Now if you have been prudent and saved appropriately during your working years you may have an Individual Retirement Account (IRA) that may have a required minimum distribution. At age 70 ½ people who have traditional IRA accounts are required to make a minimum distribution from these accounts on an annual basis. For most of us this is not an issue and we can certainly use the money in our retirement years. But for some these distributions may cause them to owe a significant amount of taxes as the distribution is taxed as normal income for tax purposes. However, there are some ways in which you can make your required minimum distribution and minimize the tax effect.
The first way in which you can make this distribution withdrawal is to donate the amount directly to a qualified charity. If you have your distribution paid directly to a qualified charity the dollar amount will not be included in your adjusted gross income for tax purposes. If you do go this route you are limited to donating $100,000 a year, which to be honest would not be an issue for most people except the ultra-wealthy. By donating in this manner one does not affect their ability to itemize deductions, eligibility for ROTH IRA contributions if you have earned income, or taxes on Social Security and Medicare premiums along with other considerations when it comes to taxes. The qualified charitable distribution is only available for IRA’s that were funded on a pre-tax basis and are not available for non-deductible contributions. Ideally, when utilizing this method you should ensure that the charity receives your money by December 31st each year.
A second way in which you can make the minimum distribution and keep the amount from being taxed immediately is to purchase a qualified longevity annuity contract. If this is done the minimum distribution is made from an amount other than what is required. If you owned an IRA with assets of $500,000 and purchased a qualified annuity for the maximum of $125,000 you would in essence lower your taxable amount from $500,000 to $375,000. That would mean that someone who was 70 ½ would not be required to make the minimum distribution of approximately $18,000 but rather one of $13,500 or a difference of almost $4,500 a year. And the annuity would not start paying until age 85 meaning the taxes are deferred yet again in a similar fashion that could be passed along to one’s heirs.
And finally, a method that does not decrease one’s taxable income but rather provides for a possible tax-free return on the already taxed proceeds. As distributions from an IRA are not earned income and therefor ineligible to be placed in a ROTH IRA you can use the distribution to purchase a universal life insurance policy. While I am not a huge proponent of life insurance in retirement unless you have dependents this is an interesting way in which to pass funds along to your heirs in a tax-free manner. Someone in the 70’s can buy a policy for about $12,000 with a death benefit of almost $315,000 from a conservative insurance company. If you did this and were to die close to the purchase date the return would be extremely high and all the proceeds would be tax-free to your heirs as life insurance death benefits are not taxed by the government.
These are just some of the ways in which you can use a required minimum distribution and not have it affect your adjusted gross income. If you have any questions about these methods or others feel free to contact me or leave a message here.
