Annuitized Annuity in IRA and calculation of RMD

Submitted by George Miklis on Wed, 2017-03-15 19:02

I have a problem that I’m not sure how to  handle and was wondering if anyone has had any experience with it.  It pertains to the RMD when an annuity has been annuitized in an IRA.

I’m having an issue determining the proper way to report the yearend IRA balance on a tax return, and the amount of RMD to take due to some annuities in an IRA account.

Lets say you have 3 separate IRA accounts with different brokerage firms.  In one of the IRA accounts you have 3 John Hancock annuities(all just alike) that have riders that accumulate automatic returns.  In 2015, you annuitize one of them and you get a stream of monthly income to meet your RMD for 2015.  This annuity is no longer reflected in the IRA balance as reported by the brokerage firm on the yearend statement for 2015.  But John Hancock issues a tax form 5498 showing a Fair Market Value for the annuitized annuity as $150,000 as of 31 December 2015 but this notice is received during early 2016.  You then get another From 5498 in 2017.

Lets say the 3 IRA accounts look like this at the end of 2015:

Account #1 balance at 31 December 2015        $5,000    RMD for 2016    $195
Account #2                                                          25,000    RMD                    976
Account #3    Has two remaining annuities       300,000    RMD                11,720

RMD to be taken on remaining IRA’s  in 2016                                                       $12,891

Issues are:  Can you use the stream of income from the annuitized annuity to meet the RMD for 2015,  2016 and after?

                        How or what do you do with the John Hancock form 5498 Fair Market Value of $150,000 on the annuitized annuity, issued during 2016. Do you include it in calculating the RMD for 2016 or just ignore it?

                        The remaining 2 John Hancock annuities will be annuitized in 2017 and Form 5498 will probably be issued on those during 2018.

Any guidance will be appreciated.



Submitted by Alan - IRA critic on Wed, 2017-03-15 22:10

  • Because all accounts had a year end 2015 balance, the 2016 RMD amount can still be aggregated in any combination from these accounts. Therefore, the period annuitized payments can be deducted from the total RMD and the remainder of the RMD taken from any of the remaining accounts.
  • However, on 12/31/2016 the annuitized contract no longer has an actual year end balance, notwithstanding that some insurance companies still report a 5498 figure using some arbitrary calculation to show a hypothetical year end balance. Since this artificial balance should be ignored, the annuitized payments are deemed to satisfy only the RMD for the annuitized contract, and the other IRAs must satisfy their own RMD calculations. The non annuitized account RMDs can still be aggregated, but NOT with the annuitized contract. Therefore, only for the actual year the annuitization takes place can the total RMDs still be aggregated.
  • Eventually, all the annuities will be annuitized and each will satisfy it’s own RMD only. The procedure is the same as above just adding more annutized contracts to the mix each year.
  • Incidentally, before these contracts are annuitized they are referred to as individual accounts, meaning that the RMD is calculated from the prior year end balance. However, there are complex IRS rules in how to determine that balance because the value of certain fringe benefits may result in a value exceeding the actual cash value at year end. The insurance company must provide that RMD amount because you cannot calculate it yourself. The value they show on the 5498 should reflect any benefits that must be added, so it that value exceeds the cash value, that is the reason. All that will end once they are all annuitized.

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