May 28, 2019

Must I Take my RMD? (Required Minimum Distributions)

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

Today I want to talk with you about a special topic many of my clients are experiencing and don’t want to be experiencing – and that topic is with RMDs – Required Minimum Distributions as many of us know, occur for ‘qualified money.’ Qualified money is money we have in retirement accounts such as IRAs, 401ks, 403bs, 457 plans, profit sharing plans…..all are considered qualified money. As we also know interest earnings and/or gains on qualified accounts are income tax-deferred. We do not need to report on our income taxes interest earnings or gains or qualified accounts. They remain income tax deferred – until age 70 ½. When we hit this wonderful age 70 ½ we are now required to make a withdrawal of some of those funds as the government feels that since this money has been income tax deferred – there comes a time when we have to pay the piper. This is the time when we have to pay the tax on at least on a portion of these retirement plans. This is an RMD – Required Minimum Distribution. Yes, RMDs are required and must be taken.

Many of my clients (and maybe this is your situation too, readers) say to me….”I don’t want to take money out of my IRA or another retirement plan. I want to leave money there for an emergency OR even to help with long-term care costs. Furthermore, when I die I want to leave that money to my beneficiary – spouse, kids, grandkids – as a legacy. How many of you readers are in that situation too? You don’t want to take money out of that qualified retirement account(s). You want to leave the money there for your benefit if needed it in the future for an emergency fund, long term care costs, AND if not needed you just want to leave the money there for your legacy to children or grandchildren. But guess what?? Uncle Sam says – too bad! That money has avoided taxes all these years. There has to be a time to pay tax on that long since income tax deferred account(s). And that is what an RMD is…required.

Over the years we have had many clients says this exact same thing. They don’t want to take money out of those retirement accounts. Today’s retirees – many of whom have both a pension plan AND a 401K plan. Many do not want to take additional money out of these qualified accounts. But the law says this is a REQUIRED Minimum Distribution. I didn’t have a good option for these folks. They had to take their RMD – pay taxes and be done with it!!

AND in addition often those withdrawals – those RMDs – count toward your total taxable income for the year. The amount is taxed at your applicable individual federal income tax rate and may also be subject to state income tax. The increase in income could result in a higher tax bracket and further impact the amount of tax we pay for Social Security AND Medicare – it’s a triple whammy. Many clients want to leave these qualified accounts for their beneficiary(s) – leaving a legacy.

Now however we may have an alternative. One of the life insurance companies we represent…in particular Allianz Life Insurance Company of North America has developed an annuity that may help in part with this concern. The newer annuity is called the Legacy by Design. This product is available only for “qualified money.” Remember the IRS classifies all of our money as either ‘qualified’ or ‘non-qualified.’ IRAs, 401Ks, 403bs, 457 plans or other retirement plans are all considered ‘qualified.’ Interest earnings and gains in these accounts have been income tax-deferred all of our working years. We did not have to report for income tax purposes earnings in these qualified accounts. They always enjoyed that benefit of income tax deferral. Now however Uncle Sam says there comes a time when these accounts must begin to pay income tax – consequently the RMD – Required Minimum Distribution.

The Allianz Legacy by Design is built to enhance your legacy. The way it works is it actually offers two companion annuities for a systematic and efficient way to satisfy RMD requirements on qualified and direct the portion of that distribution that you don’t need for income into the companion non-qualified annuity. Allianz actually issues two annuities – the Legacy Planner Annuity – a fixed index annuity that you purchase with qualified assets. Along with a second annuity – Allianz Legacy Plus Annuity – this is a non-qualified fixed index annuity issued as a companion product to the Legacy Planner. Annual RMDs when they become necessary are withdrawn from Legacy Planner, penalty free. A portion of that withdraw can be withheld for taxes or sent directly to you. Any remaining amount can transfer to the Legacy Plus – the second non-qualified annuity. This money then receives a 25% death benefit bonus.

Now let’s look at both of these annuities. First the Legacy Planner – remember this is for qualified money only. Minimum of $20,000 is needed via transfer or rollover of an eligible existing ‘qualified’ plan; issued as an individual IRA or SEP IRA. Maximum premium is $1 million. Additional premium may be accepted during the first contract year. This annuity is available for persons up to age 80.

Within the first annuity – the Legacy Planner growth is linked to the major indexes…..S&P 500, Nasdaq 100, or Russell 2000 index or others. Calculation with these indexes is monthly only. Using annual point to point calculations are available for these indexes plus others. Choices are there. Other features with the Legacy Planner as include Nursing Home Benefit, Flexible Annuity option Rider available for an additional cost.

Once again this special annuity arrangement is designed for persons wanting to build and enhance their legacy over time by directing all or a portion of their RMDs from one annuity into a second non-qualified annuity while satisfying the required minimum distribution requirement. This special annuity is actually two annuities. One called the Legacy Planner. The second annuity is called the Legacy Plus. This second annuity is issued as a companion to the first annuity and it may be issued with $0 accumulation value. The second annuity is issued to receive all or a portion of the RMD from the first annuity. The accumulation value of this second annuity will receive a 25% death benefit bonus payable to the beneficiary enhancing the value or your legacy. RMDs are satisfied. Legacy is enhanced. Call us for details.

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.

Filed Under: Finance