A Creative Idea for “Supercharging” Your IRA – Part 1
June 5, 2011
As a Grand Rapids, MI estate planning attorney, I regularly help individuals and families plan for how to transfer their IRA accounts according to the legacy they want to leave. One scenario that provides an incredible opportunity is when you don’t need the required minimum distributions (RMDs) for living expenses. If you don’t need your traditional IRA funds to live on during retirement, you may be focused on building up this nest egg for your children or other loved ones and be tempted to avoid taking any withdrawals from it. After all, the larger your IRA is, the larger your children’s inheritance will be, right?
Unfortunately, this isn’t necessarily the case. After age 70½ you must take RMDs annually. If you don’t, you’ll owe a 50% penalty on the amount you should have taken but didn’t — in addition to any ordinary income tax you owe. So, for example, if your RMD was $12,000 for a given calendar year, you would owe a $6,000 penalty. That’s $6,000 that would go to “Uncle Sam” rather than to a loved one or charity.
A much better option can be to take the RMD, pay the ordinary income tax on it and use the remaining amount to pay the premium on a life insurance policy. This strategy can “supercharge” your retirement plan by providing a way to maximize the “stretch out” of RMD payments after your death, lengthening the tax deferral period. The longer the RMDs are “stretched out,” the longer the IRA assets can grow tax deferred. Then you can use the RMD payments to leverage the benefits of life insurance to greatly increase the ultimate amount received by your loved ones, charities or others.
Curious how it works and how you can use it? Stay tuned . . . I will cover that in a future blog post.
Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™. This goes beyond merely planning for finances – it’s about who your are and what’s important to you. He focuses on estate and asset protection planning for the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning. He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.
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