How to Take RMDs to Avoid Taxes

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

How Can You Take Required Minimum Distributions (RMDs) and Minimize Taxes?

When you’re planning for retirement, understanding how to manage your Required Minimum Distributions (RMDs) effectively to minimize tax liabilities is crucial. The strategy involves early withdrawals and investing in a cash-value life insurance policy. Here’s how you can optimize your retirement funds and potentially reduce taxes due on your RMDs.

Begin Early Withdrawals from Qualified Retirement Accounts

To minimize the tax impact of RMDs, which start at age 73, as per the latest IRS updates, you should consider withdrawing from your qualified retirement accounts much earlier. The idea behind early withdrawals is to reduce the balance in your retirement accounts before RMDs kick in. A lower balance means the RMDs, which are calculated based on the account balance and your life expectancy, will be smaller. This can lead to lower taxable income each year once you reach the age for mandatory distributions.

Invest in a Cash Value Life Insurance Policy

Investing in a cash-value life insurance policy is another strategic component of reducing your future tax burden. A cash-value life insurance policy not only provides a death benefit to your beneficiaries but also accumulates value over time. This value can be borrowed against or withdrawn tax-free under certain conditions.

Here’s a step-by-step look at how investing in this type of policy can help offset RMD taxes:

  1. Policy Selection: Choose a life insurance policy that allows for cash value accumulation. Whole life, universal life, and variable life are typical policies that feature a cash value component.
  2. Regular Contributions: Start contributing to the policy as soon as possible. The sooner you begin, the more time your money has to grow, leveraging the power of compound interest.
  3. Tax-Free Loan/Withdrawal: When you start taking RMDs, you can take out loans or make withdrawals from the cash value of your life insurance to supplement your income. If structured properly, these loans and withdrawals can be tax-free, offsetting the taxable income from your RMDs.
  4. Policy Management: It’s crucial to manage your policy carefully to ensure that it does not lapse and that its cash value continues to grow. Regular reviews with your financial advisor will help you do this effectively.
How To Take Rmds To Avoid Taxes

Tax Diversification Strategies

Apart from these methods, tax diversification is a sound strategy. This means having different types of accounts that are taxed differently — Roth IRAs, traditional IRAs, taxable accounts, etc. By diversifying the tax characteristics of your retirement assets, you can better manage and potentially reduce your overall tax liability each year.

Consult with a Financial Advisor

Strategies to reduce taxes on RMDs require careful planning and a thorough understanding of tax laws, which are subject to change. It is advisable to consult with a financial advisor who specializes in retirement planning. They can provide personalized advice based on your financial situation, helping you plan your withdrawals and investments to optimize tax advantages.

Final Thoughts

Managing RMDs and minimizing their tax impact involves strategic withdrawals and intelligent investing, particularly in instruments like cash value life insurance. Starting this planning well before RMDs begin is crucial to maximize the benefits of these strategies.

For personalized guidance and more sophisticated strategies tailored to your specific financial scenario, feel free to contact us for free advice or a quote. We can help you navigate retirement planning and ensure you are making the most of your retirement assets.

Request A Quote

Get help or a quote from a licensed financial professional. This service is free of charge.

Contact Us

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

Scroll to Top