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At age 72, the government requires you to start required minimum distributions (RMD) from your IRAs and 401(k)s – whether you need them or not. This withdrawal is taxed as ordinary income. But what if you don’t need these funds? What if pensions, social security, and other assets meet your living expenses already? If you skip your RMD, you’ll be hit with a 50% penalty on the required distribution, so you shouldn’t skip your withdrawal.

So how can you make the most of funds you’ve distributed but don’t need? You’re in a great position to make a lasting impact! Here are 6 ideas to put those RMDs to good work!

  1. Provide for your long-term care today, give to family or charity tomorrow. Use the funds to purchase a hybrid life/long-term care insurance policy. If you need long-term care during your life, it can be quite costly and the policy offsets those costs. If you don’t need care during your life, the life insurance benefit can be paid to loved ones or your favorite charity!
  2. Convert pre-tax funds to a Roth and use the RMD funds to pay taxes. Pre-tax retirement accounts create a hefty tax bill when left to family. Roth IRAs, on the other hand, pass entirely income tax-free. Making these conversions will result in additional taxes for you, but often far less than your kids would pay if they inherited your IRA while still working.
  3. Fund Roth IRAs or 529s for future generations. Do you have kids or grandkids that are working but can’t afford to fund Roth IRAs or 529 college savings plans for themselves? Consider gifting them part of your unneeded RMD so they can fund tax-free accounts for retirement or college.
  4. Fund a Wealth Replacement Trust for family. A wealth replacement trust is an irrevocable trust intended to pass outside your estate to loved ones after your death. Payments to a wealth replacement trust are considered gifts to the trust beneficiaries and are often used to purchase trust-owned life insurance to compound growth and reduce income taxes of these dollars.
  5. Give highly appreciated stock to a Donor Advised Fund and replace those funds with your RMD. If you’re selling stock to fund your living expenses and charitable contributions, consider gifting your highly appreciated stock directly to a Donor Advised Fund to reduce capital gain tax and increase your income tax deduction.
  6. Make a Qualified Charitable Distribution. A Qualified Charitable Distribution is a tax-deductible gift to a qualified charity. The deduction offsets the tax otherwise owed on the RMD and benefits a cause you care about!

Which of these is right for you? Talk with your advising team about what strategies fit best within the rest of your plan. With some creative thinking, you can turn an unnecessary distribution into a significant benefit for your family and causes you care about!

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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