SPIA and RMD
The “experts” at the insurance company don’t seem to know, so thought I try here.
Client took $180,000 of their IRA funds and puchased and life annuity paying roughly $18,000 per year for life (using to fund life insurance). The client still has $200,000 of IRA funds remaining in the investment account. The client is now 70 1/2. For calculating the RMD how is the SPIA figured in; both as part of the 12/31 balance as well as the $18,000 which essentially is IRA withdrawal?
Permalink Submitted by Alan Spross on Fri, 2011-04-15 20:09
The IRA SPIA is presumably in a separate IRA account. The SPIA distribution will satisfy the RMD of the SPIA only and the other account with an annual year end balance will generate it’s own RMD in the usual fashion.
Only in the initial year where the SPIA IRA is purchased can the RMDs be aggregated. This is possible because for the first year there is still a prior 12/31 total balance from which to calculate the total RMD.The SPIA pays out the full annual or part year annual distribution and that can be subtracted from the total RMD to determine how much must be taken from the investment account IRA. But after that first year, they are separate in all respects. It must be this way because there is no longer an account balance for the annuity. There is also no provision in the IRS guidelines for using an imputed account balance.
The above is the consensus opinion on this issue. Unfortuneately, the IRS issued annuity and DB plan guidelines in 2004 and included no specifics regarding aggregated RMDs.
Permalink Submitted by Larry Leisenring on Mon, 2013-04-22 17:26
Example: $100,000 put in 10 year certain SPIA @ age 67 and $100,000 in other IRA accounts. Value of non-SPIA account = $130,000 at age 70 1/2.If the SPIA was for 10 years certain, would it be reasonable to add the pro-rata remaining value of the SPIA to the value of other accounts for the purpose of determining RMD?
Permalink Submitted by Alan - IRA critic on Mon, 2013-04-22 19:21
There are no provisions for pro rating, calculating a present value or other method for assigning a year end value to an annuitized IRA. The annuity payout becomes the RMD for that particular IRA contract and the other IRA accounts with year end values satisfy their own RMD. The IRS Regs are lacking with respect to annuitization for periods certain LESS THAN the owners life expectancy. Therefore, starting at 70.5, the annuity payouts are considered RMDs for the annuity contract only and cannot be rolled over. Essentially, the annuity will be paid out within 6 years of the required beginning date and the lifetime stretch will be lost with respect to the annuitized IRA contract. The only solution is to have the period certain end prior to the year the IRA owner reaches 70.5, as all the payments can be transferred back into another IRA account since they are not RMDs.
Permalink Submitted by Stephen Csenge on Mon, 2011-04-18 14:14
Most helpful. Thank you.
Permalink Submitted by Bruce Steiner on Thu, 2011-04-21 03:02
An annuity hedges against living substantially longer than expected. Life insurance hedges against dying substantially before life expectancy.
Why would this person buy both an annuity and life insurance? Isn’t this like betting on both teams in the same game? Especially here when the IRA owner gives up the opportunity to convert more of the IRA to a Roth.