For some clients, required minimum distributions are simply that: a requirement. Many wealthy clients may not rely on these funds to cover expenses in retirement, and the money only serves to increase their taxable income for the year.
But clients may put this money to work for them in a tax–free way and at the same time lower their taxable estate.
One strategy is to direct the RMDs to fund 529 college savings accounts for grandchildren or other family members. Grandparents may fund an account with up to five year’s worth of donations at one time, with a limit of $13,000 for each year. The maximum gift is currently $65,000 for an individual and $130,000 per couple for each grandchild. Your clients retain control over the account as they are the account owners. But the funds are not calculated as part of their estate – which gives them the opportunity to reduce their taxable estate assets.
Although the required distributions have to be reported as taxable income, investing the proceeds within a 529 can shelter the funds from income taxes in the future. For the grandchild, the money has the potential to grow tax free, and withdrawals are tax free as long as they are used for college expenses.
With the College Board’s recent estimate that the cost of a four–year education at a public college or university rose nearly 8% last year, saving money for a child’s higher education is an important priority, and a 529 could be a valued gift.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions.
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