IRA annuitization
We know that per the terms of Reg. §1.401(a)(9)-5 and Reg. §1.401(a)(9)-6 that the payment stream from an annuitized IRA cannot (after the first year) be used to satisfy the RMD for any non-annuitized IRA.
However, all the examples and discussion I have ever seen on this speak of either a life annuitization of the IRA assets, or of an annuitization for a period of more than 10 years (in an oblique reference, I assume, to §402(c)(4)(A)(ii).
My question – assume that a taxpayer annuitizes a portion of his IRA for a period of less than ten years, can the payment stream be used to offset the RMD requirement of the non-annuitized assets?
I don’t see this as possible, as the non-annuitized assets are subject to an annual RMD calculation based on 12/31 values, and the ncome stream represents payment based on the annuitized asset (which no longer has a value for RMD calculation purposes).
Any thoughts?
Permalink Submitted by Alan Spross on Sat, 2011-11-05 04:11
I don’t think that 402(c) affects RMD Regs. The 10 year period there just separates payments that are rollover eligible from payments (10 years or longer) that are NOT rollover eligible because they meet the requirements of a substantially equal periodic payment.
I agree with your other conclusion. The 10 year payout could be done, but those payments would be the RMD despite their possibly being much larger than an account balance RMD. And the excess could not be used to offset other non annuitized IRA RMDs.
Permalink Submitted by [email protected] on Mon, 2011-11-07 12:37
Thanks for the response. However, I am trying to focus on a strategy that assumes an annuitization for a period LESS than 10 years.
I have no hesitation making an argument that a life annuitization or annuitization for a period over 10 years prevents the annuity payment stream from satisfying the RMD from non-annuitized assets.
However I am aware of financial advisors who routinely recommend to clients that they annuitize a portion of assets for a period of less than 10 years (five or six years for example) as a way to satisfy ALL of the client’s RMD, leaving other non-annuitized IRA assets undisturbed for the annuitization period.
In my mind, these clients are not making sufficient IRA distributions, and are subject to an adverse determination by the IRS for failure to make distributions, unpaid taxes, and penalties.
Permalink Submitted by Alan Spross on Mon, 2011-11-07 17:44
Part of the problem is that the IRS Regs do not clearly address annuitization issues such as this because they are overly fixated on making sure that RMDs come out at a sufficient rate. A related problem is conflicting information regarding the ability to annuitize an IRA AFTER the RBD rather than just before the RBD.
I know of no on topic letter rulings that provide any further clarity. As a result there will likely be various aggressive approaches to the gray areas, most of which will probably skate by the IRS until they become a main stream strategy.
As I read the Regs, it appears that any annuitization period less than the IRA owner’s life expectancy will result in the payout constituting the RMD for the IRA annuity account or annuitized portion of a single account if any insurors allow the annuity to remain in the original IRA. Since the annuity payout would be deemed to be the RMD, no part of it would be eligible for rollover. Of course, in the initial year of annuitization, the IRS Regs are clear that since there was a total account balance on the prior 12/31, the annuity payout and the RMD from the remainder of the IRA can be aggregated together, and any excess could be rolled over. But that is for the initial year of annuitization only.
If the IRS wanted annuitized accounts to be aggregated with the non annuitized IRAs of a taxpayer, they could have specified a present value calculation for the annuitized portion that no longer has a nominal account balance. The present value would permit aggregation of the accounts while still insuring that the money is distributed at a sufficient rate.
Permalink Submitted by [email protected] on Mon, 2011-11-07 18:04
That does seem to be the consensus so far – nothing specifically addressing the annuitization period, and high probability that the annuity payment stream would not be available to satisfy RMD from non-annuitized assets. In the absence of a clear statement, some taxpayers will continue to be “aggressive”.
As you said, without a sanctioned procedure for assigning a present value to the income stream, I can’t see that the Service would allow the annuitized payment stream to be encompassed within the annual RMD requirement of the other assets.