Some Year-End RMD Strategies and a Bit More

​Crispy Fall greetings, everyone!  It's been a while since I've written, so lest you completely forget me and I end up in your spam folder, I want to reconnect and offer some timely advice about those pesky required minimum distributions from retirement accounts (RMDs) that some of us have to deal with this time of year.

First, though, I need to digress and give you something else worth thinking about that can be a trap for the unwary:  If you or others you know are assuming that you/they don't need a will or trust if all the assets are in joint ownership with someone else (like a residence or bank accounts) or have designated beneficiaries (like IRAs or life insurance) - and that because of those arrangements, the assets won't require probate administration and can't be called upon to pay off a decedent's obligations and end-of-life expenses - you/they are seriously mistaken and could be blindsided if not careful.  

That is, if all those assets pass automatically and quickly to others at someone's death - great result, for sure - the assets are by no means exempt from the obligations and expenses I mentioned.  So, if you are a recipient of one of those automatic transfers on death, it will behoove you to make sure that all the decedent's obligations have been satisfied or you could be called upon to return at least a portion of what you've received, in order to satisfy those obligations.  'Nuf said here about that, but please let me know if you have questions about what I've just described.

OK, let's talk RMD strategies.  You'll know who you are if you have this issue to contend with, so I won't bother with the basics.  The problem is that if you just receive a check for whatever that annual amount turns out to be, you're going to pay regular income tax on it unless you take steps to at least soften the blow.  Here are a few of those you might consider.

Probably the lowest hanging fruit is simply to have your IRA administrator make charitable contributions directly from the account to your favorite non-profits - the Peterborough Players is always high on my list - 'cause every dollar that goes to them is one you don't have to include on your IRS return.  Sure, there are limits on these direct payment benefits, but most of us don't have to worry about exceeding them, and even so, I'm not sure whether there's anyone left at the IRS to keep track.

Other possibilities for reducing the tax bite on RMDs is to use the funds to pay for things that are tax-deductible.  So, you could pay your year-end real estate taxes with the funds or prepay interest on a mortgage balance you still owe, or even pay a long-term care policy premium, all of which are deductible and might give you a greater benefit than taking just the standard deduction you've always used. 

Other tactics you might consider are to deposit the RMD back into the account, so the non-taxable portion will start growing again on a tax-deferred basis.  

Likewise, if you have grandchildren and want to help them avoid years of repaying student loans, you might contribute the net RMD funds to so-called "529" accounts for them, and the funds in those accounts will also grow taxed-deferred - even never taxed if the payouts are used to pay for tuition, books, room and board, and other education-related expenses for the young Einsteins.

Finally - and this one is more cutting-edge but perhaps worth a look - you can investigate what's known as a "qualified longevity annuity contract", or QLAC in gov-speak parlance.  This is a kind of annuity you can buy with up to $200,000 (per spouse) from the accounts where RMDs are required and then defer taking payments from the annuity until age 85.  So, that much would no longer be included in calculating your RMD and you wouldn't have to pay tax on the annuity payments until you started taking them.  Of course, you need to make sure the company you buy the annuity from will still be around at that point, but that's a risk anyone who buys life insurance is also taking, and you need to be clear about what happens with the annuity balance if you pass on before you start taking the payments.  You'd certainly want it to go to your designated beneficiaries.  Like lots of insurance plans, there are bells and whistles to consider, so do your homework before making a decision.

And, of course, the most advantageous option from a non-tax standpoint would be to take that RMD and book a nice trip somewhere to enjoy the fruits of all those years contributing to the account.  We just got back from a week hiking in Sicily with our kids and the value of an experience like that is priceless.  Now I'm thinking about Spring training in Fort Myers, but I'm not yet ready to broach that at home.