Annuitized from A to B. RMD question
I have read a few posts but still want to cover something. Have a planner that has annuitized two contracts because they had nice annuity values, into another one of their policies. So, A & B are going into C over 5 years. Here is where it gets messy. A&B are 403(b)s and C is an IRA. The payments are going MONTHLY. His question to be was regarding the RMD required this year.
So first(ignoring the 403b for a second) am i right that this year, by end of 2012, he’ll need to make sure that enough RMD has come out to cover the 12/31/11 value of A,B and C. And next year A&B will no longer have a market value and he’ll need to take RMD based on just C, which will be growing due to the increase in account value?
Ok now real issues. I also have read that you cannot aggregate 403b and IRA for RMD purposes, so A&B need to have a RMD value specific to A&B, and C as its own RMD.
Plus, apparently the carriers are abiding in all of this but is it allowable to have “monthly” rollovers from a 403b to IRA?
Thanks in advance
Permalink Submitted by Alan Spross on Wed, 2012-11-28 21:04
Only the amount that is NOT deemed to be an RMD can be rolled over. If the taxpayer here is past the RBD, the tough question is how much of the 5 year payout is considered to be the RMD. Generally, the RMD Regs are concerned with annuitizations that extend life expectancy and depress the RMD and those are disallowed. But a 5 year annuitization that is likely far less than life expectancy presents complications in determining how much of the annual distribution is the RMD. The Regs are not clear on this issue, but the IRS will probably be content to let the 403b plan determine how much is the RMD. That amount should be distributed to the taxpayer and only the amount in excess of the RMD should be rolled over to the IRA. If too much is rolled over to the IRA, an excess IRA contribution results.
The 2012 RMD is easy to determine because it is based on the 403b value on 12/31/2011. Starting in 2013 the issues mentioned above come into play since there is no longer a year end balance. If the IRA that receives these rollovers has been annuitized over a period less than life expectancy, the same issues will apply to the IRA RMDs. Again, the insuror should determine how much needs to be distributed from the IRA to meet RMD requirements.
IRA and 403b RMDS cannot be aggregated with each other as you mentioned. IRA and 403b RMDs can only be aggregated within each group (IRA with IRA and 403b with other 403b).
The monthly rollovers do not present a problem other than amounts up to the RMD amount should NOT be rolled over from the 403b to the IRA. IRA rollovers from the 403b annuity should only occur AFTER the RMD is distributed to the taxpayer.
In summary, the only unclear question here is that when annuitization is for a period certain less than the life expectancy of the taxpayer, is the entire payout deemed to be the RMD or only a portion, and how to determine what that portion is. When annuitization is for life expectancy or joint life expectancy with a beneficiary, those distributions are automatically considered RMDs. The IRS Regs were so fixated on disallowance of distributions that were slower than life expectancy, that very little was included about annuitizations much faster than life expectancy.
Permalink Submitted by Anonymous (not verified) on Wed, 2012-11-28 21:18
The “C” or IRA contract receiving the payments is a deferred product and not producing income, other than rmd. The client did take funds from the A & B contract as distributions this year. At this point they are wanting to make sure that those distributions are enough to cover 2012 RMDs and I beleive that they have to break down the distributions and separate the 403b from IRA and then we can determine if enough has been distributed or if they need to request more before the end of the year.
Now, i am confused when you mention RMD from the 403b regarding the payments being sent to company “C”. They are not withholding any amount at this point or plan on it. So question is, lets say 100K in C, and 50K in A & B each. That means 100K of IRA and 403B for RMD purposes this year. Then next year if no interest and 1/5 of money has moved we’ll have 120 in IRA and no FMV of the remaining 80K in annuitization phase. Are you saying we have to have sending company maintain a RMD distribution during the next 4 yrs of the 403b or will the RMD from the 120K IRA that will eventually go to 200K at end of 5 yrs do? Seems like if its the first then it will be double dipped for RMD
Permalink Submitted by Alan Spross on Wed, 2012-11-28 21:34
There would be no double dip because the plan RMDs would never reach the IRA and increase the IRA RMDs. The IRA RMDs in the future are simple because the IRA has apparently not been annuitized and will therefore have a prior year balance. If the 403b RMDs were incorrectly rolled over to the IRA, they would be taxable as 403b distributions but the corrective IRA distribution would not be taxed since it would be treated as the return of an excess contribution (the 403b RMD) that was not eligible for rollover.
It’s the 403b that is the problem. 20% per year for 5 years are being rolled over to the IRA and some portion (if not all) must be considered to be RMDs. That is the responsibility of the plan administrator to determine, and I do not know exactly if the Regs provide for this calculation, but the insuror must attempt to interpret them, pay the RMD to the taxpayer and only roll the excess above the RMD over to the IRA account. At least ome part of the annual rollover is an RMD and should not be rolled over since RMDs can never be rolled over. Technically speaking, they are not “eligible rollover distributions” from the 403b.
This could get even more complicated if the 403b plan includes 12/31/1986 accruals which are not subject to RMDs until age 75. But the code says that if this situation applies, any amounts rolled to an IRA are deemed to come first from the 1986 balance. If there was such a balance, it would be used up first and the amount remaining would become subject to RMDs at the usual RBD. This situation may not apply here, but is is possible.
I guess the first question to the insuror should be, “What is the 2013 RMD for the 403b plan??” As indicated before, 2012 is not an RMD calculation problem because there was a 12/31/2011 plan balance. But perhaps the 2012 RMD was also rolled over to the IRA?
Permalink Submitted by Anonymous (not verified) on Wed, 2012-11-28 21:58
See that’s the new rule for me, the RMD for something being rolled over. So, if someone is 73, has 100K in 403b and rolls it to an IRA they have to take RMD from the 403b prior to rolling? Oh wait, the answer is yes because the 403b had a 12/31 value year prior to rolling. Duh… Ok, on board there.
They annuitized the 403bs in May of this year and directing payments to an IRA over 5 years. Those payments have not been reduced to cover and RMDs. So, I’m seeing the light here.
More – The client is receiving LifeTime payments from another IRA contract that was annuitized for life and 20 earlier this year as well. I just spoke to them and here is whole story. 2 – 403b contracts were rolled into guaranteed life income IRA (SPIA) Feb this year and total around 14K a year in income life payments. The 12/31/11 of those two was around 200K. Another 2 403b contracts for 75K and 45K were annuitized into a deferred IRA over 5 years(the first topic). They were just looking at it as, total up the 12-31-11 value of all 5 contracts and make sure the 14K that will have come out by 12/31/12 will cover RMD and they are around 1,500 short.
Now that you’ve pointed this out I see that instead, we have a much larger problem. RMDs for the 2 rolled to a SPIA, will the income off the 2 life SPIAs count toward RMD even though they are now coming form a IRA coded account when they were 403b 12/31/11? Do they need to contact the 2 carriers on the 5 year ones to have them distribute minus 403b rmds here forward?
Permalink Submitted by Alan Spross on Thu, 2012-11-29 00:31
There was no IRA value 12/31/2011. Therefore there is no IRA RMD in 2012. Going forward to 2013, one IRA is annuitized and the payments made each year (the 14k) will automatically fulfill the RMD for that IRA. The other IRA is a deferred annuity, and it’s RMDs will be based on the 12/31/2012 balance which may also require an adjustment for fringe benefits. But the insuror will have to provide the required RMD for the deferred annuity IRA. That RMD can be aggregated with any other IRAs that have year end balances, but not with the annuitized IRA.
403b contract RMDs can be aggregated with other 403b contracts owned by the taxpayer. There was 4 such contracts with a balance on 12/31/2011 on which the 2012 RMD could be based. If I understand correctly, nothing was distributed as an RMD from any of these and those RMDs are in the two IRAs and are an excess contribution to the IRAs. Since the 403b RMDs could be aggregated, the client could take the position that the 2012 RMD for all the plans came from the ones that were rolled to the deferred annuity. That would allow the corrective IRA distribution to come solely from the deferred annuity IRA and that would be much simpler than trying to include the annuitized IRA.
The question that is difficult is again, what will the RMD be in 2013 from the annuitized 403b accounts that no longer have an account balance. That problem was covered in the prior post.
Note that the IRS pretty much leaves employer plan RMDs to those plans. They trust the plans to administer RMDs much more than they trust IRA owners. However, in this case there is a red flag because there was no distribution to the client at all. Everything was included in direct rollovers as the 1099R forms will indicate. Where the IRS might not notice the lack of an RMD if there were no distributions, in this case there will be reported distributions as direct rollovers and the IRS is more likely to ask what happened to the RMDs.