RMD calculation on Annuity
Client has 2 IRA accounts. One is an investment account with stocks, bonds, and cash. The second is a guarenteed annuity contract. Client is rolling the distributions from the annuity into his investment account. Insurance company that issued the annuity states that there is no actual value of the annuity, since the client basically surrendered the money when he purchased the contract. For purposes of calculating his RMD, should he just calculate using the market value of his investment account, or somehow include the annuity?
Permalink Submitted by Alan Spross on Thu, 2010-01-28 22:26
Once an IRA annuity has been annuitized, there is no account balance on which to figure an RMD and the annuity payout becomes the RMD for that account. These accounts must remain entirely separate. Client should NOT be rolling these distributions into the IRA with the conventional account balance since he is causing his RMD for the investment account to be increased by increasing the balance by the amount of the other RMD. In addition, an RMD is not eligible for rollover in the first place. And finally, if this is being done by indirect rollover rather than direct tranfer, the one rollover limitation is being breached.
The first thing to do now is to stop these rollovers or transfers immediately, then you can determine more details such as how long this has been going on, how it has been reported on client’s 1040, and how many different problems have resulted.
Note that the RMD is deemed satisfied even if the funds are rolled over. The problem is that since they are not eligible for rollover, his other IRA has excess contributions to correct, which can lead to excise taxes. One prime question is how much has he distributed from the investment IRA, enough to make up for those rollovers?
Has the IRS contacted him yet?
Permalink Submitted by Charles Hackett on Thu, 2010-01-28 22:32
Ed,
A little (lot) confused here. You say, “Client is rolling the distributions from the annuity…” What do you mean by “distributions?” The insurance company saying there is “no actual value of the annuity” doesn’t make sense if it’s in deferral, nor does the statement that the “client basically surrendered the money when he purchased the contract.” IF he has an IRA that is in a fixed deferred annuity, the company will tell him the value of that contract on 12/31/09, end of story.
IF he also has an investment account, his custodian will be able to provide the 12/31 value of that account as well. When you have the TOTAL of each account, (he’ll need the 12/31 value of ANY OTHER IRA’s he may have as well) he’ll add them together, apply the divisor based on his age, and out will pop a number that is the minimum amount he must take; the RMD. He can take a portion from each account, or take it all from one account, as long as he takes the TOTAL RMD amount. I suggest you do some thorough research before giving this client a final answer, becasue “somehow” including the annuity is not going to fly.
Permalink Submitted by Charles Hackett on Thu, 2010-01-28 22:38
Ohhh… an ANNUITIZED IRA annuity… Alan, you’ve done it again!
Permalink Submitted by Alan Spross on Thu, 2010-01-28 22:52
I’m not Ed, but if the insurance company is saying there is no year end value to the annuity, then it must have been annuitized, ie a single premium immediate annuity was purchased with the IRA funds within an IRA annuity. The only thing that is fixed from here is the annual annuity payout. If this is what happened, the only RMD year for which there will be a prior year end balance for all the assets will be the year that the immediate annuity was actually purchased. If the annuity has NOT been annuitized, then we have a different story, but then the IRA custodian (Insuror) would be reporting a year end value on Form 5498. You will need to determine exactly what the status is here.
Permalink Submitted by Eric Drossner on Fri, 2010-01-29 16:19
Thank you for your response. The annuity has been annuitized. The annuity was purchased in 2009, so this is the first year of any type of reporting, which is why the questions are being generated now. Here are the exact chain of events. Client sends $400,000 from his investment IRA at custodian 1 to purchase an annuity, which is immediately annuitized. Client will receive $7,000 per month for life. Client has been sending that money back to custodian 1 as a trustee to trustee transfer back into his IRA.
As I understand your response, client has the following issues:
1. Monthly distribution can not (??) be sent to custodian 1 for deposit as trustee to trustee transfer.
2. Client should be paying tax as ordinary income on each monthly withdrawal.
If this is the case, should the $400,000 withdrawal from his IRA to purchase the annuity have been a taxable event? The insurer of the annuity told him no.
Also, for purposes of calculating the client’s overall RMD due for 2010, do I only use the value of the investment IRA at custodian 1, and if his distributions from the annuity exceed that, he is done, and needs no withdrawals from his investment IRA?
Permalink Submitted by Alan Spross on Fri, 2010-01-29 16:42
I think the circumstances are such that things can be salvaged here. For 2009 only, the RMDs were waived so there is no problem with what was done in 2009. The transfer of rollover of funds to the IRA annuity is not a taxable event as long as the new annuity remains in an IRA.
But as of 12/31/09 there is NO year end account balance for the annuitized IRA, and therefore the 7,000 monthly payout becomes the RMD for this account only and cannot be rolled into the other IRA any longer. The transfer to the other IRA should be stopped immediately. The 7,000 will be a taxable RMD from the annuity IRA and the other IRA will have RMDs based on it’s 12/31/09 value. Both RMDs cannot be rolled over to any other IRA account.
In other words, the aggregation rules that apply to multiple IRA accounts cannot apply to this structure starting this year. Each IRA must distribute it’s own RMD. That will be 7,000 X 12 = 84,000 for the annuity plus whatever annual amount the investment IRA generates on it’s own.
Note: If the 84,000 is the correct figure, this client must be well up into his 80’s. Is that the case?
Permalink Submitted by kathy huckabay on Fri, 2015-02-06 07:40
Alan, this is the exact question I am researching. I understand that the anuitized IRA creates its own RMD. However, I cannot find a code section that explicitly states that – in your example, the $84,000 cannot be used to apply to the RMD from the investment account.Kathy
Permalink Submitted by Alan - IRA critic on Fri, 2015-02-06 16:12
This conclusion is drawn from IRS Reg http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol5/pdf/CFR-2012-title26-vol5-sec1-401a9-6.pdf. The Reg is complex, but basically it does apply to IRAs, and distributions that are not calculated using periods longer than the IRA owner’s life expectancy of joint life expectancy with a beneficiary satisfy the RMD requirement. If they satisfy the RMD requirement of the annuitized contract, they cannot be applied to the RMD of the individual account as well. In addition, the annuitized IRA no longer has a year end value so there is no way to calculate an RMD using the rules for individual accounts. It is generally accepted that in the initial year of the annuity where the annuity did not exist for the entire year and there was therefore a year end value for the amount annuitized, that the total RMD can still be aggregated in that initial year.
Permalink Submitted by Eric Drossner on Fri, 2010-01-29 16:58
Thank you for the clarity. The client is 88. It’s a pretty good deal if can live to 98!
Permalink Submitted by Alan Spross on Fri, 2010-01-29 17:27
Has there already been one monthly annuity payment transferred to the investment IRA this year?
Permalink Submitted by Eric Drossner on Fri, 2010-02-05 15:36
Yes. One payment.
Permalink Submitted by Alan Spross on Fri, 2010-02-05 22:48
This one payment is a problem for reasons stated in prior posts. An immediate annuity will not accept a transfer back into the annuity either. Therefore, client will have to withdraw the transferred amount from the investment IRA in addition to the investment IRA RMD figure. The annuity 1099R will be one payment short, but client will have taken that much extra out of the investment IRA, so the correct total RMD will be met.