Reducing RMD’s and Benefiting from a Drop in the Stock Market

Advice to a friend who wanted to reduce and postpone her RMD (required minimum distribution):

(1) Rolling Funds from a Traditional IRA to a Roth IRA

While I have been reading about the stock market going down I remember a tip I recently got in a tax seminar. Down markets are a good time to roll funds from a traditional IRA into a Roth IRA – because the traditional IRA fund is selling stock at a lower price and the Roth IRA is acquiring it at that low price. When the stock market goes up in value, your Roth account will have a higher fair market value.

This is especially good for you, because you don’t want so much money in your traditional IRA and 401(k) (from which you have to take required minimum distributions – a certain percentage depending on your life-expectancy). You may keep your money in your Roth as long as you like. In fact, you should keep money in your Roth at least 5 years from the day you first start a Roth. “Should”, but not “must”, see the end of the next paragraph.

Now you probably can’t afford to roll over your whole traditional IRA into a Roth – because you would be whammed with a huge tax bill.
When you do such a rollover, you must pay taxes NOW on everything you roll over. Then, forever after all distributions from your Roth are tax free. Of course you paid taxes on the money that went into the Roth, but every dollar EARNED in the Roth you NEVER pay taxes on – I repeat, ALL distributions from a Roth are tax free, and you can keep money in your Roth as long as you like, building up more and more tax-free earnings.
Important EXCEPTION or caveat: to have the post-conversion EARNINGS be tax-free, you can only withdraw them 5 years after the date that you created the Roth. – That beginning could have been with a very small investment, so it’s a good idea with Roths to add to them over the years. Of course Roth’s are always safe, because you can always get your principal out tax-free, unless the market goes down below your initial investment.

So that’s a good strategy for money you can put-aside for at least 5 years. Really great for teens when they have their first job – heck, you might even let them keep their earnings and gift them a Roth. – “I was hoping for a Porsche”, such gratitude.

Back to old folks, and RMDs…

(2) QLACs (Qualified Longevity Annuity Contracts) as an Alternative Strategy

QLACs, Qualified Longevity Annuity Contracts, are my other strategy.
This also requires that you must not have access to the funds for a number of years… but that, of course is what you want… keep the money invested and let it grow tax-free. You can put up to 25% of your combined traditional IRA and 401(k) portfolio – up to a limit of $200,000 in one of these investments. Whereas the age at which you must start withdrawing funds from typical plans is 73, you are required to structure you annuity to begin withdrawals by age 85. These are also called RMDs and are based on life expectancy. The QLACs are offered by insurance companies, which have a variety of flavors; they can terminate with a lump sum, or with periodic payments. You can fund them gradually, if you wish.

Note: (1) and (2) differ in that, with the Roth conversion, you have to pay at the moment of conversion.
You don’t pay the government when you purchase a QLAC. But, with a QLAC you pay taxes when you have your distributions. Distributions from Roths are tax-free.

Reducing RMD’s and Benefiting from a Drop in the Stock Market

(1) Rolling Funds from a Traditional IRA to a Roth IRA

(2) QLACs (Qualified Longevity Annuity Contracts) as an Alternative Strategy

Note: (1) and (2) differ in that, with the Roth conversion, you have to pay at the moment of conversion.
You don’t pay the government when you purchase a QLAC. But, with a QLAC you pay taxes when you have your distributions. Distributions from Roths are tax-free.

Have tax questions? Ask Us.

Schedule a Consultation

Reducing RMD’s and Benefiting from a Drop in the Stock Market

(1) Rolling Funds from a Traditional IRA to a Roth IRA

(2) QLACs (Qualified Longevity Annuity Contracts) as an Alternative Strategy

Note: (1) and (2) differ in that, with the Roth conversion, you have to pay at the moment of conversion. You don’t pay the government when you purchase a QLAC. But, with a QLAC you pay taxes when you have your distributions. Distributions from Roths are tax-free.

Have tax questions? Ask Us.

Schedule a Consultation

Note: (1) and (2) differ in that, with the Roth conversion, you have to pay at the moment of conversion.
You don’t pay the government when you purchase a QLAC. But, with a QLAC you pay taxes when you have your distributions. Distributions from Roths are tax-free.