RMD from a IRA invested in a Variable Annuity with a DB ride

Submitted by M Freedman on Thu, 2012-06-07 19:18

Can an investment Company require the client to take a RMD based on the enhanced death benefit value( Greater Value) vs. the account value on 12/31 of the previous year? I couln’t find anything on this in IRS Pub. 590. If so, please let me know the source to reference. Thank you, Freedman



Submitted by Alan Spross on Thu, 2012-06-07 22:50

If the only enhanced value is the death benefit, per Q&A 12 of IRS Reg 1.401(a)(9) copied below, it can be disregarded:
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Q–12. In the case of an annuity contract under an individual account plan that has not yet been annuitized, how is section 401(a)(9) satisfied with respect to the employee’s or beneficiary’s entire interest under the annuity contract for the period prior to the date annuity payments so commence?

A–12. (a) General rule. Prior to the date that an annuity contract under an individual account plan is annuitized, the interest of an employee or beneficiary under that contract is treated as an individual account for purposes of section 401(a)(9). Thus, the required minimum distribution for any year with respect to that interest is determined under §1.401(a)(9)–5 rather than this section. See A–1 of §1.401(a)(9)–5 for rules relating to the satisfaction of section 401(a)(9) in the year that annuity payments commence and A–2(a)(3) of §1.401(a)(9)–8.

(b) Entire interest. For purposes of applying the rules in §1.401(a)(9)–5, the entire interest under the annuity contract as of December 31 of the relevant valuation calendar year is treated as the account balance for the valuation calendar year described in A–3 of §1.401(a)(9)–5. The entire interest under an annuity contract is the dollar amount credited to the employee or beneficiary under the contract plus the actuarial present value of any additional benefits (such as survivor benefits in excess of the dollar amount credited to the employee or beneficiary) that will be provided under the contract. However, paragraph (c) of this A–12 describes certain additional benefits that may be disregarded in determining the employee’s entire interest under the annuity contract. The actuarial present value of any additional benefits described under this A–12 is to be determined using reasonable actuarial assumptions, including reasonable assumptions as to future distributions, and without regard to an individual’s health.

(c) Exclusions. (1) The actuarial present value of any additional benefits provided under an annuity contract described in paragraph (b) of this A–12 may be disregarded if the sum of the dollar amount credited to the employee or beneficiary under the contract and the actuarial present value of the additional benefits is no more than 120 percent of the dollar amount credited to the employee or beneficiary under the contract and the contract provides only for the following additional benefits:

(i) Additional benefits that, in the case of a distribution, are reduced by an amount sufficient to ensure that the ratio of such sum to the dollar amount credited does not increase as a result of the distribution, and

(ii) An additional benefit that is the right to receive a final payment upon death that does not exceed the excess of the premiums paid less the amount of prior distributions.

(2) If the only additional benefit provided under the contract is the additional benefit described in paragraph (c)(1)(ii) of this A–12, the additional benefit may be disregarded regardless of its value in relation to the dollar amount credited to the employee or beneficiary under the contract.

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Submitted by M Freedman on Fri, 2012-06-08 16:01

Thanks Alan, in this case the client put in $156k and the death benefit is $285k so it exceeds the 120% and based on the information you sent me it appears it shouldn’t be excluded. Thanks again for the document support and now that I’ve given you all the pertinent info please let me know what you think.



Submitted by Alan Spross on Fri, 2012-06-08 16:25

Note that (c)(1) addresses all additional benefits combined and is subject to the 120% limit.

However (c)(2) is a separate exclusion that is not subject to the 120% IF the death benefit (conditioned per provision) is the ONLY additional benefit provided by the contract.

Therefore, it is still possible in this case that the death benefit could be disregarded if it meets these conditions:
1) There are no other additional benefits having a current value under the contract
2) The death benefit itself cannot exceed the premium paid less distributions already taken



Submitted by M Freedman on Fri, 2012-06-08 16:36

Based on the death benefit of $285,000 and the investment of $156,000 it doesn’t meet this condition: 2) The death benefit itself cannot exceed the premium paid less distributions already taken

Thanks again for your help



Submitted by Alan Spross on Fri, 2012-06-08 17:08

You are correct. Appears that the death benefit must have grown to that amount by resetting based on FMV acheived at some point in the past, but values declined after that point.

It is up to the insuror to provide the required RMD for the annuity or the valuation to be used in calculating same. Since the death benefit alone cannot be disregarded and that triggers the 120% rule, there might be other benefits that increase the value even higher than the death benefit.



Submitted by M Freedman on Fri, 2012-06-08 18:22

Thanks again



Submitted by Peter Thoresen on Mon, 2016-09-19 14:00

Have 84 year old client who’s only qualified money remaining is in 2 VA contracts with enhanced DBs causing contracts to implode.  After years of RMDs with added NPV of enhanced DB….cash values in accounts will only support 1 more year of RMD.It appears the only remaining option is to instruct client to refuse taking further RMDs and face the penalties with this in order to keep the contracts open.Thanks for your help.Q:  Is there any other IRS provision or exception that presents this.  I would hope the IRS intention is not to nullify contracts – rewarding insurance companies by excusing their contract obligation?? 



Submitted by Alan - IRA critic on Mon, 2016-09-19 18:31

Has this situation resulted from insurer RMD calculations using added death benefits to the cash value?  Is there other enhanced value in addition to the death benefit?  If not, there is an exception to using the death benefit to increase RMDs above the cash value calculation. Here is the section of the IRS Reg stating that:

(ii) An additional benefit that is the right to receive a final payment upon death that does not exceed the excess of the premiums paid less the amount of prior distributions. (2) If the only additional benefit provided under the contract is the additional benefit described in paragraph (c)(1)(ii) of this A–12, the additional benefit may be disregarded regardless of its value in relation to the dollar amount credited to the employee or beneficiary under the contract.



Submitted by Mike Owens on Wed, 2018-03-28 01:02

I was questioned today from a client concerning his 90 year old aunt with a variable annuity that has no living benefits, with $3400 of cash value but has a death benefit of just over $121,000.  Her CPA has been having her take RMD’s…..and telling her she needs to take $4500 this year…This would implode the contract and that would be stupid….can she qualify for the exception?



Submitted by Alan - IRA critic on Wed, 2018-03-28 01:45

The applicable Reg is quoted above in the response of 6/7/2012. If the ONLY additional benefit is the death benefit, that benefit is disregarded in determining the RMD. Normally only the insurance company can calculate the correct actuarial present value if there actually are other benefits in addition to the death benefit. Did they provide this figure or did the CPA calculate it? A 4500 RMD almost guarantees that the death benefit was included. Might be worth it to ask the insurance company what their figure is, and if it included the death benefit, why?



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