Annuitized IRA Annuities & RMD
Once an annuity is annuitizied, the insurance company says they can no longer give us a December 31 account value. When the annuity is an IRA, does this mean that once it’s annuitized there is no more reporting of year end value by the insurance company to the IRS? We believe that the payout amount is enough to cover RMD’s for all of the client’s IRA accounts, but without the year end value of the IRA annuity, we really don’t know for sure. What do we need to do as their advisor to make sure our client is taking the appropriate RMD amount?
Permalink Submitted by Joseph Arsenault on Thu, 2010-06-24 19:11
Once you annuitize in an IRA, that annuity payment literally becomes your RMD for that amount elected. Even if you only annuitize 50k out of 100k on the account, you would have to take an RMD for the amount not annuitized. So to answer your question, if the account was fully annuitized, than that is the clients RMD. And going further, if they have other IRAs, this RMD from the annuity DOES NOT cover them. It usually not advised that someone annuitize their IRA.. In your case, the annuity payment is the reported RMD for the amount annuitized, ineligible for rollover or covering any other RMD obligations.
Permalink Submitted by Alan Spross on Thu, 2010-06-24 22:17
I agree with Joe.
The only exception would be in the year of the annuitization because there will be a prior year end FMV representing all the assets. Annuitization payouts are basically flat from year to year instead of back loaded like the RMD divisors. Therefore, in that first year the annuitized payment will cover some of the RMD for the other assets because it will be higher than the usual RMD for the amount annuitized. After the first year, the annuitized amount and the non annuitized amount must separately generate their own distributions.
For an IRA owner in excellent health with a history of longevity in the family, annuitization (including joint and last survivor with spouse) can be an advantage to the IRA owner and/or spouse if the longevity materializes, otherwise it’s a big win for the insurer and a big loss to any successor beneficiaries.
Permalink Submitted by BruceM on Fri, 2010-06-25 23:26
I’ve never quite understood how this works.
If I’m, say 65, and annuitize an IRA with a fixed life annuity, how does the insurer meet the IRS life expectancy (uniform) table mimimum withdrawal amounts? Does the IRS have to approve the insurers actuarial tables to ensure that the distributions will actuarily meet the minimum IRS distributions?
BruceM
Permalink Submitted by Alan Spross on Sat, 2010-06-26 00:13
Hi Bruce.
My impression is that there is not enough diversion in the tables used by different insurers to matter to the IRS. However, there might be an issue due to the complex options in the 2004 Annuity and DB RMD Regs including certain COLAs or joint and last survivor annuities. Basically, the minimum age for a joint annuitant is capped in these Regs so that the annuity payout is not reduced much below the Uniform Table or Table II equivalents for younger spousal joint annuitants. In general, however, IRS confidence in insurance carrier calculations is probably on par with those for qualified plan RMD administration.
In addition, the IRS collects taxes sooner for an annuitized IRA since the payouts start out higher than the Uniform Table. Up to around age 86 tax collection is enhanced, and after that the nearly level annuity payouts trail what the Uniform Table would generate. As is typical, the insurance industry may be prone to develop products that are not addressed by the current Regs. The US Govt is pushing annuitization now in a big way, hoping that it will preserve retirement assets longer. QRPs will be encouraged to offer life annuity options as well. The mantra is that you will have income for life, but of course there is no representation on how much that income will buy.
Permalink Submitted by Joseph Arsenault on Sat, 2010-06-26 06:20
What is interesting is that a lot of the life income products being pushed are actually not annuitizations at all. I know the ones I have worked are “RMD” friendly. Basically meaning the payout from the guaranteed income rider would never be below the RMD. At least with these products there is a residual value, where with annuitizing there is really no residual value, just term-certain options in the event you die too early.
Alan makes a good point in his first paragraph. I had always thought that an annuitization no longer gave the IRA owner an issue with RMDs for two reasons, one is that the annuitized payment is the RMD, and the second is that there is no longer a state FMV as of Dec 31st to actually worry about calculating an RMD off of. Truly though, fewer and fewer SPIAs are being written, and less fixed and index annuities are actually being “annuitized” to my knowledge. The life income benefit riders that started with VAs have moved over and that seems to be the new “thing”.