RMD and a SPIA
If a client’s IRA is split with half the funds being put into a single premium immediate annuity (SPIA) the remaining half being put into some other investment vehicle, what amount does the IRS look at for determining the RMD? The SPIA is a contract with the annuity company and the client can not cancel the contract nor can he take any additional monies out of the contract. The client gets a monthly check from the SPIA. The client does not get a yearly statement showing the amount of his money left in the SPIA. Generally the SPIA will pay out for a time certain or life of the annuitant or the joint annuitants. The insurance company takes the risk of longevity. The insurance company could pay out substantially more than the original investment. If the annuitant dies prematurely the insurance company will pay out to the beneficiaries the original investment less any funds already paid out (the death benefit). There is a cost to the annuitant to have the death benefit, the payment is lower than it would have been without the death benefit.
The distributions from the SPIA will be reported on a 1099R as coming from an IRA. I have never seen a IRS form 5498 issued on a SPIA. The distribution from the SPIA would not be sufficient to cover the RMD for the IRA prior to the split. However the distribution would be enough to cover the RMD from the other investment vehicle after the split.
Several investment advisers have been using this method to beat the IRS rules on the RMD. They are taking less money from the IRAs than they would need to meet the RMDs without this arrangement. Does this actually work? If it does where can I find something on this in writing? If it does not work is that in writing and where can I find it?
Permalink Submitted by Alan Spross on Thu, 2010-09-30 20:41
Once a portion of an IRA is annuitized, the annuity should be in a separate IRA account and the annuity payout IS the RMD for the annuity portion only. The other IRA accounts have an account balance so that RMD can be calculated in the usual manner.
The actual year of annuitization is different because there IS an account balance for all the assets as of the prior 12/31, so far that initial year only, aggregation will still work.
An SPIA annuity has a basically level payout as opposed to the RMD table divisors which produce a lower RMD in the early years and it doubles in about 15 years. The IRS has published several rules which provide some flexibility with the SPIA with respect to the ages of a joint annuitant which are allowed without depressing the payout much below the amount required for the owner’s life expectancy. But I don’t know how these rules will produce a lower RMD for someone in their early 70s.