using Ira monies to buy an annuity
a question for ALAN:
If a fixed immediate annuity is bought using trad IRA money say for 200K, how do the monthly payouts figure into the RMD calculation at 70 1/2 considering there is a principal balance….how does this work if the annuity always have a principal balance like in a hybrid annuity, growth and income (eg. met life)….I know any other trad IRA’s balances have RMD’s taken out…thanks in advance….gerry
Permalink Submitted by Alan Spross on Thu, 2011-04-28 22:27
I have not heard of this type of hybrid. If a portion of the principal is allocated to an immediate annuity through annuitization, then the account balance is not likely to be calculated using a present value for the annuitized portion. After any annuitization, that particular contract must satisfy it’s own RMD and any other remaining IRA accounts that still have year end balances will satisfy their own RMD.
For various insurance products that have almost unlimited applications described by the term “hybrid”, the insurance company must provide answers regarding the RMD and determine the RMD for each such contract. The IRA annuity owner cannot be expected to calculate the RMD, especially if the company indicates that the actual payout is a figure other than the RMD.
Typical immediate annuities no longer have an account balance and the annuity payout IS the RMD for that contract. If this one actually has some sort of account balance, it should be determined how that balance is calculated and exactly what it represents. The IRS is likely not fully up to date dealing with newly released insurance products, so it is possible you are referring to that type of product.
Permalink Submitted by Uno Nieeban on Thu, 2011-05-26 23:10
To elaborate on the question. You have two IRAs, one being an annuity being annuitized over a fixed period, for example 5 years, and the amount distributed annually is greater than the calculated RMD of the other IRA, will the annual distribution satisfy the other IRA’s RMD?
Permalink Submitted by Alan Spross on Thu, 2011-05-26 23:40
Only for the year in which you purchased the immediate annuity IRA. For that year the usual account balance existed on the prior 12/31 to calculate the total RMDs.
But in the first full calendar year of the annuity, it will no longer have any prior 12/31 balance. Therefore, the payout will become the RMD for the annuity only and the other IRA that has the year end balance will have to calculate it’s own RMD in the usual manner.
Due to this RMD wrinkle, an annuity payout period much shorter than your life expectancy makes you draw down the IRAs at a much faster pace than if the annuity was a life or joint life annuity. The mechanics would still work as stated above, but the life annuity payout would obviously be far less, and therefore the total RMD will be far less.