By Maurice Stouse, Branch Manager and Financial Advisor
As we approach the end of the year, many of you will be needing to take your Required Minimum Distribution (RMD) from your retirement accounts. That must be done by Thursday, Dec. 31, 2019. You work with your plan provider or financial institution where your retirement plan or IRA is held and complete a distribution, because it is required by the IRS. You can do so by completing a form or through providing instructions to your financial institution.
The RMD typically 1) begins at age 70½ (or April 1st in the year following the year you turn 70½) and 2) takes into account the plan balance from Dec. 31 of the previous year and 3) utilizes the IRS tables for mortality – how long you are expected to live. The number or factor for mortality usually is the divisor into the balance which then determines the amount that must come out. That amount – with some exceptions- is taxable income.
This article further explores utilizing some of your assets in your retirement plan to address concerns you might have regarding finances later in life. One of these that is often heard about is not running out of income. This in part might be addressed through utilizing the Qualified Longevity Annuity Contract (QLAC) with your RMD. It is a way for you to 1) provide for future lifetime income while 2) lowering the taxable amount of your RMD.
Here is how it works: You have the option of moving 25% or $130,000 from your retirement account (whichever is less) one time during your retirement into a QLAC. That movement is not taxable, and it also lowers the retirement account balance hence making future payments smaller and the tax owed potentially less on future distributions.
Simultaneously the distribution is moved into the QLAC in the form of a deferred income annuity. That is a vehicle that offers fixed income payments. Current rules specify that the annuity must begin making lifetime payments to you no later than age 85. A deferred income annuity can offer fixed payments for life – cannot be outlived while potentially also offering survivor benefits. Many might consider this arrangement as an addendum to your income plan or a personal pension plan as it is individualized for you.
To determine if this is a strategy that might work for you, please see your tax advisor and financial advisor to learn more.
Maurice Stouse is a Financial Advisor and the branch manager of the First Florida Wealth Group and Raymond James and he resides in Grayton Beach. He has been in financial services for over 32 years. His main office is located at First Florida Bank, 2000 98 Palms Blvd, Destin, Fla. 32451 with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.
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Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Investing always involves risks and you may incur a profit or a loss. No investment strategy can guarantee success.
Holding stocks for the long term does not insure a profitable outcome. Diversification and asset allocation do not ensure a profit or protect against a loss. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly. An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although it seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
