Annuitize IRA to satisfy RMD rules
Is it advisable to annuitize an IRA if the only reason is because of RMD rules? My clients don’t need or want their RMD. Is the annuitization a good idea? If so why? If not why?
Thanks
Is it advisable to annuitize an IRA if the only reason is because of RMD rules? My clients don’t need or want their RMD. Is the annuitization a good idea? If so why? If not why?
Thanks
Permalink Submitted by Alan Spross on Mon, 2010-11-01 23:53
The primary consideration is still the life expectancy of the IRA owner, ie live more than expectancy annuitization is beneficial and vice versa. The RMD rules are designed to make sure that the IRA owner must still distribute the IRA at a rate that is not slower than the RMD tables indicate. The annuitized distributions are basically level, ie higher than conventional RMDs in the first few years and then lower in the later years.
Once an IRA is annuitized it should be held in a separate account and whatever the annuitized distribution is becomes the RMD for that IRA account only. Any other non annuitized IRA accounts satisfy their own RMD requirements separately. The only exception is the actual year of annuitization where there was a prior year end account balance for all the assets.
In summary, RMD considerations should be considered, but there are not the driving force in this decision.
Permalink Submitted by Gerald Newton on Tue, 2010-11-02 01:52
Thank you for your response. The IRA owner has two accounts totalling approximately $379,000. The RMD for both accounts totals approximatley $14,000. If he annuitizes $225,000 his annual income is $14,973. Shouldn’t this satisfy the RMD requirement. I understand that, at some point, he would be required to take RMD from the balance of the account not annuitized. But, in the meantime, wouldn’t the distribution from the annuity satisfy current requirements?
Permalink Submitted by Alan Spross on Tue, 2010-11-02 03:16
That’s the exception I noted above. In the year a portion is annuitized there was still a prior year end value. After annuitization there is year end value available and no way to calculate an RMD based on that.
The figure of 14,973 contemplates annuitization early in January, so if this is done in Jan, 2011, the annuity distribution will satisfy the 2011 RMD. But in 2012 and beyond, there is no year end balance for the annuity IRA, and the 14,973 can only satisfy the RMD for the annuitized account. The other non annuitized IRA balances will have to distribute their own RMD based on their prior year end value. The RMDs must then remain separate.
And if the annuity is purchased in July, then only half the 14,973 is distributed so for that year there will have to be distributions from the non annuitized assets to bring the total distribution up to the RMD amount.