By Cole Bruner, President of Buska Retirement Solutions and Buska Wealth Management
For many retirees, Required Minimum Distributions (RMDs) mark an important transition in retirement planning. Beginning at age 73 for most individuals, the IRS requires withdrawals from traditional IRAs and certain retirement accounts each year. While these distributions ensure retirement savings are eventually taxed, they can also create an unexpected challenge: higher taxable income and funds that may not be needed for everyday expenses.
However, with thoughtful planning, RMDs can become more than just a required withdrawal — they can serve as a powerful legacy planning opportunity.
The Challenge With RMDs
RMDs are taxed as ordinary income, which can potentially push retirees into higher tax brackets, increase Medicare premiums, or affect taxation of Social Security benefits. Many retirees find themselves withdrawing money they do not actually need to support their lifestyle, simply to satisfy IRS requirements.
Instead of allowing these funds to accumulate in taxable accounts or be spent unintentionally, some individuals choose to reposition RMD income into strategies designed to benefit future generations.
A Legacy-Based Approach
One strategy gaining attention is using after-tax RMD proceeds to fund a life insurance policy. Because life insurance death benefits are generally income-tax-free to beneficiaries, this approach can transform taxable retirement distributions into a more efficient wealth transfer tool — providing immediate liquidity.
In simple terms, required withdrawals that would otherwise increase taxable assets may be converted into a guaranteed benefit for heirs.
This strategy may help accomplish several goals:
- Create instant liquidity for beneficiaries at death
- Provide tax-efficient wealth transfer
- Help offset taxes paid on RMD income
- Equalize inheritances among family members
- Support estate or charitable planning objectives
For families with non-liquid assets — such as real estate, businesses, or investment portfolios — liquidity can be especially important. Life insurance proceeds can provide immediate cash to cover expenses, taxes, or financial needs without requiring heirs to sell assets at an inconvenient time.
Who Might Consider This Strategy?
Using RMDs to fund life insurance is not appropriate for everyone, but it may be worth exploring for individuals who:
- Do not rely on their RMDs for living expenses
- Want to leave a defined legacy to heirs or charities
- Are concerned about tax efficiency in wealth transfer
- Value certainty and guaranteed outcomes within their plan
Health, age, underwriting eligibility, and overall financial goals all play an important role in determining whether this approach makes sense.
Planning With Purpose
Retirement planning today extends beyond income generation — it also includes thoughtful distribution and legacy strategies. RMDs may feel mandatory, but how those dollars are used remains a choice.
By aligning required distributions with long-term intentions, retirees can potentially turn a tax obligation into an opportunity to provide clarity, liquidity, and financial support for the people and causes they care about most.
A conversation with a financial professional can help you evaluate whether incorporating life insurance into an RMD strategy fits within your broader retirement and estate plan.