Forgo RMDs this year in favor of variable annuity income?

Submitted by Jim Rueter on Fri, 2020-04-17 21:17

I”m 76, married and retired. For the last 10 years my main source of income has been the RMDs from my TIRAs. The income from my TRIAs plus social security is about what I need each year to cover my expenses plus gifts I make to my children and to my grandchildren (529’s).

Around 20 years ago I invested in a variable annuity which in hindsight was probably a mistake. Most of the money in it now is from gains and when withdrawals are made, gains come out first and they are taxable at my regular income tax rate. (The same will be true for my heirs when they inherit any variable annuities of mine.)

Now due to the Cares Act, I am not required to take out RMDs this year. Since any RMDs from TIRAs are taxed at the same rate as my withdrawals from my variable annuity, maybe I should forgo RMDs this year and take monies from my variable annuity.

Any advice is greatly appreciated.



Submitted by Alan - IRA critic on Fri, 2020-04-17 23:58

You could do that to use the tax space created by the RMD waiver. Or similarly, you could convert some of your TIRA to Roth and that will reduce future RMDs and enable the converted money to generate tax free gains. Perhaps you should ask the insurance company the age at which you will be forced to cash in portions of the annuity (similar to RMDs). At that time the annuity distributions would be added to your other income including actual RMDs. Of course, you could also do some of each in the amounts you choose.

Submitted by Jim Rueter on Sat, 2020-04-18 21:47

Alan, thank you for your prompt reply.  I’m always impressed by your helpful advice to everyone’s querys.”Tax space”?  That’s a term I haven’t heard.  Define that for me please.  The variable annuities are directly with Fidelity, so I don’t know that there is any insurance component.

Submitted by Alan - IRA critic on Sat, 2020-04-18 23:27

  • Usually, retirees have similar taxable incomes from year to year and the same marginal tax rate. Less income in a year without RMDs might either lower their marginal rate or place them must lower within their current tax bracket. The “tax space” created is the room for more income at the current rate before spilling over into the next higher bracket. By using this space, they can reduce the chance of future income being taxed at higher rates due to larger RMDs, rate increases, or due to the death of spouse, a much higher single tax rate.
  • The insurance element is usually due to the death benefit, certain fringe benefits, or the ability to annuitize the VA at some point. A VA is a contract with an insurance company, so Fidelity either uses their own life insurance subsidiary or has agreements with other insurance companies to issue these annuities.

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