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What should I do with RMD funds after paying taxes if there is currently no need for the funds and I want them to grow with limited risk?

I have two annuities and a 401(k) totaling $500,000, a year’s emergency fund, and a home worth approximately $350,000. The annuities have a 10-year surrender period. I’m five years into the contracts this December. I will began RMDs in 2019. I’m currently debt free, however, I plan to do $10,000 in home maintenance projects yearly until they’re all done (replacement windows, driveway repair, etc.). My pension and Social Security should cover those expenses and I do not anticipate needing the RMD funds. I also do not plan to start an income stream from the annuities before the surrender period ends. They both have a death benefit and a 10 percent free withdrawal option that I also don’t plan to use.

At this point I’m not sure I want to keep the annuities after the surrender period, but don’t know if I should start taking the free 10 percent now and invest it, or wait five years and start taking it then. I don’t have life insurance, but I have prepaid my funeral expenses. I want the $500,000 to grow and go to my son and granddaughter. What should I do to make the most of the annuities and 401(k) money with limited risk?

Debt, Financial Planning, Pensions, Social Security, 401(k)
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July 2018

You're doing a fantastic job of looking at the multi-faceted aspects of RMDs.  Your question is also a great one because not only does it show how complicated these can be but how imminent they loom not just for you, but for all retirees with money in tax deferred accounts. 

There are several approaches that would work but I'll start with that one which seems most applicable to you (this is for informational purposes only though). 

That strategy would look like this: Take your RMD and have the provider send 100% of it to the IRS.  Using this as a tax payment offset, then take a portion of the remaining funds equal to the tax payment just made (be aware of tax bracket thresholds) and convert some of the remaining funds to a Roth IRA.  Repeat this each year until all monies are Roth IRA.

The advantages of this plan: Roth IRAs are not subject to RMD rules.

You do not experience any difference in your income or taxes on that normal income as this is largely an insulated transaction- meaning your cash flow in retirement is unaffected.

You can leave this Roth as a tax free gift to your son and granddaughter that can continue to give them lifetime tax free growth as well!

As for which accounts, I would need to examine your situation and contractual obligations closely before increasing the specificity but if you look at the 10% free withdrawals as an optional cash account, that might provide more liquidity to maneuver this strategy, especially since you mentioned you don't think you'll keep them beyond the surrender period.

I hope this helps. 

July 2018
July 2018
July 2018
July 2018