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Strategy to Maximize Unwanted IRA Distributions

| April 26, 2021

RMD’s are Back!

Welcome back for 2021 are those Required Minimum Distributions (RMDs)! From the CARES Act in 2020, one provision allowed anyone subject to RMDs to forgo the requirement. But as we continue through the current year of 2021, RMDs are back on the table and required to be taken out of IRA accounts by December 31st.

Quick refresh on RMDs – Required Minimum Distributions, commonly referred to as “RMDs,” is an amount a retiree is subject to withdraw from their IRA each year once they reach age 72. The amount is calculated based on the value of the account at the end of the prior year and current age of the account owner. 

Many retirees have realized they do not need these withdrawals to fulfill their retirement lifestyle, and would rather leave those assets for their heirs. But remember, failure to take out the required amount will result in a huge 50% penalty!

Enter the “IRA Maximization” strategy. This strategy is designed to take those unwanted or unneeded RMD withdrawals and increase the amount you give to your heirs, federally tax free. However, this strategy could work for someone as early as 60 years of age. When set up properly, one can manage their future tax liability and maximize the amount they pass to their beneficiaries free of income taxes.

Ideal Retiree Fit for Strategy –

  • Retiree has income for retirement fulfilled by other resources
  • Aged 60 or older and reasonably healthy
  • Desires to leave IRA assets to heirs


How it Works

The IRA owner receives the taxable RMD amount each year, and uses the net proceeds as the premium payment for a life insurance policy. Unlike the IRA, when the beneficiary receives the life insurance proceeds, this benefit is federally tax free. By structuring this tax-efficient approach, your heirs are left with more of the money you’ve accumulated, after taxes.


**If Estate Taxes are a Concern..

Another part to this strategy can be advantageous if the IRA owner faces possible estate taxes when they pass. Rather than paying the life insurance premiums directly, the IRA owner would “gift” the premiums to an irrevocable trust (ILIT), which in turn the trustee uses the gifted amount as the premiums for the life insurance policy. With the ILIT structured properly, the death benefit proceeds will still pass to the heirs federally tax free, and the amount will also be excluded from the owner’s estate.


**If you Have Charitable Intentions..

One last idea that could further enhance this strategy is when the IRA owner has charitable intentions. Here, the account owner assigns the charitable organization as the beneficiary of the IRA balance when they pass. In result, the income taxes are eliminated for the charity and they would receive the IRA completely federally tax free. And similar to above, the life insurance death benefit will pass federally tax free to your heirs, thus eliminating Uncle Sam all together!!


The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.