IMMEDIATE ANNUITY INSIDE IRA
A client had $1mil in an IRA. He bought a $300k SPIA (single premium immediate annuity) that pays INSIDE the IRA so no taxation incurred from the SPIA payments.
Being over 70-1/2 he takes RMD. This will be based on the value of the IRA on the prior Dec 31. If he hadn’t dropped the SPIA ticket, the RMD would be based on $1mil. Instead, it is based on $700k (approximate value from the prior year end) plus the small amount of SPIA funds received during the year.
His concern was that we were inadvertanly circumventing the Federal RMD rules by having the SPIA use IRA money and pay inside the annuity, thus reducing the amount of funds availalbe to have RMD applied.
Can someone comment on this?
Permalink Submitted by Alan Spross on Mon, 2009-03-23 20:56
Any SPIA should be partitioned into it’s own IRA account once RMDs have begun due to the account balance issue. If the SPIA is in a different account from other TIRA assets, the SPIA distribution satisfies the RMD for the no balance annuity, and the other assets use the account balance that is available for those assets.
The final Regs for DB and Annuity Plans was issued in 2004 and does not even address this issue, which would appear to be begging for IRA guidance. If you have this situation now, you can take advantage of the 2009 suspension of RMDs to get the SPIA into its own account instead of a custodial account. If this occurred in a prior year, about all you could do is to add the annuity payout to the RMD for the portion of the IRA that has a balance and hope that the IRS does not question the total RMD as adequate.
In theory, the insurance company could calculate a present value of the income stream as of prior year end, and added to the other assets could be used to figure the RMD, but the IRS has never suggested doing this. Neither have they specifically addresssed how any non deductible basis in the IRA would be recovered while distributions emanated from an IRA SPIA income stream. That calculation is also predicated on a year end balance which does not exist.