Why an RMD Strategy Matters

Many advisors express that handling a client’s Required Minimum Distribution (RMD) is a mandatory yearly chore. However, it may be time to re-think how RMDs fit into the client and advisory firm’s financial planning strategy.

The baby boomer generation, born between 1946-1964, is currently in the midst of their RMD years. They continue to hold corporate and economic power, with 50.3% of personal net worth at an estimated $70 trillion in the U.S.^[1] Additionally, at an average of 10,000 people per day crossing the 65-age threshold, all boomers will be at least 65 years old by 2030.

So how do RMDs affect an advisory firm that does not have a strategy to retain those mandatory distributions? Let’s assume your firm has an AUM of $500M, with 70% of assets in accounts owned by baby boomers. Of this $350 million, 70% is in a retirement account, or about $245 million, subject to distributions. From this amount, 33% or $81 million would be subject to an RMD in the first year. At the lowest amount of RMD distribution, the uniform lifetime table age of 72 would mean that the distribution (27.4 factor) would be about 3.65% of the $81mm, or $2.9 million, in the first year. An advisory firm that charges a 1% fee amounts to a loss of $29k for the first year of distributions, assuming no funds were reinvested with the firm. While this example may appear minimal in the first year, by year 10, the scenario reveals a cumulative potential loss of $1mm.

Therefore, how should advisors considering generational wealth transfer and asset retention strategies use the annual RMD conversation?

1. Consider the heirs
   Transition the RMD conversation from satisfying the IRS requirements to discussing how to help the client pass on their wealth. Commit to spending valuable time connecting with a client’s family and having conversations more centered on the financial goals for their children.
2. Plan an RMD tax strategy
   An RMD tax plan may include relatively simple strategies such as:
• Holding Roth conversions before RMD age
• Reinvesting distributions back into a low-cost tax-sheltered annuity
• Leveraging a “tax bracket optimization” strategy before RMD age^[2]
3. Protect longevity and reduce the RMD
   The qualified longevity annuity contract (QLAC) reduces an investor’s burden by protecting a portion of retirement account money from RMD calculations, resulting in smaller required distributions and potentially lower income tax liabilities. ^[3]
   
   To simplify things, SS&C’s Black Diamond® Wealth Platform leverages the fee-based Advent Insurance Marketplace Powered by DPL to offer commission-free insurance products, like QLACs, to help advisors with their RMD strategy.
4. Support their charitable desires
   Perhaps many clients have expressed a desire to support charitable organizations under the IRS’s 501(c)(3) definition. However, these clients may also have a secondary goal of minimizing their tax bill so more funds can go to the charity they support.
   
   The Qualified Charitable Distribution rules allow clients to transfer funds from their pre-tax accounts directly, excluding the donated amount from taxable income and counting towards the required minimum distribution amounts, as long as specific rules are met. ^[4]

The RMD oversite tool on Black Diamond provides transparency into clients’ current status and the details of distributions from retirement accounts. Advisors can use the tool to transform the annual RMD process from a required chore into an opportunity to connect with their clients and have meaningful conversations about the future.

To learn how the Black Diamond Wealth Platform and the RMD oversite tool can support your advisory firm, request your personal demo, call 1-800-727-0605, or email info@advent.com.

Foot notes:

^[1]Board of Governors of the Federal Reserve System. "DFA: Distributional Financial Accounts: Distribution of Household Wealth in the U.S. Since 1989: https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/#quarter:127;series:Net%20worth;demographic:generation;population:1,3,5,7;units:shares

^[2]https://www.schwab.com/learn/story/required-minimum-distributions-what-you-should-know#:~:text=Make%20withdrawals%20prior%20to%20age%2072

^[3]https://www.forbes.com/advisor/retirement/qlac-qualified-longevity-annuity-contract/

^[4]https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals#:~:text=owner%20reaches%2072.-,Qualified%20charitable%20distributions,-What%20is%20a