In our last article, we discussed the importance of having at least one IRA account that is protected from market losses. This is because Required Minimum Distributions happen each year after age 72 and RMD’s will require the liquidation of investments, which could be down in value. Since the IRS allows the satisfaction of an RMD from any IRA account, an investor could satisfy the RMD or ALL accounts from the IRA account that did not lose money.
In this article, we’ll dig into which types of strategies could be used for this market protected account.
What are the most common types of market protected accounts that can be used?
1. Indexed Annuity without income rider. A low or no cost annuity can act as a covering over an account in order to protect it from stock market losses. These types of annuities allow you to participate in the gains of the market (up to predetermined levels), but do not share in stock market losses. These types of accounts can have differing amounts of liquidity (ability to withdraw money), so it is important to ensure that there is enough liquidity to distribute the RMD for all IRAs from this account.
2. Index Linked Variable Annuity. This is another type of investment that can limit the total amount of loss in a particular time period. For example, the account may absorb the first 15% of losses during the time period. Although it’s not completely protected from loss, it does guard against the significant losses that can occur during short time periods. These accounts can also have various forms of liquidity, so it is important to ensure that there is enough liquidity to distribute the RMD for all IRAs from this account.
3. First Trust Deeds. First Trust Deeds are an example of an investment that is not tied to the performance of the stock market. These could be a good account to take RMD distributions from in a year of significant market losses in other accounts. First Trust Deeds also have liquidity considerations so planning must be done to have sufficient liquidity.
4. Cash. There’s no law against keeping a certain amount of money out of the stock market in a money market position in order to satisfy RMD’s. In years of stock market losses, a distribution can be made from this account to satisfy all RMD’s. In years of stock market gains, a small sale of assets from the IRAs that made gains can be made and transferred to the cash account to replenish it for future bad years.
Have you reached the RMD stage yet? Did you know that the new tax law has delayed the start of RMDs?
If you have any questions please feel free to contact me.