How to Turn a $350,000 IRA into $600,000 for Your Heirs!

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Jim Lorenzen, CFP®, AIF®

IRS mandated withdrawals from retirement accounts – required minimum distributions (RMDs) – must begin by April following the year people turn 70-1/2.   

But, if you wait until the year following that birthday, you will be required to take a double-distribution that year – two RMDs (be sure to talk to your tax-advisor).  Here’s an RMD strategy you might like!

Many people, however don’t need their RMDs and don’t want them – they have to pay taxes on the distributions.  They simply plan to pass the money on to their kids or grand kids.

Fred and Wilma have been retired in Bedrock for some time now.  He’s 69 years old and has $350,000 in an IRA he plans to leave to his children, Pebbles and Bam-Bam.

The problem, of course – as usual, is Uncle Sam.   Uncle Sam will force Fred to begin taking money from his IRA in the form of Required Minimum Distributions (RMDs).

Because they both have pensions and other sources of income, this is money they never intended to spend or use.  What’s more, because the IRS uses a ‘withdrawal factor’ that changes as they age,  the RMDs are calculated to deplete his IRA, thus guaranteeing the government they’ll get their cut, by the end of his life expectancy.

To summarize:  Fred gets older, the IRA money is distributed by force, and the longer he lives, the greater the chances there will be little, if any, IRA left for the kids or grand kids.

The government is going to get their money – I guess we can all let that go – the only question is when, but that’s another story.  The fact is, if Fred’s in the 28% tax bracket, only 72% of the money he sees on his statement is actually his.  Uncle Sam is a 28% partner for the rest, unless he decides to change his percentage.

Fred could invest the after-tax withdrawal money and the kids could take advantage of the “stretch” option for the IRA, which requires non-spouse beneficiaries to take distributions over the course of the person’s life expectancy, keeping the money for the kids working for a longer period of time.   Of course, as noted, there may not be much left if he’s in good health and lives a long life.


The IRS withdrawal factor for Fred at his age is 27.4 (you can find yours on the IRS website).

This means his first year RMD will be $12,773 and, of course, he’ll have to pay income taxes.  At his 28% tax bracket, that would leave him with $9,196 after taxes on his first RMD.

If he invested that $9,196 every year and earned 5%, he’d have $217,554 for his children and grandchildren if he passed away at age 85.  If he passed away at age 90, he’d leave $328,474 to his heirs, plus whatever pretax dollars might be left in the IRA – a balance that will likely be declining each year because the IRS withdrawal factor is based on life expectancy and computed on the balance of all IRAs a the end of the previous year.

There might be a better option[1].

Fred’s in good health.  Since he doesn’t need the money, he decides to pursue a little more sophisticated strategy.

He decides to leave the IRA where it is and use the required minimum distributions to purchase a permanent life insurance policy (since Fred can’t predict his date of death, his outliving a term policy would mean all the premiums he had paid would be lost forever with nothing to show for them).

For our example, we’ll use a no-lapse guaranteed individual universal life policy.  We’ll also assume the same numbers cited above and a 28% tax bracket.

Since Fred’s a non-smoker and in good health,  his $12,773 RMD, after his 28% income tax payment, means he might leverage his  $9,196 after-tax withdrawal into an immediate $334,936 death benefit, which generally would pass tax-free to his heirs.[2]  

The IRA money will still have embedded taxes, of course, and the amount of death benefit this annual premium might buy will vary by company, policy, and design.  For illustration, though, this is close enough to make the point.

As you can see from our table[3], when added to the remaining after-tax IRA assets, the net total to the beneficiaries can be substantial, regardless of when it happens.  I’ve highlighted two ages (85 and 95) to show what that $350.000 IRA could really mean if the RMDs are used for this strategy and Fred’s death should occur at those ages.

End of   Tax-Free End of Year Less Tax on Net IRA Value Total Value
Year Age Life Ins. Benefit IRA Value4 Beneficiaries (30%) to Beneficiaries To Beneficiaries
5 74 $334,936 $387,852 $116,356 $271,496 $606,432
10 79 $334,936 $392,978 $117,893 $275,085 $610,021
16 85 $334,936 $369,468 $110,840 $258,628 $593,564
21 90 $334,936 $318,786 $95,636 $223,150 $558,086
26 95 $334,936 $241,227 $72,368 $168,859 $503,795


All of this, of course, depends on Fred’s qualifying for a permanent policy.  Since Fred isn’t dealing with any ‘high risk’ conditions, he should have no issues getting approved.

Not a bad strategy for the use of $9,196 he otherwise didn’t need during a time he’d be drawing down on his $350,000 IRA.

This was a generic hypothetical.  In reality, RMDs do not remain constant; so, having a strategy properly designed can make a significant difference in outcomes.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.