RMD – Switch from use of IRS table to purchase of immediate
An IRA owner in RMD status who is using the IRS tables to calculate her RMD may roll her IRA over to an immediate annuity. She must, however, first take the RMD for the current year and rollover the balance to the immediate annuity because a RMD may not be rolled over.
An individual is over age 70½ and is calculating RMDs from her two IRAs in brokerage accounts by dividing the prior year’s balances by the age-based divisor from the IRS table. The RMDs must be calculated separately for each IRA, but the sum of the two RMD amounts may be taken from one of the IRAs only, taking no distribution from the other IRA.
Suppose that the owner of two IRAs in brokerage accounts wants to roll both of them over to an immediate annuity. She can satisfy the distribution requirement by first taking the current year’s RMDs and receiving periodic payments from the immediate annuity thereafter. Can she take both current year RMDs from one of the brokerage account IRAs prior to the rollover, as in the case of the ongoing use of the IRS table divisors referred to in the preceding paragraph, if the brokerage account IRAs are going to be rolled over to an immediate annuity?
Suppose that the owner of two IRAs in brokerage accounts wants to roll only one of them over to an immediate annuity. What must the IRA owner do to satisfy the distribution requirement, both in the year in which the rollover is done and in future years?
Permalink Submitted by Alan Spross on Thu, 2008-10-09 01:13
Remember that unlike qualified retirement plans, the RMD for traditional IRA accounts may be aggregated over any combination of those accounts. When rolling over to an immediate annuity, the results are different in the year of rollover and subsequent years as follows:
1) For the year of rollover, the total of all IRAs has a prior year end balance on which to calculate the RMD. An immediate annuity produces a higher distribution in the early years and lower distributions in later years than other IRAs because the amounts are relatively even. Therefore the annuity distributions after annuitization can be subtracted from the total RMD to determine how much can come from the remaining accounts. There is no timing issue here due to aggregation rules, only the requirement that the year end total distribution must be met.
2) In later years, the annuitized account should be in a separate IRA and the payout stands on its own. There is no prior year end balance on which to figure a conventional RMD. The annuity payout satisfies the requirement for the annuity only. The remaining IRA accounts must satisfy their own RMD based on the prior year end balance.