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RMD Penalties



There are steep penalties for failing to take an RMD. The current 50% tax is one of the heaviest penalties in the entire tax code, so it's no wonder legislators want to bring it down. The SECURE 2.0 Act reduces the penalty to 25% in all cases. In addition, the penalty drops down to 10% if you take the necessary RMD by the end of the second year following the year it was due.


So, for example, if you fail to take an RMD due in 2022, the penalty is knocked down to 10% if you withdraw the necessary funds by December 31, 2024. These penalty-reduction provisions apply beginning in 2023.


Finally, the SECURE 2.0 Act boosts the use of qualifying longevity annuity contracts (QLACs). Generally, with a QLAC, you can invest up to $130,000 (2022 amount) or 25% of a retirement account, whichever is less, and shield those funds from RMDs. The SECURE 2.0 Act repeals the 25% limit and bumps the dollar amount up to $200,000 (adjusted for inflation each year). It also clarifies that (1) survivor benefits can be paid following a divorce, and (2) an employee has 90 days from the purchase date to rescind a QLAC.


Please hover over the RMD's tab for more information on the benefits of QLAC’s and how they work. If you're having difficulty, then click on to get to the page.


There are some new rules for required minimum distributions (RMDs) from retirement savings accounts (e.g., traditional IRAs and 401(k) plans). The SECURE 2.0 Act of 2022 makes significant changes to the way people save for and are taxed in retirement. And RMDs are one of the major areas of focus in the new law.


It wasn't all that long ago that the retirement-savings landscape was shaken up. Among other things, the original SECURE Act, which was enacted in 2019, extended the age at which you must start taking RMDs from 70½ to 72. That was a big boost for many seniors, who can now keep money in their tax-free retirement accounts a little longer. But that wasn't enough help for retirees in the eyes of many lawmakers. So, as soon as the ink was dry on the SECURE Act of 2019, Congress began planning additional legislation to help more people save for retirement and hold on to their money longer in retirement. Those efforts resulted in the SECURE 2.0 Act of 2022.


For retirees, or those approaching retirement, who are worried about mandatory retirement account distributions, getting up to speed on the new RMD changes is very important. You need to know how the new RMD rules will impact you to properly plan your finances in the future. 

Age When RMDs Are First Required


Before the SECURE 2.0 Act you had to start taking RMDs from 401(k) accounts, traditional IRAs, and similar retirement savings accounts (other than Roth IRAs) in the year you turned 72 (although you had until April 1 of the following year to take your first RMD). However, the SECURE 2.0 Act eventually pushes the age for starting RMDs to 75 (in 2033) after moving it to 73 this year.

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Required minimum distribution (RMD) rules for individual retirement accounts (IRAs) may bother you if you don't need the money and don't want to pay the taxes. Compliance is not a choice. It's the law.

A few annuity strategies exist that may address your future RMD issue. Knowing all of your options lets you choose the right RMD strategy for you.


Key Takeaways

  • The IRS will look at the total dollar amount of your qualified accounts to tally your required minimum distribution for each year.

  • Attaching a death benefit rider to an annuity you don't plan to tap into for living expenses can guarantee you a minimum rate of return. This should let you offset your RMDs.

  • You might also apply your RMDs toward the purchase of a life insurance policy, The death benefit of this could pass tax-free to your beneficiaries.

  • This tactic could also apply to the purchase of a flexible-premium fixed annuity with a guaranteed death benefit rider.

Required Minimum Distribution

Whether you have one IRA or 10 separate IRAs, the IRS will look at the total dollar amount of your qualified accounts to calculate your RMD annual payment. Your RMD can be deducted from one IRA or from multiple qualified accounts. You just need to meet the IRS dollar requirement .


Annuity Death Benefit Rider Strategy


Some IRA owners don’t plan on ever accessing the money in their IRA, aside from the RMD. Instead, they plan to leave the bulk of their IRA to beneficiaries as a legacy. This can be done by using a contractually guaranteed death benefit rider attached to a fixed annuity. 


A guaranteed death benefit rider costs an extra yearly fee. In exchange for your fee, you receive a base level interest rate guarantee.


Let’s say you have $300,000 in a traditional IRA, and you never plan on using that asset to live on in retirement. You place that money in a fixed annuity with a contractual death benefit rider that guarantees 5% growth. The $300,000 will grow and compound by that amount every year. This offset strategy lets you take your RMDs ​while keeping your initial IRA total dollar amount intact for your listed beneficiaries and heirs. The growth should outpace your RMDs.


You may have to pay taxes on an annuity purchased with IRA funds, depending on whether you use pre-tax or after-tax money. Consult a trusted financial advisor or accountant first so you know what to expect.


An RMD calculator can help you decide if this is a good strategy for you. If this seems like a feasible option for your investment goals, the sooner you start this strategy before you turn 72, the better. Your initial investment can grow by an annual 5% before you are required to take your RMDs.




Maximizing Your RMDs With Life Insurance


Another creative strategy to maximize RMDs is to apply those annual dollar amounts to the purchase of an annuity or life insurance policy. If you qualify for life insurance, this would be the first choice because the death benefit would pass tax-free to your listed beneficiaries. It also leverages your money by letting you purchase a policy that pays out much more than the premiums you pay into it.


Figure out what the after-tax dollar amount would be from your RMD. Then buy as much life insurance death benefit with that as possible. Term life insurance is a low-cost option, but it will either stop at the end of your term or require increased premiums if you have a renewable policy. Single-premium whole life works well if you qualify. You pay a premium once, and then the policy is in effect for your lifetime, passing to your beneficiaries when you die.


Flexible-Premium Annuities


If you do not qualify for life insurance, the same strategy can be used to buy a flexible-premium fixed annuity with a guaranteed death benefit rider attached to the policy. A flexible premium means you can add money to the policy. This annuity strategy is another very effective way to use your RMDs. Note the death benefit will not pass tax-free to your beneficiaries, as with life insurance.


Having to take your Required Minimum Distributions (RMDs) need not be painful—an annuity or life insurance solution may exist that will fit your overall legacy plan beautifully.

For more information, please complete the information on the Contact tab and we will reach out to you as soon as possible.

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