Required distributions are part of IRS rules but there are ways to use this to your advantage. Strategizing with a financial advisor in Northern Virginia before required distribution begins is a great idea. Here are some of the strategies you can use to take advantage of required distributions.
529 College Savings Plan
One way to use your required distributions is to fund a 529 college savings plan for a grandchild or loved one. It doesn’t help much when it comes to taxes, since annual contributions are limited to $15,000 a year and are not deductible for federal tax purposes. However, there may be deductions at the state level. Furthermore, earnings on these plans grow tax-free as long as the distributions are used for qualified expenses.
Roth IRA
Another option is converting a regular IRA into a Roth IRA. While traditional IRAs are funded with pretax dollars, Roth IRAs are funded with after-tax dollars and therefore, payouts and capital growth from Roth IRA plans are tax-free and can be inherited free of inheritance tax. Also, there are no required minimum distributions for Roth IRAs.
This strategy will require some payment of income tax, but it is flexible. The conversion doesn’t have to involve all the assets in a regular IRA account. So, you can manage the conversion in a tax-efficient way.
Charitable Donations
Making qualified charitable donations can be beneficial in more ways than one. You can give $100,000 a year directly from the IRA to a qualified charity. Furthermore, both spouses can donate from their IRAs, but the distribution allowance isn’t shared if you are filing a joint return. This means if one spouse donated $85,000 the other spouse could still donate $100,000.
Qualified Longevity Annuity Contract
QLACs help individuals defer tax payments and provide guaranteed monthly payments until death. If the annuity complies with IRS rules, you can defer RMDs until age 85. You can also exchange some of your assets for a lifetime stream of money. While the money doesn’t grow, it also can’t go down.
Another benefit is that QLACs reduce a person’s required minimum distributions. This helps keep the retiree in a lower tax bracket, which has benefits. The total contribution is limited to 25% of the assets in the IRA, up to a maximum of $130,000.
Variable Annuity
If you are confident that you won’t need money from your IRA, you should consider using the required distributions to buy a variable annuity with a death benefit. A variable annuity is like a mutual fund. Finance professionals manage the funds, and the value of your investment can go up or down. However, the variable annuity can have a death benefit, which guarantees the beneficiaries will get at least the amount invested.
Variable annuity assets grow tax-free as long as you live. Upon death, beneficiaries will get at least the same amount of money you put into the annuity but if assets grow, they may receive more. When the IRA is passed on, regular IRS rules apply when distributions are withdrawn. Annual costs are usually around 2-2.5% of the total amount invested.
Financial Advisor in Northern Virginia
There are many options available for individuals who may not need the money from their required distributions. However, there is no one-size-fits-all answer. The best way to handle this is to strategize with a financial advisor in Northern Virginia. Discuss your personal situation and plan for which track you should take during your retirement years. Contact Argent Bridge Advisors today to learn more.
