KEY TAKEAWAYS:
- IRA Maximization Strategy: If you don't need your RMDs for living expenses, you can use them to pay life insurance premiums. This strategy can help mitigate the tax burden on heirs, as life insurance proceeds are typically tax-free, unlike the fully taxable distributions from an inherited IRA.
- Tax Implications for Heirs: The SECURE Act requires most non-spousal beneficiaries to fully distribute inherited IRAs within 10 years, potentially leading to a significant tax burden. Using RMDs to fund life insurance can provide a tax-free death benefit, helping to alleviate this burden.
RMD Age and Penalties: The SECURE 2.0 Act has raised the age for required minimum distributions (RMDs) to 73 for those born between 1951 and 1959, and to 75 for those born in 1960 or later. If you fail to take your RMDs, you could be subject to a 25% penalty.
Once you reach age 73, the IRS mandates that you start taking distributions from any of your Individual Retirement Accounts (IRAs) or be subject to a 25% penalty. Many people use their RMDs to pay for living expenses. However, if you don’t need (or want) this excess income, IRA Maximization could be beneficial if your goal is to leave a legacy.
By repurposing your RMDs, you can use the distributions to pay life insurance premiums. This strategy can be especially beneficial due to the SECURE Act. As of January 1, 2020, most “non-spousal” beneficiaries must now take full distribution of the Inherited IRA within 10 years. This means that the entire balance of the IRA is fully taxable (at the beneficiary’s tax bracket) within 10 years—which can place a sizable, unintended tax burden on the IRA holder’s heirs. Tax-free life insurance proceeds could help mitigate that tax liability.
Please note that the SECURE 2.0 Act raised the RMD age. If you turned 73 in 2023 or 2024, your RMDs have already started. If you were born between 1951 and 1959, your first RMD is due at age 73. For those born in 1960 or later, the first RMD is due at age 75.
How it Works
- A life insurance policy is purchased using after-tax distributions from your IRA or other qualified plans to pay the premiums.
- The remaining balance in the IRA or qualified plan will pass to the designated beneficiaries upon your death.
The life insurance death benefit will be paid income tax-free to the named beneficiaries.
Potential Advantages
- The death benefit can potentially be more significant than the total of the RMDs used to pay for the insurance.
- The death benefit payment is usually free of federal taxes, so your heirs shouldn’t get bumped into a higher tax bracket due to their inheritance.
Is IRA Maximization the right strategy for your needs? Contact your Financial Advisor to learn more.
Working With Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
If you engage in a brokerage relationship, you will buy and sell securities on a transaction basis and pay a commission for these services. Our recommendations for the purchase and sale of securities will be based on what is in your best interest and reflect reasonably available alternatives at that time.
If you engage in an advisory relationship, you will pay an asset-based fee, which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory relationships.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
