RMD for Immediate Annuity

Submitted by Cory Levetan on Thu, 2012-09-20 18:24

An IRA owner who is subject to RMD’s purchases a 5 year Immediate Annuity with a portion of the IRA assets and the 1st year payout is enough to satisfy the RMD on the combined IRA assets. How is the RMD calculated for the preceding years since the immediate annuity will no longer be valued and a 5498 is not generated? Also, since a 1099R is generated each year from the immediate annuity can the annuity payout be counted toward RMD distribution?
Thanks



Submitted by Alan Spross on Thu, 2012-09-20 22:39

For the year the annuity was purchased, there was a prior year end account balance, so the RMD for that year can be aggregated.

But for the additional years, there is no specific guidance from the IRS on this. IRS guidance is limited to limiting term certain conditions which would extend the life of the IRA beyond owner’s life expectancy. This payout is likely to constitute the RMD for the annuity portion with no part of the distribution eligible for rollover since it is all RMD. Therefore, annuitization for periods far less than the owner’s life expectancy should generally be avoided.

Submitted by kevin conroy on Wed, 2013-01-30 15:50

what type of guidance can we expect on a period certain payout that is far shorter than the life expectancy of the client?doesn’t make sense that the payout more than exceeds rmd from all IRA’s, and yet limits the ability to plan for inflation on the long end and predictability on the short end. So my question would be what are the processes at the insurance company when it comes to the second year and beyond for paperwork other than the 1099? thanks

Submitted by Alan - IRA critic on Wed, 2013-01-30 16:22

There should have been guidance included in the 2004 IRS release on RMDs for annuities and DB plans. But that Notice was so focused on rules that prevented annuitization methods that reduced the rate of payments, it overlooked the affect of a shorter period certain annuity. The 2004 release apears to suggest that these payouts are considered the RMD for the contract and if so it also means that none of the payments can be rolled over to another IRA. IRA custodians including insurors are responsible for notifying IRA owners what their RMD requirement is. What did this insuror indicate at the time of annuitization and what do they indicate now? Perhaps they were aware of or received correspondense from the IRS how this would be viewed and there is some relief I am unaware of.

Submitted by kevin conroy on Wed, 2013-01-30 20:23

there were vague answers other than  referencing the code that pre dates IRA’s from what I understand having to do with db plans. 

Submitted by Alan - IRA critic on Wed, 2013-01-30 21:51

That is not surprising. Here is a link to the IRS guidance from 2004, starting on p 1083. I don’t see where it includes any direct guidance on this issue:    http://www.irs.gov/pub/irs-irbs/irb04-26.pdf

Submitted by Gene Adams on Tue, 2013-11-12 22:27

I am just past age 79.  I am in the process of buying two immediate lifetime annuities.  I am buying from two companies to spread the risk and to ensure that I do not exceed the state’s guarantee program amount.  I am transferring the money from an IRA to the insurance companies, custodian to custodian.  These are not period certain annuities and they are single life.  Payout will cease when I croak.  I will have other IRA assets outside of these annuities, and the amount of these other assets will exceed the total amount in the annuities.  Can I include the amount used to purchase the annuities in my year end IRA total to calculate the MRD for 2014?  Can I use the monthly payments in 2014 as required withdrawals to count towards total MRD for 2014? If I count the money used to purchase the annuities towards total IRA amount, the monthly payments will come close to satisfying required MRD.  I will still have to make a small withdrawal from the remaining IRA.  What about in future years?  Can I continue to count the money used to purchase the annuities as part of my total IRA value and continue to count the monthly payments towards required MRD?  Could I do it by using the “fair market value” which I understand will be provided by the insurance companies annually?  There is a huge tax advantage to doing it this way.  The monthly payments are taxable as ordinary income, and any withdrawals from the remaining IRA are also taxable as ordinary income.  But if the monthly payments can be counted towards total MRD, the required withdrawal from the remaining IRA is reduced, so taxable income is reduced and so are taxes.  I seem to read different answers on different websites, and I get different answers from different CPA’s here locally.  It also seems to make a difference whether the annuity is singe life or is designed to continue payments beyond the purchaser’s lifetime (this won’t happen in my case), and it seems to make a difference if the annuity is for a “period certain”.  Again, this won’t be the case for me. 

Submitted by Alan - IRA critic on Tue, 2013-11-12 22:57

  • Your situation will be one of the simplest. For years after annuitization of part of your IRA balance takes place, the annuity distributions will satisfy the annuity RMD and your other IRAs that still have a year end balance will have their RMDs calculated like you have in the past. The annuity distributions cannot be used to satisfy any part of the RMD for your non annuitized IRA accounts.
  • An exception to the above applies in the year you annuitize the IRA annuities. This is possible because there was a prior year end balance on which the RMD is based. Since there was a prior balance only in the first year, the annuity payouts can count toward your total RMD, thereby reducing the RMD from the non annuitized accounts.
  • There is no IRS authorization for insurance companies to issue a 5498 showing a year end value after annuitization, nor to use the 5498 value to calculate RMDs should an insuror incorrectly issue a 5498 showing the value of remaining payments or some other value.

Add new comment

Log in or register to post comments