Annuitized IRA with Form 5498 and Multiple RMD’s

Submitted by Mitch on Thu, 2013-11-07 20:17

I am aware that once an IRA is annuitized for a 5 year period certain, under normal circumstances, the custodian will no longer generate Form 5498. This makes sense as there will no longer be a year end FMV, just ongoing cash flow payments.

I also understand that the IRA annuity payments would normally only satisfy RMD for the same IRA in question and could not be applied as RMD toward other remaining IRA’s.

In this case, however, I have a client with an IRA he annuitized 3 years ago under a 5 year period certain payout.

The insurance company generates Form 5498 every year on the annuitized account. I called and asked them how they calculate FMV and they tell me based upon the number of guaranteed payments remaining.

The 2012 Form 5498 shows a FMV of $58,620. Based on the clients age of 71, his RMD on this amount would be $2,213.

His annuity payments from this same account will total $36,907 for 2013. He will receive a 1099-R in this amount with Distribution Code 7 and marked as an “IRA”.

So I’m wondering why he wouldn’t be able to apply the balance of these annuitized IRA payments totaling $34,694 as RMD toward other outstanding IRAs.

It seems that from the documentation provided to the IRS there is no indication that the account has been annuitized.

Am I missing something here?

Thanks in advance for your consideration.



Submitted by Alan - IRA critic on Thu, 2013-11-07 23:32

  • There are no clear IRS Regs regarding annuitized plans with periods certain less than the owner’s life expectancy. The only Regs (1.401(a)(9)-6 are consumed with eliminating annuitized payouts that depress the rate of distribution below the life expectancy RMD tables. Therefore, a period certain less than life expectancy that breaches age 70.5 is very risky since there is no way to know how the IRS views these. Most likely, any payments made will be considered RMDs and therefore NOT eligible for rollover. Your client apparently does not wish to roll over these large distributions in excess of normal RMDs, but instead wishes to reduce the RMDs from the non annuitized IRA account. Consensus is that in years after the annuitization, the non annuitized IRAs and annuitized contract are entirely separate with the annuity payment constituting the annuity RMD and the other IRA accounts would calculate RMDs in the usual fashion.
  • You are correct about the 1099R not indicating an annuitized IRA. Good chance that the lack of IRS Regs on period certain RMDs is due to the fact that the IRS just assumes that annuitizations are not taking place. They have yet to tighten up their matching of 1099R and 5498 reports and there remains a large RMD tax gap. Therefore when there is no 5498 for annuitized accounts, the IRS likely sees the 1099R totals as exceeding the actual RMD. If taxpayers rolled over the annuity distributions the IRS would probably not know the difference.
  • There are no 1099R instructions that address 5498 YE valuations on annuitized accounts. The insurer in this case is just improvising by showing the remaining payments and my impression is that most insurers do not issue a 5498 for annuitized IRA accounts. If you client wants to reduce his other RMDs, the IRS is not likely to know the difference lacking an actual audit of the client.
  • The insurer should not be annuitizing IRA accounts for short period certain terms that end after the usual RBD due to the risks of having the IRS consider the entire payout as the RMD for just that account. The client is therefore caught in a state of limbo due to the lack of IRS guidance on non life expectancy annuities in IRAs. 

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