IRA’s/ RMDs and Income Annuities

Submitted by Jessica Ricci on Mon, 2016-12-19 16:50

Assume this SPIA has been inforce for over one year and the client has 4 IRA accounts

BD 1Custodian IRA (owner of some mutual funds) $100k
BD 2 Custodian IRA (owner of some stock and bonds) $100k
Deferred Annuity Co owned by Mr. Smith (IRA) $100k
Annuitized SPIA –Life with cash refund $200k premium paying $13,200 / year (reported FMV with a 5498 of $190,000 on 12/31)
Assume RMD 3.65%

We know that annuitized contracts can’t be aggregated but we have gotten some legal advice from a SPIA carrier that aggregation is allowed if all IRA dollars held custodially. True/False?

If true, what is the definition of a custodian? Technically BD#1, BD#2, Deferred Annuity Co and Annuitized Annuity co are all custodians for Mr. Smith

If all was held in one custodial account and the FMV was sent to them to calculate the RMD, they would have $490,000 to base the RMD on at 3.65% = $ 17,885
The income from the SPIA of $13,200 could be used to satisfy part of the $17,885 (only requiring a withdrawal of $4685 from the other IRA amount of $300,000k) – amounting to only a remaining 1.56% withdrawal

If this is true, does the income have to come into the plan directly from the carrier and then the custodian sends it out as a distribution or can it still go to the client’s mailbox?

If it has to come into the plan, then technically doesn’t the custodian have to then add the $13,200 to the total for RMD calculation? 490,000 + 13,200 = 503,200 (3.65% RMD = $18,366.80)?

If true that a custodian can aggregate, why couldn’t an individual client and/ or his advisor do the same thing since NOW the SPIA carriers ARE sending out 5498 with FMV?

Was this rule put into place by the IRS before SPIA carriers starting sending out 5498 with FMV? Is it outdated now or should it be outdated and brought to the IRS’s attention?

-Johnna



Submitted by Alan - IRA critic on Mon, 2016-12-19 18:57

  • Due to lack of guidance by the IRS, some life insurers are apparently providing year end FMVs to IRA custodians when the annuitized IRA is held by a different custodian. While the term “custodial IRA” is generally attributed to a minor’s IRA with an adult appointed to manage it for the child, the secondary useage of the term describes an insurance company annuity product held in an IRA where the insurance company product is in the same account as standard investment products and the direct custodian to the IRA owner is the custodian of the non annuity account. Since this custodian reports year end values on Form 5498 to the IRA owner and IRS, they seem to be using whatever figure the life insuror provides to them to add to the other FMVs on the 5498. The IRS looks at this and is not even aware that an annuitized product exists. This arrangement is ripe for full aggregation just as if the annuity had not been annuitized. I am not sure whether the insurance company sends the annuity distribution to the custodian or directly to the IRA owner, but it is possible that both arrangements exist. Perhaps the IRS has provided some direct guidance to these life insurers, but there is certainly no general guidance to the public or in the 5498 Inst. An IRA owner who uses this format for RMDs has little risk of IRS issues.
  • That said, the consensus guidance of tax attorneys is that other than the year the annuitized contract is purchased, each account must stand on it’s own with respect to RMDs. When the annuitized contract is held directly by the insurance company as custodian, it is not clear in all cases what they are doing with respect to year end FMV. The IRS has not indicated that some present value of the cash flow can be reported or even if these companies are exempt from stating the year end value once annuitization has occurred. The consensus opinion then is when there is no actual year end FMV, the annual payout IS the RMD for the annuitized product only and the other IRAs are treated as normal with their actual Form 5498 FMVs.
  • As you can see, in the year a contract is annuitized, there IS a prior year end FMV, so for that year only a true aggregated RMD can be calculated with the annuity payout credited toward the total RMD.
  • I am not aware of any pre 1987 guidance, but there is nothing in the IRS Regs reflecting the 2001 overhaul of RMDs, or in Reg 1.401(a)(9)-6   (Annuities and DB plan RMDs) addressing this issue.
  • Would not be too concerned about penalty exposure to client if they are being pushed in a certain direction by their custodian. It is unlikely the IRS will cause problems for them, and even if they are required to change their approach going forward, there is little reason to think that the IRS would not waive any excess accumulation penalty for prior RMD years.


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