Those who have qualified retirement accounts (An IRA, 401K, or other account that has never been taxed) will need to start paying Required Minimum Distributions (RMD’s) at age 70.5. RMD’s specify that you must take annual distributions from your qualified accounts every year. Failure to do so will result in substantial IRS tax penalties.
The RMD is based on a table that determines what percentage in a given year needs to be paid. The percentage amount increase with age. Roughly, a person who is 70.5 will need to take about 3.7% while a person who is 80 will need to take approximately 5.6%.
Many people are taking money out of the qualified accounts every year for income which meets the RMD requirement on an annual basis. This does not pose a problem for them but it does for people that are trying to preserve a qualified account in order to pass it on to heirs. For them, the annual RMD reduces the amount in the account which reduces the amount they will pass on. If they can achieve annual account growth in the market to off set the distribution, the account will be preserved but how many investors have been earning over 4 % every year with their investments?
Two companies have products that specifically address this problem. Annexus (Aviva) and Security Benefit have both come out with annuities with RMD friendly death benefit riders. These products will provide a minimum guaranteed growth on the account as a death benefit regardless of actual account growth. In other words, the actual account value may be going down every year but when the owner dies, the death benefit payout will reflect a minimum growth of 4% per year. Both companies currently offer a 4% growth minimum.
They both also offer a feature that allows any account value gains to be stacked on top of the 4% growth. For example, if the Annexus product earns 3% interest in a year, the 3% is added to the minimum 4% death benefit growth for a 7% interest rate that year. The accumulation accounts can never product less than a 0% return in any given year which means the death benefit will never grown less than 4%
Both products will work well to preserve qualified assets for those looking to pass them on. The Security Benefit Product currently has a 10% bonus which gives it a small edge however.