Can Immediate Annuity Payout Satisfy RMD on Other IRA Assets?

Submitted by JOSEPH LARSEN on Fri, 2020-02-14 02:36

A client has an immediate annuity that lists a year-end value each year. The client has computed the RMD using all IRA’s (including the immediate annuity IRA) and then subtracted the immediate annuity to see what is the net RMD for the other IRA’s. Is the client subject to the 50% penalty for all past years (the client is was 84 years old in 2019). How would you fix the problem?

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Permalink Submitted by Alan - IRA critic on Fri, 2020-02-14 04:04

The IRS has never issued specific guidance on this question, so I doubt there is any risk of a penalty being assessed. In addition, the insurance company has contributed to the problem if they are showing a year end value of an annuitized contract. There is nothing in the tax code that authorizes using an imputed annuity value.
Due to lack of direct IRS guidance, a consensus from experts has emerged that the annuity distributions satisfy the RMD for the annuity IRA account only, and any other IRAs can be aggregated with each other, but not with the annuity. However, for the year of the annuity purchase there IS a prior year end value for the annuity account, so all IRAs can be aggregated for RMDs in that initial year only.
If the imputed value of the annuity is reasonable, the total distributions from all accounts should not be too far off of the consensus method.
It would be fairly easy to shift over to the consensus method this year. I think that would be wise unless the insurance company can produce some specific documentation that allows them to calculate an imputed year end value for RMD purposes. But I don’t think the client needs to worry about the IRS challenging his distribution total, and if they ever do, he would almost certainly be able to file a 5329 and have the penalty waived.