IRA within an annuity and RMD

Submitted by steve johnson on Wed, 2016-04-20 15:59

I may have over invested in 2 GMIB annuities within my IRA. I discovered I will run into an RMD problem in my late 70’s where the required RMD will be greater than my 5% allowed distribution. Am I correct to say I could turn one or both into a Roth to alleviate the problem? Am I correct to say if I annuitize the GMIB’s the IRS allows the distributions within the RMD perimeters? I really don’t understand the difference between taking a straight 5% from the GMIB vs actually anuitizing it?



Submitted by Alan - IRA critic on Wed, 2016-04-20 18:15

  • For RMD purposes, annuitization of an IRA annuity wipes out the account balance and the annuity payment is considered to be the RMD for the IRA annuity only. If the annuity is not annuitized it is called an “individual account” and still has an account balance. Because it still has an account balance, your total RMD can be aggregated in any proportion between the IRA annuity and your other owned IRA accounts. If all your TIRAs are in annuities, then you can still aggregate your RMD between the annuity IRA accounts.
  • Note that the IRS RMD regs for various annuity IRA accounts are highly complex as outlined in IRS Reg 1.401(a)(9)-6. This regulation is mainly dedicated to requiring that distributions from an IRA annuity do not result in additional tax deferral beyond what the RMD regs intend. In many of these cases only the insurance company issuing the annuity can properly determine if their payout meets the IRS Reg or not. I would ask the company to provide you with written assurance that your payout meets the RMD requirements. With that in hand, if the IRS ever questions this, you will be assured of receiving a penalty waiver, although you might have to make up the amount the IRS considers delinquent.
  • If you converted an IRA annuity, RMDs would be eliminated starting the year after the conversion. But for the year of conversion you would have to complete your RMD for that IRA annuity and then convert the remainder. Chances are that the conversion could increase your tax rate for the year of conversion, or the conversion might not be otherwise beneficial. You should not do a conversion unless the conversion is beneficial to your long term planning since it accelerates your taxes. Smaller incremental conversions might work better, but that could turn into a hassle with some companies.

 

Submitted by [email protected] on Fri, 2016-04-22 13:05

be aware that conversions of annuities with lifetime income benefits may result in a taxable amount that is greater than the account balance at the time of the conversion.  this is because the insurance company will compute a value of the lifetime guaranteed income benefit. 

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