Preparing for RMDs in August?


There are about 4 months remaining until December 31st when Required Minimum Distributions are required to be filed. Typical planning for RMDs occurs during the last quarter of every year, but this year why don’t you try something different which includes potential for new business.
Often those who are taking RMDs don’t necessarily use those for living expenses. For those who aren’t using them for direct living expenses here are three ideas to consider (obviously, the client’s objective determines the strategy to be considered).

One – Using RMDs as a gift to charity. This strategy is often used to provide a benefit to a desired charity or means to perhaps pay a religious tithe. There is a better way to structure these types of gifts using the Qualfied Charitable Distributions (QCD). The concept is fairly direct where the qualified account makes a direct contribution to a declared charity instead of having the contribution paid to the account owner and then writing a check to the charity. Making a direct contribution to the charity keeps the money out of your adjusted gross income and it also helps avoid the Medicare high-come surcharge for those right on the threshold. This also can be beneficial with the new higher itemized deductions being phased out with the increased standard deduction.

Two – Consider a Qualified Longevity Annuity Contract (QLAC) to further defer the RMD to age 85. In 2014 the U.S. Treasury exempted certain deferred income annuities from RMD rules in regard to distributions. An individual can establish a QLAC equal to the lessor amount of $130,000 or 25% of the funding sources value. For Example, if your client has an IRA with a balance of $300,000, they can contribute $75,000 from that account into a QLAC to defer the RMD on that portion until age 85. Once the plan balance gets above $520,000 the maximum amount that can be transferred to a QLAC caps at $130,000. If death occurs prior to age 85, the funds are returned and still accessible to beneficiaries.

Three – Possible funding source for life insurance premiums. Qualified plans are subject to income in respect of decedent (IRD). IRD is income earned by a decedent or income to which the decedent had a right prior to death but was not properly included in the decedent’s gross income prior to death. This may be the decedent’s estate or an individual who acquires the right to receive the income directly from the decedent. It’s basically the income tax that is due on the qualified plan. Often qualified plans are left as an inheritance for children. Sadly, the tax calculation on these plans is often overlooked and net result passing to the heirs is often not explained to the qualified plan owner. RMDs could be used to purchase a life policy (if insurable) to “make the gift whole” as originally intended for the beneficiaries. The life policy recoups the taxes paid without causing additional taxation at death. This might also provide relief to the beneficiaries as their own personal taxes will be impacted. A beneficiary in a lower-income tax bracket might see an impact with subsidized health insurance premiums, or one in a high tax bracket might experience loss of deductions with the new 199a deduction available or small businesses.

Strategies one and two are also great helps for accountants as they often look for tools when consulting with clients who are taking RMDs. I’ve yet to meet a CPA who understood or knew about qualified longevity annuity contracts.

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Layne Turner