fixed annuity plus investment combination and correct RMG
If an 82 yr old client divides their ~1.2 million IRA that currently a $74k RMD into two parts, with one being a fixed life annuity paying life income of 64,000 per year, the other part must pay the balance of $10,000. But if the annuity has a pays only $60,000 per year (under the life plus 5 yrs certain feature), does she still need to take out $74,000? Please advise how to correctly do this.
John ([email protected])
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Permalink Submitted by Alan Spross on Fri, 2008-02-29 17:58
John,
See copy following of thead posted a couple days ago. This all covers the same issue you are inquiring about:
Posted: 27 Feb 2008 09:50 Post subject: RMD-SPIA and balance remaining RMD
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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.
REPLY:
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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.
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Permalink Submitted by John Rosenheim on Fri, 2008-02-29 19:21
Alan,
I guess I should restate my concern. If the client buys a fixed annuity, with life only payout, or life payout with 5 years certain, is it true that whatever the RMD payout required for 2008 can come in combination from the fixed annuity and the separate IRA balance?
Then, in the following year she gets the fixed annuity payout that is guaranteed, but the is no year end annuity value to help determine ithe 2009 RMD in combination with the 12-31-2008 year end value of her IRA.
Thus what would the RMD calculation be based on?
Permalink Submitted by Alan Spross on Fri, 2008-02-29 21:28
Yes, for the year the annuity was purchased, the RMD can be satisfied by a combination of the payments. In your first example, the total distributed must be 74,000 as calculated from the prior year end balance.
There is no year end balance 12/31/08 in the IRA to reflect the annuity. Therefore, the 2009 RMD will be whatever the annuity pays PLUS the usual RMD calculation based on the 12/31/08 value of the other assets. The annuity payout of 64,000 will satisfy the RMD for the annuity only, and the additional amount must be calculated as usual from the other assets.
Note: I believe the 5 year period certain is short enough in relation to the life expectancy of an 82 year old to meet IRS RMD requirements for the annuity. But the insurance company can and probably should verify that.
Permalink Submitted by John Rosenheim on Fri, 2008-02-29 23:37
Alan,
If you are correct and the client is required to take full RMD from the non fixed annuity IRA, that would foil the desire for a part guaranteed and part variable payout, since the fixed annuity payout does not offset the total RMD required in 2009 and beyond. That makes no financial sense. If 2009 requires ~$78,000 and the fixed provides $64,000 it seems that all that should be required is $14,000 of RMD from the variable IRA account. Or, is there a definitive ruling on this?
Permalink Submitted by Alan Spross on Sat, 2008-03-01 04:27
I am not aware of a specific ruling. If there were one other than a PLR, you would expect it to have been in the link I posted above which dealt with RMD requirements for annuities.
But how do come up with the 2009 figure of 78,000? There is no account balance as of 12/31/08 other than the non annuity assets from which to generate a total RMD requirement.
A full life annuitization of all IRA assets results in a level or close to level RMD vrs increasing %s of the account balance under the usual arrangement, and of course providing additional insurance against a very long life span.
In addition, it also smoothes out the RMD variations due to large price fluctuations of IRA assets, so it does definitely have an affect on RMD patterns.