IRA MAXIMIZER

If you use your IRA distribution, such as taking a Required Minimum Distribution (RMD) from a traditional IRA of $500,000 and utilizing a 5% distribution rate, you will receive $25,000 annually. One strategy is to use this distribution to purchase life insurance, which can have both wealth transfer and tax benefits.

Steps and Benefits of Using RMD to Purchase Life Insurance:

1. Calculating the RMD:

• IRA Balance: $500,000
• Distribution Rate: 5%
• RMD: $500,000 × 0.05 = $25,000 annually

This $25,000 is the amount you would be required to take out each year.

2. Using RMD Funds for Life Insurance:

Since the RMD is taxable income, the strategy involves using this after-tax money to fund a permanent life insurance policy, such as whole life or universal life insurance.

Benefits:

• Tax-Free Death Benefit: The death benefit from a life insurance policy is usually passed on to your heirs tax-free. This can help mitigate the tax burden that beneficiaries may face when inheriting traditional IRA assets, which are subject to income tax upon distribution.
• Wealth Transfer: Life insurance allows you to transfer more wealth efficiently. The death benefit can be significantly larger than your premiums, meaning more for your heirs.
• Tax Diversification: By taking the RMD from the IRA and converting it into life insurance, you can create a tax-efficient vehicle for passing wealth to your beneficiaries.
• Avoiding Future RMDs: Since RMDs increase as you age, utilizing the funds for life insurance helps remove some future tax obligations by using those funds now.

3. Considerations for Life Insurance Premiums:

• The $25,000 from your RMD can be used to pay life insurance premiums. Additional funds from other sources can be used if your insurance needs require a higher premium.
• Permanent Life Insurance?offers both a death benefit and the potential to build?cash value.?This value can grow tax-deferred and be accessed later in life, further adding flexibility to your financial plan.
• RMD Calculation at Age 70:

The IRS determines RMDs based on a life expectancy factor, which changes with age. Starting at age 73 in 2024, the IRS uses the Uniform Lifetime Table to calculate your RMD. For someone aged 73, the distribution period is approximately 26.5 years (depending on the table used).

For a $500,000 IRA at age 73:

RMD=500,00026.5≈18,868.(first?yearwithdrawal)\text{RMD} = \frac{500,000}{26.5} \approx 18,868. (first-year withdrawal)RMD=26.5500,000≈18,868.(first?year withdrawal)

If you’re younger, the RMD is smaller; if you’re older, it increases.

2. Taxation on RMD:

RMDs are treated as ordinary income and subject to federal income tax at your marginal tax rate and state income tax in some cases. The tax rate depends on your total income, including other retirement or earnings.

Example:

• IRA Balance: $500,000
• RMD for Age 73: $18,868
• Federal Tax Bracket: 22% (hypothetical)
• Federal Tax Due: $18,868 × 0.22 = $4,151

You would owe about $4,151 in federal income tax on your RMD, leaving you with $14,717 after taxes.

Key Considerations:

• Higher Tax Brackets: If your RMD pushes you into a higher tax bracket, you could also end up paying more taxes on other income.
• State Taxes: Some states tax retirement income, while others (like Florida, Texas, and Nevada) do not.

Strategies to Minimize Taxes:

Example of Potential Wealth Transfer:

Using your $25,000 RMD to pay premiums on a permanent life insurance policy might secure a $500,000 life insurance policy (depending on age, health, and policy type). This amount would be tax-free to your heirs, offering a more efficient wealth transfer strategy than leaving a taxable IRA.