulating cash value in certain circumstances, among other options.
Donate IRA funds to charity (tax-free for 2013 distributions)
If you donate funds from an IRA to a qualified charity in 2013, the donation is tax-free up to $100,000. This provision was set to expire in 2011, but it’s been extended through 2013—no guarantee it will continue beyond that, however. Generally, the distribution must be transferred directly from your IRA to the qualified charity. If you have questions about life insurance, IRAs and RMD options, please get in touch with me.
✦ This is not intended as legal or tax advice. Please see a qualified attorney or accountant to be sure you are properly managing your required minimum
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