Required Minimum Distribution (RMDs)

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1 Required Minimum Distributions (RMDs) Page 1 Required Minimum Distribution (RMDs) The IRS Forces You to Take Them and Pay, But You Can Fight Back You ve used IRAs and other retirement savings plans to accumulate a nest egg to provide financial security in your golden years. Then the IRS comes along and sets out some pretty stringent rules of what you can and cannot do with your funds. In fact, the rules are pretty much what you must do. You must start taking some of your retirement funds and start paying income taxes. It s important you know the rules and play the game by the rules. The difference between tax avoidance (good) and tax evasion (bad) is about ten years behind bars. RMDs Know and Play by the Rules Our goal in this brief section is to give you the basic rules of RMDs. It is not our intent to replace your professional tax preparer (Enrolled Agent (EA) or CPA). Your situation is unique and worthy of examination by a professional. Seek that advice as you make your plans. Basic RMD rules: You must begin taking RMDs no later than the year following the year you turn age seventy and one-half (70 ½) years old You must normally take your RMD by December 31 st of each year. In certain cases you must take an RMD by April 1 st (no joke intended) RMDs are based on your account balances on December 31 st of the previous year

2 Required Minimum Distributions (RMDs) Page 2 Your RMD is calculated on the total of all appropriate retirement accounts, but you may pick and choose whether you withdraw funds from any combination of accounts you wish Your RMD amount is included in your taxable income. If you decide (poorly) to not follow the rules the penalty could be as much as fifty per cent (50%) on top of the required tax The income tax you pay is your personal income bracket currently from a maximum of 30.6% to as low as 0%. With these basic rules in hand, you have options. The option you choose should be the one that best fits your personal financial goals. There is no correct answer for everyone. Know the rules, review the options, and choose to fit your needs good advice. Your RMD Options Option One Take your RMD, pay the correct income tax, and spend what remains. The number one use for IRA and other retirement assets is to provide financial support and security in retirement. If that is your goal then take the RMD, pay the required income tax and spend it as needed. Very simple. You will still have decisions to make: Will you take your withdrawals in a lump sum or periodically over the year? Will you have income taxes withheld?

3 Required Minimum Distributions (RMDs) Page 3 Do you wish state income taxes withheld (pleasantly Pennsylvania does not tax RMD withdrawals)? If you have multiple IRAs, which one(s) will be liquidated to fund this year s RMD? For many people, taking their RMD is an annoyance. They have sufficient income from other sources to pay their bills. They are forced to take their RMD, but have always wondered if they couldn t be doing something more productive with these funds than sticking them in the bank. Option Two Instruct your IRA custodian to send your RMD directly to an IRS qualified nonprofit of your choosing. The tax code permits this action with the result that the RMD never shows up in your income tax calculation. If you are committed to supporting your church - or any one of thousands of worthy organizations - this might well be an excellent opportunity to do so and minimize your income tax bite. Work with your professional tax advisor and/or financial advisor to insure you follow the rules to get you this very nice result. Option Three Employ your net RMD, a life insurance policy, and an ILIT to create a substantial block of capital for someone(s) you love that will be free of both income and estate taxes.

4 Required Minimum Distributions (RMDs) Page 4 If this option fits your circumstances and objectives, it can be very impactful indeed. The components (again) are quite simple: Determine your net, after tax RMD Identify the person/people in your life that would benefit from receiving a substantial block of capital at your passing Work with a qualified, experienced, estate savvy attorney to design an Irrevocable Life Insurance Trust (ILIT) that precisely serves your needs Work with a qualified life insurance expert to determine the type and amount of life insurance benefits that precisely meets your goals Properly implemented, this strategy can turn a seven thousand dollar ($7,000) annual RMD into block of capital in excess of three hundred forty-two thousand dollars ($342,000.00) that will be income tax free and estate tax free for someone(s) you love. Of course, your work with your financial advisor will help you determine the details of your plans. You can customize this idea to produce a relatively small amount at your passing or a truly breath taking impact at your death. Again no surprise it all depends on your goals. Option Four Employ your net RMD to fund Roth IRA(s) for people you really love. If you ve dreamed of finding a way to guarantee your grandchildren will always remember you this just might be your ticket. Under favorable circumstances lots of time and successful investment choices your loved one could see dramatic balances in their retirement. It is certainly feasible you will be creating millionaires tax free millionaires of your heirs.

5 Required Minimum Distributions (RMDs) Page 5 As with all of our options, you must follow the rules: Select someone you love (child, grandchild, anyone you love) who works. This option requires the target of your affection be gainfully employed. Follow the IRS guidelines for maximum Roth IRA contributions. You may not be able to use your entire RMD for one of your loved ones Use your net RMD to fund Roth IRA contributions for this person. The IRS permits funding of a Roth IRA by funds contributed by folks other than the taxpayer You may not, however, fund a Roth IRA for yourself using your RMD Employ an experienced financial advisor for establishing, investing, and monitoring the Roth IRAs for your loved ones Option Five Employ your net RMD to fund 529 Plans for people you really love whom you wish to see go on to higher education. This strategy employs much of the feel of option four, but has education, not retirement, as the object of value you will be creating. The 529 plan has significant tax advantages in funding education beyond high school. Indeed, 529 plans carry significant flexibility that often surprises folks who have not explored their capabilities. It is not the purpose of this paper to set out the requirements and potentialities of the 529 plan platform. It is very important that you take sufficient time and effort to acquaint yourself with the nature of these plans prior to making your commitments. A financial advisor with experience applying 529 plans to the employment of RMDs can be quite helpful in this effort.

6 Required Minimum Distributions (RMDs) Page 6 Option Six Invest your net RMD in the financial guidance of your kids, grandkids, or someone else you love, but fear they are not well trained in the world of personal financial matters. How many ways can bad financial decisions cripple the financial futures of those you love? Inability to employ a budget and control their spending Lack of understanding of the wise and disciplined use of borrowed money Wasting years of potential investment gains No understanding of the needs and uses for personal insurances Ignoring the importance of wills and estate documents to protect their families Waiting to fund college expenses Thinking retirement is so far away they can start saving later What if you used your RMD to employ a financial coach to get and keep your loved ones on the right financial track? What if you could supply those you love with the financial experience and wisdom to make great financial choices consistently throughout the lives? What if they could know now at their young ages what it took you a lifetime to learn? What if? This can be their reality. Financial plans are books of charts and graphs. Financial coaching is educating, instructing, guiding, and monitoring the entire financial lives of people you love. Not once, but every ninety (90) days. Using your RMDs to fund financial coaching for a loved one might have the biggest long term - impact you can imagine. And it happens without the risk of turning Thanksgiving s family dinner into a nagging session. Giving someone you love the advantage of financial coaching will help them:

7 Required Minimum Distributions (RMDs) Page 7 Spend less than they make Avoid borrowing money unless absolutely necessary Invest money inside an intelligent and well thought out system Acquire the right insurances at the right prices Protect their families with appropriate and cost efficient estate planning Provide education to their children in wise and responsible ways Retire with dignity and financial security Consult with a financial coach that can provide all these results and walk with the ones you love to a brighter financial future. Bonus - Option Seven Sometimes, the way to solve a real problem is in advance. Once the RMD rules have kicked in, you need to look to options One through Six to find relief from their impact. If, however, as you read this paper you find yourself well short of seventy and one-half (70 ½) you might be able to head the problem off at the pass. One simple way might be to withdraw all the funds you are able to and still stay in what you consider a low tax bracket. At this writing, a married couple can report taxable income up to $72,500 and remain in the fifteen per cent (15%) federal income tax bracket. If, at your age sixty-five (65) you find your taxable income to be well below that threshold and you find that tax bracket to be attractive - you might consider taking a distribution from your IRAs early, paying the tax and avoiding your future RMD challenges. Done over time, you might well find yourself able to remove significantly large sums of money while paying tax at an acceptably low rate.

8 Required Minimum Distributions (RMDs) Page 8 And just to keep things lively, if you choose to take taxable distributions from your IRAs in advance of age seventy (70) you might also choose to convert those distributions to balances in a Roth IRA for yourself and leave the IRS behind. But that is a strategy for another time and another white paper. These Are All Great Ideas, but Not All Great For You Start with what you want and need. Start with your financial objectives. Measure every decision, every choice by your personal goals. What your family wants most is for you to be healthy, happy, and independent. Once you know you have enough resources to be healthy, happy, and financially secure for all of your days, you can turn to the question what impact do we want to have on those we love most?