In my financial planning and tax practice, I encounter more than a few older retirees who bemoan the fact that they have to withdraw IRS-mandated amounts from their IRAs or qualified plans each and every year, beginning as we have seen, at age 70.

These individuals have other income-producing assets that generate more than enough income each year to support their life styles, and the majority of these retirees are widows. Their major concern now is to pass on their IRAs and other assets to their children and grandchildren.

One elegant solution to this situation is to utilize the RMD itself to build additional wealth to pass onto the next generation. Here is how this can be achieved:

Assume that our client is a healthy 75-year-old widow. She currently has $1 million in her IRA that she inherited when her husband passed way. Her total income from her other assets is around $70,000 per year and she has little or no debt. She wants to benefit her two children and five grandchildren.

One solution is to withdraw the required distribution each year, pay tax on that amount at an assumed 25 percent tax rate, and use $16,620 of the after-tax amount to purchase a $500,000 life insurance policy with a guaranteed premium until her age 110.

The dollars that are “left over” from the after-tax amount become premiums to purchase a low-load variable annuity. Remember that before purchasing any variable annuity, you should read carefully the required prospectus for charges and other expenses.

So, at age 75, her RMD would equal $43,668, and after she pays income taxes at an assumed 25 percent rate, she would have $32,751 to use as she chooses. The life premium is, as we have stated, $16,620, and the remaining $16,131 is utilized as a variable annuity premium.

Using a variable annuity for accumulation in this example makes sense, since the hoped-for growth in the accumulated variable annuity values can increase on a tax-deferred basis, which means they will not be taxed until they are withdrawn, by her children or grandchildren. Naturally, those variable annuity values can go down, but a conservative investment mix should minimize that risk.

Assuming that the IRA values grow a 4 percent rate each year, along with the premiums she paid into the variable annuity, here is a snapshot of the total death benefit for her heirs when she passes away:

Age – Death Benefit from this approach/Death benefit from doing nothing

Age 80 – $1,566,682/ $946,500

Age 85 – $1,623,939/ $838,124

Age 92 – $1,715,346/ $597,892

An added bonus to this planning technique is that the life insurance death benefit is passed along to her heirs completely income tax free.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at