Saving up for a comfortable retirement is a challenge for most Americans: In their golden years, they may be heavily dependent on the required minimum distributions (RMDs) from their tax-deferred retirement accounts.
Even if you’re in the minority who are not reliant on annual RMDs, the IRS requires that you withdraw them yearly, and distributions are mandated to start when you turn 73.
If you don’t have to rely on your RMD to cover your cost of living and other routine expenses in retirement, there are a few strategies that could help you start using it to accumulate generational wealth that you can one day hand down to your heirs. Let’s have a look at what finance experts recommend.
Get Life Insurance
If you are in good health, it could make sense to contribute a portion of your RMD funds toward a life insurance policy.
“If the policy is structured properly, your death benefits would go to your beneficiaries tax free,” said Mark Henry, founder and CEO of Alloy Wealth Management. “Another scenario could be if you have grandchildren, you could use the RMD funds to purchase a life insurance policy on your own children so that in the event they pass away, your grandchildren would receive the death benefits from their parents tax free.”
Get a Brokerage Account
Another option to consider is opening a brokerage account and naming your grandchildren as the beneficiaries.
“You can invest the RMDs according to their age, longer timeline and risk tolerance,” Henry said. “Typically this would be an aggressive portfolio since they have time on their side. When you pass away, the beneficiary will inherit the assets and receive a ‘step-up cost basis,’ which means the value of the investments on the day you pass is the new cost basis for the investments, rather than the value from when you purchased the investments.
“Over time, with high-quality investments, this could lead to substantial growth and the step-up cost basis could save your grandkids a significant amount in taxes.”
Invest in an IRA
Another powerful method to build generational wealth with your RMD is to invest in a Roth IRA for a grandchild.
“As long as they have some form of earned income, your RMD can be directed into this account, allowing the funds to grow and compound over the years in a tax-advantaged manner,” said Taylor Kovar, CFP, CEO at The Money Couple and Kovar Wealth Management.
Establish a 529 Plan
Supporting the educational ambitions of your heirs is another solid way to use your RMD to generate wealth you can pass down in a useful way.
“This could take the form of funding a 529 plan for future educational expenses,” Kovar said. “This type of account also offers tax advantages, with earnings growing tax-free and distributions not taxed when used for qualifying educational costs.”
Diversify Your Portfolio
Investing RMDs in a taxable brokerage account can be a money-building move — if you do it right.
“A well-diversified portfolio of stocks, bonds or ETFs can create an additional source of wealth to pass on to future generations,” Kovar said. “This approach doesn’t come with the same tax benefits as a Roth IRA or 529 plan, but it does offer flexibility in terms of how and when the money can be used.”
Put Your RMDs in a Trust Fund
Another proven tactic to amass and pass on generational wealth is to put your RMDs into a trust fund that can be accessed in the future by your beneficiaries.
“This strategy can provide financial security for your loved ones while also delivering estate planning benefits,” Kovar said. “The creation and structuring of a trust should be done with the help of an estate planning attorney to ensure it aligns with your unique needs and goals.”
