buying an immediate fixed annuity with IRA funds

Submitted by ellen dawmdellipizzi on Thu, 2017-03-16 12:43

I am 68.5 years, and have been advised to buy a 200K immediate fixed annuity with a part of my IRA funds. Can you please simplify the R&R, especially regarding Cost Basis, RMD’s, and limits on amount of IRA monies allowed for the purchase of such. Thank you.



Submitted by Alan - IRA critic on Thu, 2017-03-16 21:25

  • There are no limits on the amount of your IRA that can be annuitized. The first annuity payment becomes your required beginning date for that IRA, meaning that your RMDs have started for that account prior to 70.5. As a result, none of these payments can be rolled over. Make sure this is a life or joint life annuity with your beneficiary so do not accelerate your tax bills too much. For example, if you opted for a 10 year annuity period, this account would be fully distributed in most cases well before your death, so you would have lost much of the stretch.
  • Your other IRA money would not be subject to RMDs until 70.5, and those RMDs would be calculated in the usual manner. The IRA annuity would not be considered in determining the RMD calculation for your other IRA accounts.
  • Don’t confuse this with a QLAC. A QLAC is a deferred annuity that does not begin payout until around 85, and the QLAC premium is exempt from RMDs until that time. QLACs are limited to the greater of 125,000 or 25% of your total IRA value.
  • You asked about cost basis. If you have IRA basis recorded on Form 8606, then annuitize part of your IRA, there is NO CLEAR IRS regulation on how to apportion the cost basis to the annuitized IRA. Form 8606 uses a pro rated basis recovery method dependent on the year end account values. But the annuitized IRA does not have a year end value, so it is not clear how much of your annuity payments would be non taxable basis recovery. I guess you would have to improvize. Lack of clarity is a good indication that very few people have been annuitizing their IRAs. Perhaps 10% of people have IRA basis, and perhaps 1% annuitize, so if these estimates were correct, only 1/10 of 1% would be facing this question.

Submitted by ellen dawmdellipizzi on Mon, 2017-03-20 14:34

What I’m failing to grasp is:  how does the dollar amount [200K in this case] taken from total IRA funds – 500K figure into the total IRA value used to determine the RMD each year after 70.5 years?  Thanks very much !

Submitted by Alan - IRA critic on Mon, 2017-03-20 15:31

It doesn’t because what your immediate annuity pays you annually IS the RMD for that account. There is no longer a year end balance to calculate RMDs the usual way. Since you are 68, the payments you receive starting immediately are considered RMDs for that account, and that means you cannot roll them over.If 300k is left in your other IRA account, RMDs from the other account do not begin until 70.5 based on the prior year end balance for that IRA only.  Is the proposed annuity a life or joint life annuity?

Submitted by ellen dawmdellipizzi on Mon, 2017-03-20 20:09

So i will have 2 IRAs.Do the RMDs in the annuity IRA stay the same dollar amount figure year after year? [as this is a fixed immediate annuity]?  My understanding is that the RMD factor increases yearly, so why does it remain the same, constant , amount in the annuity IRA???  This is where I am confused. [ The proposed annuity is a life annuity.]  Thank you again !

Submitted by Alan - IRA critic on Mon, 2017-03-20 23:28

The annuity payout will satisfy the RMD because there will no longer be an account balance for it from which to calculate a different figure. The annuity payout will be basically flat throughout your lifetime, but so would the other IRA’s RMDs if your other account had no gains or losses, because each RMD will reduce the account balance for calculating the next RMD and that will offset the increase resulting from the new annual divisor. Are you sure you want to annuitize the IRA now? Interest rates are rising and if you wait awhile you will get a larger payout. In addition, if you receive SS benefits those are also basically a life annuity.

Submitted by ellen dawmdellipizzi on Tue, 2017-03-21 00:16

I’ve put together an IRA portfolio of corporate bonds with the help of an advisor at a bank I am best described as a “Buy and Hold” investor..  As of April 10, the new DOL “fiduciary” ruling takes effect; Retirement accounts will fall under the “new” fiduciary law and I will no longer have access to this advisor.  THe bank gave me 2 choices: keep a self-directed brokerage account  with them, but fore go the advisor’s help, or, keep the account with them as “Assets Under Management” and be charged a fee of 1 to 2%. With the “AUM” account I would basically give up my control of “buys” and “sells”. To relinquish control is unacceptable to me.  To pay 1%, or 2%, while earning 4.5% is unacceptabe as well.  There are several long term positions in this account that are losing value.  If I liquidate them now, I can recoup a bit, while I still have the advisor do the sell. Frankly, I do not know how to access bond inventory, nor execute a sale on my own.  This is the simple reason I want to buy the annuity now, while I still have the advisor.  Yes, I know rates are rising, but time is of the essence.  I would gladly accept any suggestions you might have.  Thanks !

Submitted by Alan - IRA critic on Tue, 2017-03-21 00:41

While the DOL rule might be delayed, the bank is probably going to act when they originally announced. If you are located near a large city that has offices of either Fidelity, Vanguard, or Schwab, you might take your statement of these bond holdings and ask if they can be transferred in kind in a direct trustee transfer to one of these firms. If you hold individual corporate bonds to maturity, you will receive the face value unless the issuer defaults. So you may not need to sell them, but these firms would probably get you a better price if there was a reason to sell any of them. Banks are generally not the best place for IRAs unless all you want are CDs. They are known to push annuities of various kinds that often are not in the best interest of clients either because they are not appropriate or because the commissions and prices are higher than you can get elsewhere. Also, these other firms have various platforms under which you do not lose control unless you want to hand over control and even then you would not be paying over 1% at worst. I agree that neither of your 2 choices should be acceptable. I don’t know if the annuity is a wise choice, but I would not be rushed into a lifetime decision, since you cannot get out of the annuity without paying a prohibitive price. Note that if you leave the bank, they are likely to charge you an exit fee of some kind, even though their reaction to the DOL rule in their own decision.

Submitted by Steve Hagedorn on Tue, 2017-03-21 13:12

When all this bank offers are bad choices the worse thing you could do is choose one. Alan makes very good reccomendation with financial service companies such as Vanguard, Schwab and Fidelity. I would add T. Rowe Price to this list. Many of these firms are low cost, shareholder owned, and customer friendly. They also have advisor services that are the lowest in the industry. These firms are approaching the DOL issue a little differently by providing robo advisors that lowers advisor fee and the potential conflict of interest.You are being pressured to make a very serious decisions based on bad information and bad choices. Your bank is acting in their best interest, not yours.

Submitted by ellen dawmdellipizzi on Sat, 2017-04-15 10:17

I need to THANK YOU again for you sage advice.  As usual, you are spot on with your recommendations, guidance. I took my portfolio to Fidelity, had my “eyes opened”.  It was fantastic ! and I wouldn’t have gone there without your  suggestion.  THANK YOU AGAIN !

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