50+ Lifestyles

Postpone the Dreaded RMD

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

Taxation is always a risk to our valued retirement assets. The higher our tax, the lower our income. Retired persons
suffer the brunt of the tax man, as all sources of income are taxed for retirees. Further, retirees eventually will face the loathsome RMD – Required Minimum Distribution – tax at age 70 ½. Here is a strategy that may help with the RMD tax bite.

Let’s review the RMD first. Remember Uncle Sam classifies all money into one of two classes; qualified class or non-qualified class. Qualified money is any money that is part of a retirement plan – IRA, Roth or Traditional (although remember there is no RMD requirement for Roth IRA), 401K, 403b, 457 – any money that is part of a retirement plan is considered in the qualified class of money. Everything else is non-qualified money. Simple savings and other investment plans outside of the retirement plan are considered in the non-qualified money class. RMDs apply to qualified money only.

This week I met with a client who is approaching RMD age. As with all qualified money holders he received a letter from the retirement plan indicating he MUST take an amount out of his IRA. Due to a nice healthy pension and social security as well as spouse social security he said ‘I don’t want to take this RMD. Is there anything you can do?’ After some extensive research, we found a special program that allows the sheltering of up to $125,000 of qualified retirement money into a “Longevity Annuity.” A longevity annuity allows individuals affected by RMDs the option to postpone taking the RMD to age 85.

What’s the benefit of postponing until age 85? Two huge benefits exist with the Longevity Annuity. First there is savings with income tax along with potential savings in social security tax. That’s one big benefit. The other benefit is preservation of qualified money. This benefit especially is important for spouses. And that benefit is special for a spouse primarily dependent on the working spouses’ retirement plans. The Longevity Annuity is an excellent way to preserve some qualified money for survivors.

Naturally some restrictions apply to qualify for a longevity annuity. Regulations state that premiums are limited to the lesser of $125,000 or 25% of all qualified money account balances. These limits apply at the time of a contribution to the qualifying longevity annuity and the qualifying money account balances of all accounts on December 31 of the year before the year of the contributions.

Existing qualified money can be transferred to a qualified longevity annuity but could be restricted to the insurance company contract issue minimum premiums, age of investor and perhaps other carrier restrictions.

Qualified Longevity Annuities are especially attractive to folks that have large qualified plan balance. AND attractive for folks that have multiple qualified accounts AND especially for folks that do not need current income from these accounts – at least for the short term. Income from this Qualified Longevity annuity must begin no later than the first day of the month after the month turning age 85. What a way to preserve some qualified money for survivors!

During the month of April we continue to host Community Meetings to help preserve assets from the risk of health care costs. Note we have a Community Meeting scheduled for Tuesday March 17 sponsored by Wellmark Blue Cross Blue Shield focusing on basics of Medicare and the Medicare Supplement Plans. On Thursday March 19 United Healthcare is hosting our meeting again reviewing the basics of Medicare and then focus on the Advantage Plan. Reservations are available by calling us at 563-332-2200. If you are aging into Medicare these meetings provide valuable information on the Medicare choices available.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.