Here is a copy of the actual statement in the IRS Reg you referenced:

>>>>>>>>>>>>>>>>>
c) Annuity commencement. (1) Annuity payments must commence on or before the employee’s required beginning date (within the meaning of A–2 of §1.401(a)(9)–2). The first payment, which must be made on or before the employee’s required beginning date, must be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Similarly, in the case of distributions commencing after death in accordance with section 401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or before the date determined under A–3(a) or (b) (whichever is applicable) of §1.401(a)(9)–3, must be the payment which is required for one payment interval. Payment intervals are the periods for which payments are received, e.g., bimonthly, monthly, semi-annually, or annually. All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of annuity payments for payment intervals ending on or after the employee’s required beginning date.
>>>>>>>>>>>>>>>>

Note that in all these Regs, when referring to IRA accounts, the word “IRA Owner” is substituted for the word “employee” in the Regs. I have also seen this issue cited by Natalie Choate, a highly recognized tax attorney out of Boston.

How many annuitizations that get done after the RBD is anyone’s guess. It might be that there is more awareness of this issue by DB plan administrators than insurance company staff handling IRA annuities. If you are still working for the govt, your RBD has not yet occurred, and if annuitization is that important to you, then check to see if there are any such options directly from the TSP. Of course, annuitizing with today’s historically low interest rates will result in a similarly low historical annual payment per dollar annuitized.

• Flag as spam
• Log in to Reply

This doesn’t make enough sense to me. There is the generic word annuity which just means a series of payments. And then there is a commerical annuity policy which one purchases through an insurance company. Of the latter kind, you can buy a single premium immediate annuity and exchange your lump sum for a lifetime and/or a period certain of annual or monthly etc payments. You can also buy a deferred annuity from an insurance compnay and later annuitize it. There are also a new breed that has income riders that allow you to have a lifetime income without giving up your lump sum, but instead you pay a premium.

I’m wondering if ” Annuity payments must commence on or before the employee’s required beginning date (within the meaning of A–2 of §1.401(a)(9)–2). ” isn’t just saying that you have to start your RMDs, which is a series of payments in the generic sense of the word annuity.

As screwy as the tax code is, I can’t imagine that you can’t start your RMDs by taking distributions from you lump sum in the normal fashion and then later at age 72, or 75 or whenever you want to, take your funds and buy a commercial annuity through an insurance ecompany and exchange your lump sum for a lifetime and/or a period certain of annual or monthly etc payments if you so desire.

Can we clarify this?

Lee

• Flag as spam
• Log in to Reply

Ah, thanks Alan. To clarify, I did mean annuities within an IRA. But I wasn’t thinking about the possibility of the annuitization payouts being less than the required RMD. If they were, it does make sense that the IRS wouldn’t like that. That could throw a monkey wrench in a lot of peoples plans.

I look forward to your further post.

• Flag as spam
• Log in to Reply

Peter, can you quote some of this? I don’t have the book. And what year was that edition published?

Lee,
I am afraid that I cannot provide documented clarification for this question at this point. The Choate article was in a morningstar link and morningstar has updated the article and protected it by a subscription requirement, so I cannot pull it up. Therefore, what appears to be clear in the Regs might have been changed or otherwise interpreted.

First of all, the problem here is mainly for TIRA accounts since a Roth IRA has no RBD and employer plan annuities are almost all activated right after separation from service and therefore prior to the RBD. Also, this provision in the Regs did not appear until 2004 as an official IRS Reg, although the same preliminary statement appeared in the basic IRS RMD changes first released in 2002. The summary of those changes also clearly states that the annuitization must occur prior to the RBD.

Strangely enough, all references to IRA annuitization do NOT address this issue, although all their examples seem to start at 70.5. Another oddity is that all the recent releases of govt plan to encourage more annuitization of retirement plans do NOT indicate that the starting date is a deterrent. For TIRA owners, it obviously WOULD be a deterrent if it was off limits after the RBD. All along, there have been several posts about how to handle the RMD when annuitizing, and there is specific consensus on that issue. However, the consensus does NOT address when the annuitization can or does occur. My impression is that many people HAVE annuitized part of their TIRA balance after the RBD, and there has never been an issue about it from the IRS regarding inception of the payments being too late.

While overall there has been insufficient demand for this to stimulate the IRS into further clarification, I am mystified that a clear Reg could exist and Natalie Choate is the only person that ever commented about it.

This is going to take more time, but I will work on it. Meanwhile, if the insurance company allows you to annuitize, particularly if they can explain their reasons, I would just proceed with it. But better later after interest rates rise out of the basement.

• Flag as spam
• Log in to Reply

Thanks, Peter.

But it is not real clear how to interpret the double set of ( ) there. The “year of purchase if later” could mean the entire purchase or just the COLAs or other enhancements, but purchase would generally be interpreted as the initial annuitization. And if that is the case, why even show the “not later than 70.5 part in the first place. Perhaps she refers to the 70.5 age due to the captioned IRS Reg, but then says the Reg can be disregarded? I find the statements are confusing.
401(a)9-6 is extremely long and detailed and does allow for several adjustments post annuitization.

I wonder if even the IRS knows what their intent is, but the pressure for more annuitizations might result in a change of the Regs or different interpretation. The govt is very concerned about people going broke, particularly since we seem to now be in an era of extreme market upheavel and underperformance. I don’t see our major institutions or economists doing such a great job addressing these hazards either. That said, annuitization probably could save many people from disaster.

I would consider annuitizing a portion if interest rates rise enough, using only a top rated insuror. Not too comfortable about the solvency of state guarantee funds should the insuror go under.

• Flag as spam
• Log in to Reply