It’s tax season once again- meaning it’s time for the annual discussion about RMDs. Many clients don’t need the income or want the distribution, although they’re forced to take money out of IRAs, which they then pay taxes on. As a reminder of the tax implications of inherited IRAs- after a client passes away and the IRA is inherited by children or a spouse, there are taxes owed on the inherited IRA.
An option for healthy clients who don’t need the income from RMDs is to use the after-tax RMD dollars to fund an insurance policy.
Life insurance is one option. Clients can allocate the RMD dollars to something tax efficient, and the tax-free death benefit from the policy can be used to pay for any taxes on the inherited IRA. There are also many polices that grow cash, which grows tax-deferred and can be distributed tax-free through policy loans as another avenue of tax-free income in retirement. There are various funding options for this strategy, specifically one where the policy can be started before the client is required to take RMDs, then the premium can be stepped up once the client reaches RMD age. The ability to lock in a policy at a younger age (before RMDs) means that clients will be younger and have a better chance to qualify for life insurance coverage.
We can also use RMD dollars to address LTC concerns for clients. There are many LTC hybrids in the market that blend life insurance and LTC insurance together. These options are attractive when funded by RMDs because all LTC benefits are paid out tax-free and these policies can be funded for a short number of years- usually 1-10.
When you start the RMD conversations with your clients who don’t need the income, keep these insurance options in mind and call Wholehan Marketing to find the product and strategy that fits best for your clients!