Consider Using RMDs to Buy Life Insurance
If you don't need the income, this strategy can help you create more wealth to leave your loved ones.


For years, you contributed diligently to your 401(k) plan at work, enjoying the convenience, the lovely employer match and the knowledge that, as you made your contributions to the plan, it reduced your taxable income.
Then you watched your earnings grow, tax-deferred.
Each and every dollar remained in your account, at work for you, enlarging your retirement nest egg. It was a great deal for you, but not such a great deal for lawmakers who have an insatiable appetite for tax revenue.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Congress wants you to save money for retirement, and tax relief is a great motivator. But no tax relief is open-ended. Eventually, we must all "render unto Caesar."
Thus, required minimum distribution (RMD) rules were established.
In essence, RMD rules mandate that once someone turns 70½ years old, he or she must begin drawing an income from their qualified-plan assets. (There are a few exceptions, but generally speaking, most plans are subject to RMD mandates.) This income is considered ordinary income and is subject to taxation. And the penalty for not taking them is severe—50% of the untaken RMDs.
There is an IRS formula that is used to calculate each year's exact RMD percentage. Although unique to each individual, generally speaking, for someone who is in their early to mid-70s, an RMD is roughly 4% of all qualified-plan assets. So, if someone owned $500,000 in qualified-plan assets, they would be required to draw about $20,000 in annual income.
For most retirees, RMD mandates are not a concern, as they always intended to use those assets to produce retirement income.
But some retirees don't need the money. They have enough income being generated from other sources. So, what can they do?
Take, for example, Jim. He had owned his own business and contributed to qualified plans at work. Once he retired, he sold his business for quite a large sum of money and simply didn't need the RMD income he was required to take when he turned 70½.
Still, Jim's RMDs were about $30,000 per year, and his overall tax rate was roughly 30%. Given those financial parameters, Jim's RMDs left him with about $20,000 per year. He decided to accumulate the payments in certificates of deposit, thinking he would leave the money as an additional inheritance to his children. This all sounded great —but was it the best way to go?
Another option: Jim could have redirected the $20,000 a year into a guaranteed premium universal life insurance policy, with a death benefit that would be substantially greater than years of accumulated RMDs. Because his health was good, life insurance was a viable path to consider. In the end, Jim could have qualified for $650,000 in life insurance death benefits, proceeds that would be paid tax-free to his beneficiaries.
Then, Jim could have established an irrevocable life insurance trust and moved ownership of his life insurance policy into the trust. If after 11 years of annual premium payments to the trust, Jim died, he'd leave $650,000 of life insurance proceeds to his beneficiaries, subject to the trust mandates. Over the course of 11 years, Jim would have made a total of $220,000 of premium payments to create $650,000 of wealth.
By redirecting unneeded RMDs into life insurance, you too can use this strategy to create more wealth for your heirs. Of course, it may not be the right move for everyone, but this certainly illustrates that by being creative about RMDs, you can make your retirement strategy more efficient.
Gerard (Gerry) Dougherty is the founder and president of Boston Independence Group Inc. He is an Investment Adviser Representative and a licensed insurance professional. He hosts a weekly radio show called "Uncomplicated Money" and recently published his first book, Uncomplicated Money: Retirement Is Within Reach.
Kim Franke-Folstad contributed to this article.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Gerry Dougherty is the founder and president of Boston Independence Group Inc. He is an Investment Adviser Representative and a licensed insurance professional. He has a bachelor's degree in economics from the University of Massachusetts at Amherst and holds a certificate in Financial Management and Leadership from The American College and Pennsylvania State University. He hosts a weekly radio show called "Uncomplicated Money" and recently published his first book, Uncomplicated Money: Retirement Is Within Reach.
-
Social Security Under Trump: Live Updates to Keep You Up to Date
Social Security Blog Social Security is undergoing big changes in 2025 under President Trump. Get live daily news, updates, tips and analysis to help you navigate the developments.
By Donna LeValley Published
-
Stock Market Today: Auto Tariffs Send Stocks Lower
The main indexes snapped their win streaks after the White House confirmed President Trump will talk about auto tariffs after the close.
By Karee Venema Published
-
Charitable Contributions: Five Frequently Asked Questions
Make the most of your good intentions by understanding the ins and outs of charitable giving. A good starting point is knowing what's deductible and what isn't.
By Stephen B. Dunbar III, JD, CLU Published
-
Can You Be Fired for Going to Work When You're Contagious?
What's an employer to do when an employee shows up at the office with a cold or the flu and spreads germs to co-workers?
By H. Dennis Beaver, Esq. Published
-
Are You a High Earner But Still Broke? Five Fixes for That
If you're a HENRY (a higher earner, not rich yet) but feel like you still live paycheck to paycheck, there are steps you can take to get control of your financial future.
By Mallon FitzPatrick, CFP®, AEP®, CLU® Published
-
Five Things That Are Spiking Your Insurance Premium
It's a drag, but just as your expenses keep rising, so does the cost of doing business as an insurance company. That means higher premiums.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
How Savvy Is Your Financial Adviser? Three Ways to Find Out
Don't be afraid to ask your adviser if they're keeping up with industry developments and their own training. How else can you know they're giving good advice?
By Sean Walters, CAE® Published
-
Beware of TV/Billboard Personal Injury Law Firms: Here's Why
If you or someone you know is tempted to hire a so-called settlement mill to handle a personal injury case, here are some reasons to reconsider.
By H. Dennis Beaver, Esq. Published
-
Facing a Layoff? Ask Your Employer These Questions Now
If you're being laid off or forced into early retirement, don't make any decisions without proper guidance — and that starts by asking some key questions.
By Ben Maxwell, ChFC®, AAMS® Published
-
These Four Books Explore How to Leverage Our Outrage Positively
The authors offer some powerful tools to help us find solutions to discord rather than remaining silent or blowing up in anger.
By H. Dennis Beaver, Esq. Published