Using RMDs to Fund Life Insurance

Under current law (SECURE 2.0 Act), required minimum distributions from traditional IRAs and most employer retirement plans begin at age 73. This age will increase to 75 starting in 2033. RMD amounts are calculated annually based on your account balance and the IRS Uniform Lifetime Table, and the percentage you must withdraw increases each year as you age. Failing to take your full RMD results in a 25% excise tax on the amount not distributed.

The SECURE Act of 2019 (and SECURE 2.0 in 2022) significantly enhanced the value of this strategy. Most non-spouse beneficiaries must now distribute inherited IRA funds within 10 years of the account owner's death, often pushing heirs into higher tax brackets during their peak earning years. By converting RMDs into life insurance, you replace this concentrated taxable inheritance with a tax-free lump-sum death benefit that your heirs receive on their terms.

Absolutely. The strategy is specifically designed for individuals already in the RMD phase. You can begin redirecting after-tax RMDs into life insurance at any point. The earlier you start, the more premiums you pay and the larger the potential death benefit. Even starting at age 75 or later can be effective, as the death benefit will likely exceed the after-tax value of the remaining IRA assets your heirs would have received.

If your financial situation changes and you need RMD income for living expenses, you have several options. With a universal life policy, you can reduce or pause premiums if sufficient cash value exists. With whole life, accumulated dividends may cover premiums temporarily. You can also access the policy's cash value through tax-free loans if you need supplemental income. Your Nevada agent will design the strategy with flexibility in mind, understanding that circumstances can change during a multi-decade retirement.

Roth conversions and RMD-funded life insurance serve different purposes and can complement each other. Roth conversions (done before age 73) reduce future RMDs and create tax-free growth for your heirs. RMD-funded life insurance converts distributions you are already required to take into a tax-free death benefit. Many affluent Nevada retirees implement both: Roth conversions in the years before RMDs begin, then redirect RMDs into life insurance once distributions are required. Your financial advisor and insurance agent can coordinate both strategies.

For individuals with estates approaching or exceeding the federal estate tax exemption ($13.99 million per person in 2025), owning the policy in an irrevocable life insurance trust (ILIT) removes the death benefit from your taxable estate. For estates below the exemption, personal ownership is simpler and still provides the income-tax-free death benefit. Nevada's favorable trust laws make ILIT formation straightforward. Your estate planning attorney and insurance agent should coordinate to determine the optimal ownership structure for your situation.