7 ideas for helping clients manage RMDs

SECURE 2.0 has changed some of the rules surrounding taking required minimum distributions, or RMDs, from retirement accounts, leaving clients in need of a strategy to help them manage those RMDs and minimize tax consequences that arise from taking them.

Michelle O’Haren, senior retirement strategy consultant with Pacific Life, outlined seven ideas for managing RMD rules during a recent Financial Experts Network webinar.

The seven ideas for managing RMD rules are:

1. Avoid RMDs by converting retirement accounts to Roth accounts.
2. Gift the RMDs to charity.
3. Gift the RMDs to children or others.
4. Start taking RMDs before the required age to begin taking them.
5. Begin taking RMDs at retirement.
6. Begin taking RMDs at age 85.
7. Pick and choose which individual retirement account to use.

 Avoid RMDs with the Roth play

Converting to a Roth account means paying tax now for tax-free growth later, O’Haren said. Clients can save with Roth by contributing their compensation to Roth IRAs, Roth SIMPLE IRAs and designated Roth accounts, or DRACs. Clients who have traditional IRAs can convert them to Roth IRAs or DRACs. Clients also can elect to have their employer contributions go into DRACs, Roth SIMPLE IRAs and SEP-IRAs.

The Roth IRA benefits several different classes of workers, she said. College students working their first jobs can choose to contribute a portion of their salary as well as their employer contribution to a Roth to save on income taxes. Workers who are in transition or business owners with losses can contribute a portion of their compensation or elect employer contributions to a Roth or convert pretax savings in a year of low or no earnings. Workers who have made after-tax contributions to employer plans or traditional IRAs can convert their after-tax savings into a Roth.

If a client is working and their workplace plan will accept an IRA rollover, a client can rollover the pretax dollars into the employer plan and convert the after-tax dollar into a Roth.

If your client doesn’t need the RMDs, gift them 

RMDs can be gifted in one of two ways, O’Haren said. Qualified charitable distributions (QCDs) are excluded from a client’s gross income, have some limitations placed upon them and may be taken only from IRAs. Donated distributions that aren’t qualified are included in a client’s gross income, then deducted from their adjusted gross income for tax purposes, and normal charitable donation rules apply.

Under SECURE 2.0, clients have a one-time opportunity to make a QCD with a maximum distribution of $50,000, indexed for inflation, for each owner of the IRA. The one-time QCD can be taken only from IRAs, the donor must be age 70 ½ or older and the owner or beneficiary of the IRA. The QCD’s recipient must be a charitable remainder trust or a charitable gift annuity, with income payments to be made to the donor and/or spouse.

Clients also can make annual QCDs, O’Haren said. The funds for these annual distributions must come from an IRA, and can be donated only to public charities. The donor must be age 70 ½ or older and be the owner or beneficiary of the IRA. The donor can put up to $100,000 (indexed for inflation) into the QCD and payment to the charity must be made directly from the IRA.

For clients who want to reduce income for tax purposes in future years, combining a QCD with Roth conversion of some retirement accounts can help with tax planning, O’Haren said.

Don’t want to wait to take RMDs? Reposition them

Not everyone wants to wait until they are required to take RMDs, O’Haren said. For those clients who want to take RMDs after age 59 ½ but before RMD age, the payments can be repositioned. Some clients may need those RMDs for additional income while some may want to do some Roth conversion on those RMDs to manage future tax liability.

Another strategy for those who don’t want to wait is to use the RMD to purchase a life insurance policy owned by an irrevocable life insurance trust. The terms of the trust can establish the distribution of the life insurance benefit to the beneficiaries.

Build a bridge

Some clients may want to retire before age 70 but hold off on claiming Social Security benefits until that age. O’Haren said they can use a portion of their IRAs to help build a retirement income bridge until then.

A portion of the IRA can be used to buy an immediate annuity that reduces payments at age 70 to provide protected income while waiting to claim Social Security benefits. For example, a client can use a portion of their IRA to invest in an annuity with payments starting at age 62 and offers a future payment adjustment where annuity payments are reduced when their Social Security begins.

Still working? Roll it over

Clients who are still working have some options as well, O’Haren said.

If a client has a traditional IRA or a 403(b) plan from a prior employer, and works for an employer whose retirement plan has a still-working exception, the client can roll the IRA or 403(b) funds into the employer’s retirement plan to hold off on taking RMDs.

Invest in a QLAC

Clients can take money out of their IRAs and invest in a qualified longevity annuity contract. O’Haren said a client can take up to $200,000 out of their IRAs in 2024 to fund the annuity, making the amount of money going into the QLAC excluded from future RMD calculations.

Start planning early

O’Haren said advisors who are helping clients plan for retirement should begin planning for RMDs as soon as the client starts saving, strategizing where to save. In addition, she said, RMD planning should be revisited at various life events, such as when the client retires or hits RMD age.

 

To listen to the webinar online, go to: https://www.financialexpertsnetwork.com/webinars/sessions/seven-ideas-manage-required-minimum-distribution-rules-owners

 

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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