Does Annuitization of an IRA satisfy RMD
I have a client who has 3 different IRA’s. One has been annuitized. Can the payment from annuitization satisfy the RMD for the other IRA’s?
I have a client who has 3 different IRA’s. One has been annuitized. Can the payment from annuitization satisfy the RMD for the other IRA’s?
Permalink Submitted by Jose Morales on Wed, 2011-04-06 18:14
if the amount withdrawn is enough to satisfy the RMD amounts for those other IRAs, yes.
Permalink Submitted by Alan Spross on Wed, 2011-04-06 22:06
That will work for the first year, ie the year that the IRA annuitized payments begin.
But for all years after that, there is no account balance for the annuitized IRA. Therefore, the annuitized IRA distribution satisfies the RMD for the annuity IRA account only and the other accounts must satisfy their own RMD requirements in the usual fashion.
Annuitizing an RMD will result in higher RMDs in the earlier years and lower RMDs in later years because the payments are basically flat, except for possibly a COLA. An IRA with a prior year end balance starts with lower RMDs and they increase each year, doubling by age 87 when the divisor is about half of what it started at.
Permalink Submitted by [email protected] on Wed, 2011-04-06 22:29
Even though there is no formal balance, the annuity company could provide a FMV calculation, could it not?
Several annuity companies (Allianz comes to mind) will trustee-to-trustee transfer the annuitized payment to a custodial IRA elsewhere and place the onus of calculating and distributing the RMD on the client?
If the annuity payment is self-satisfying and independent of other IRA accounts (as I think you are suggesting), shouldn’t the practice of the transfer as a non-reportable distribution be disallowed?
Permalink Submitted by Alan Spross on Thu, 2011-04-07 00:03
They could provide a present value figure based on the annuitization deferred payout, but I am not aware that they do that. And even if they did, there is nothing in the 2004 IRS Annuity and DB plan RMD requirements to recognize that option. But the main problem is that this IRS Notice does not adequately address annuitization issues in connection with other IRA accounts so it leaves everyone guessing.
Are you sure that Allianz and others are actually doing this? If so, there could be problems all right. Transfer of the annuity payout to another IRA itself is OK because transfers are not considered distributions, but the added value in the other accounts is not going to generate a sufficient RMD figure. For example, assume a typical RMD of 5%. If you take the annuity payout and increase the other account balance by 5% and then calculate the next year RMD on a value increased 5%, your RMD will be 5% of the 5% and would fail to meet the IRS goal of having these accounts distributed within the guidelines of the RMD tables.
Picture some with 1,000,000 in a TIRA and then they transfer 900k to various IRA annuity accounts, all of which transfer the annual annuity payout into the 100k IRA. For the next year, the 100k IRA would grow to around 145k and the RMD would be based on a total balance of 145k, about 85% less than what the IRS expects to collect.
Do you think this strategy is being implemented on and the IRS has not caught on yet?
Permalink Submitted by [email protected] on Thu, 2011-04-07 15:55
I think that there may be some using this strategy.
I think that most clients/firm think that it should work as follows:
Let’s say client has a 900k annuity and at age 72, the client annuitizes. The annuity company tells the client that the distribution “self-satisfies” the RMD, but[u] also[/u] gives the client the option to transfer (trustee to trustee) to another IRA as a brokerage firm (I know that Allianz and other companies will do this). The client does this thinking, “I want the annuitized guarantee, but I also know that my RMD should be less than the annuitized amount, so I’ll transfer that to my brokerage, then do a FMV calculation on the annuity contract and take an aggregate RMD from the brokerage account.”
I don’t know the Annuity/DB regs well enough to know whether this should be prohbited, or how a client in this situation should calculate the “true” RMD amount.