The following Q&A from IRS Reg 1.401(a)(9)-6 indicates that such a distribution would not be eligible for rollover because the RBD would be advanced and the distribution would constitute the RMD:

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Q–10. What rule applies if distributions commence to an employee on a date before the employee’s required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A–1 of this section?

A–10. (a) General rule. If distributions commence to an employee on a date before the employee’s required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A–1 of this section, the annuity starting date will be treated as the required beginning date for purposes of applying the rules of this section and §1.401(a)(9)–2. Thus, for example, the designated beneficiary distributions will be determined as of the annuity starting date. Similarly, if the employee dies after the annuity starting date but before the required beginning date determined under A–2 of §1.401(a)(9)–2, after the employee’s death, the remaining portion of the employee’s interest must continue to be distributed in accordance with this section over the remaining period over which distributions commenced. The rules in §1.401(a)(9)–3 and section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply.

(b) Period certain. If, as of the employee’s birthday in the year that contains the annuity starting date, the age of the employee is under 70, the following rule applies in applying the rule in paragraph (a) of A–3 of this section. The applicable distribution period for the employee is the distribution period for age 70, determined in accordance with the Uniform Lifetime Table in A–2 of §1.401(a)(9)–9, plus the excess of 70 over the age of the employee as of the employee’s birthday in the year that contains the annuity starting date.

(c) Adjustment to employee/beneficiary age difference. See A–2(c)(1) of this section for the determination of the adjusted employee/beneficiary age difference in the case of an employee whose age on the annuity starting date is less than 70.

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When writing these Regs the IRS was focused almost exclusively in defining the length of the annuity that would exceed the IRA owner’s life expectancy and therefore not meet the RMD requirements. There was no examples of mention of accelerated annuity payouts such as a 5 year or 10 year immediate annuity for IRA owners under the normal RBD age. Even in the Q copied above, the IRS was focused on the death of the IRA owner more than the implications to the owner. It seems ridiculous that such an IRA annuity could be fully paid out before the usual RBD but still be considered RMDs. Once distributions are deemed to constitute RMDs, that by definition eliminates any rollover.

With the newer annuity products available now, in many cases the IRA owner can take distributions without annuitizing the IRA. They would still have an accout balance and the RBD and RMDs would be calculated under the usual rules.

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lIn a situation where there is no 1099R issued, and the proceeds are being directly transferred to another IRA account or held in the same custodial account, the insurance company is not treating the payments as distributions, just as non reportable transfers. This does avoid the rollover of an RMD issue by eliminating reported distributions. I wonder what the insuror is doing with respect to the Form 5498 which reports the year end valuation of each IRA account and what they will do at age 70.5.

IRS Reg 1.401(9)-6 does suggest that annuitization prior to the RBD creates a new RBD upon the first distribution. The IRA owner still owns the cash flow from the annuity even though a lump sum was paid to the insuror and is being distributed back into the IRA account. The problem is that the “new RBD” passes without any IRA distributions being reported. While it is unlikely to happen, there is a definite risk that the IRS could levy the 50% excess accumulation penalty for failing to take an RMD after annuitization moved up the RBD.

The only way for the IRS to realize that an annuitization took place would be a missing Form 5498 as the IRA would no longer have an actual value. There is no provision to report discounted present values of an annuity cash flow. Therefore, I would expect that this would escape IRS scrutiny, at least until the usual RBD on 4/1 following the year IRA owner reaches 70.5.

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The sentence quoted on p 15 of the 5498 is in the CONTRIBUTIONS paragraph and the form would be needed to report any contributions made.

With respect to the FMV portion of Form 5498, once the account has been annuitized, there is no account value remaining, just a cash flow. In that situation, the custodian might issue a statement in lieu of the 5498 indicating the annual payment as the RMD.

P 16 of the 5498 Inst indicates “see Reg section 1.401(a)(9)-6 for RMDs from annuity contracts.” However, that Reg never specifically mentions Form 5498 or how it should be completed post annuitization of the account. It does into considerable detail to explain what types of calculation will meet the RMD requirements. I assume an insurance company IRA custodian would then select either Alternative one or two outlined on p 16 showing the calculated annuity payment that must meet the requirements, which basically means that it is not too small a distribution.

I doubt that there is much IRS scrutiny of the actual calculations made by the company to determine if they are sufficient or not. Annuity payments start out higher than ordinary RMDs because they are much closer to being level throughout the IRA owners’ lifetime than the typical RMD divisors which produce lower RMDs to start with but eventually become higher.

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