RMD-SPIA and balance remaining RMD
A client has 400K in her IRA, she’s age 75 and has an RMD of $30000 for 2008. She buys a SPIA for a 5 yr payout of $1250/ month ($15000)and that costs $70000. She has $330000 left in her IRA.
We have been told that she must now take an RMD of of $25000 from the remaining IRA monies, instead of $15000. She gets no credit for the w/d via the SPIA.
Where in the tax code and/or where in any of Ed Slott’s (or others)articles is there a description of this ridiculous law/ code interpretation?
thx alot.
Permalink Submitted by Alan Spross on Thu, 2008-02-28 03:59
Jim,
I am not aware that this question has been clearly addressed by the IRS. But one thing for sure is that an annuitized amount no longer has a year end fair market value. There is no guidance suggesting that some present value calculation on the annuity cash flow is acceptable for determining an equivalent fair market value.
In the year the amount is initially annuitized, there IS a prior year end FMV of the IRA. Therefore, the RMD based on that amount is satisfied by the total amount paid out of the IRA or both IRAs if the annuity was made in a separate account. It’s the following years when there is NO prior year end value that present the problem.
In these following years, the non annuitized value of the IRA produces it’s own RMD figure and it must be added to the annuity payout whatever it is. A short term payout will aggravate the situation by making a larger payout than a life annuity, and even a life annuity pays a level amount which is higher than the regular RMD until the annuitant reaches the later 80’s. Therefore, for the second and later years, the explanation seems correct because the 25,000 is the same % of 30,000 as the 330,000 remaining balance is to the original 400,000. In other words, this has resulted in a considerable loss of tax deferral for the next 5 years.
The question seems to arise whether it matter if the annuity is in a separate IRA or in a single custodial account with the other funds, but I do not see how that would matter, because the account balance for the annuity has still disappeared. While this question seems rather basic with respect to RMDs, it still does not seem to have been addressed in the following IRS RMD guidance for annuities issued in 2004. If you can find anything in there, please point it out:
http://www.irs.gov/pub/irs-irbs/irb04-26.pdf
Perhaps Al Fry can comment on this, as he frequently works with annuities and may well have a different take on this.