Clients need to start taking RMD’s by April 1st of the year after they reach age 72. This is the new rule that is in effect. For those clients that have accumulated a good deal of assets, this could mean taking required minimum distributions that they DON’T need. As an example, a couple of age 72, who have a combined $2M worth of qualified plans, would need to take a gross distribution of $78,125. See the chart below. Based on how RMD’s are calculated, this generally means that a client’s qualified plan balance declines dramatically in their later years.
How can clients retain more of that value to leave to their loved ones? A 2nd to Die policy would provide clients with a leveraged & tax-free approach to leave money to the next generation. Here is a sample quote showing two 71 year old’s (male- standard plus non-tobacco & female- preferred non-tobacco). For a $5,677 level premium, they can acquire a $250,000 tax-free death benefit. That equates to a $7,569 pre-tax distribution (using a 25% tax bracket) from their qualified plan account(s). That is .7% of a $1M balance! If that is not enough of a reason to consider, let them know what rate of return they would need on that $5,677 to generate $250,000 at different ages.
- Age 85- tax free rate of return of 14.33%
- Age 90- 7.86%
- Age 95- 4.58%
- Age 100- 2.66%
The rules that apply to required minimum distributions (RMDs) have changed over the last couple of years, and it’s possible they could change again in the future.
For example, in 2020 the coronavirus relief bill waived RMDs for many people with tax-deferred retirement accounts. This year, RMDs are back in the picture.
So what should you keep in mind going forward?
What kinds of accounts come with RMDs?
RMD rules apply to several different retirement plans, including 401(k)s, Roth 401(k)s, 403(b)s, 457(b)s and traditional IRAs.
When do RMDs start?
You are required to begin taking RMDs when you reach a specific age. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the age requirements for RMDs.
People who turned 70 1/2 years old in 2019 were required to take their first RMD by April 1, 2020. After the SECURE Act went into effect, the rule became that people must take their first RMD by April 1 of the year after they reach 72.
How much will your RMD be?
You can calculate your RMD using tables provided by the IRS. First, you will find the life expectancy factor based on your situation. Then, you divide your account balance as of Dec. 31 of the previous year by that life expectancy factor. Note that for 2022, new life expectancy tables will go into effect.
What happens if you don’t take an RMD?
If you do not take your yearly RMD in the required amount by the applicable deadline, the amount that should have been taken out of the account is taxed at 50%.