RMD CALCULATION ON IMMEDIATE ANNUITY

Submitted by MICHAEL LICITRA on Fri, 2019-10-18 16:08

CLIENT ROLLED OVER A IRA INTO AN IMMEDIATE ANNUITY IRA IN 2018. FORM 5498 WAS ISSUED IN 2018 TO REFLECT THE BALANCE IN THE IMMEDIATE ANNUITY.

I AM READING THAT IMMEDIATE ANNUITY IRA SHOULD NOT FACTOR IN THE RMD CALCULATION. I AM NOT CERTAIN BECAUSE A FORM 5498 WAS ISSUED AND IRS WILL LOOK FOR THAT AMOUNT FOR THE RMD CALCULATION.

1- DOES THE IMMEDIATE ANNUITY VALUE NEED TO BE PART OF THE RMD CALCULATION.

2- THE CLIENT ROLLS OVER THE IMMEDIATE ANNUITY PAYMENT INTO A NON ANNUITY IRA. DOES THIS CHANGE ANYTHING BECAUSE HE IN NOT TAKING THE PAYMENT AND PAYING TAX ON IT?



Submitted by Alan - IRA critic on Fri, 2019-10-18 18:28

  • The IRS has totally ignored annuitized IRA accounts in their instructions for Form 5498 and the Form itself. IRS Reg 1.401(a)(9)-6 (RMDs for annuities and DB plans only partially deals with this issue. Therefore, both IRA owners and IRA custodians are improvising when it comes to RMD administration. Experts such as Natalie Choate have reasoned that since the surrender of an IRA lump sum to an insurance company in exchange for period distributions will generate an amount unassociated only indirectly associated with the prior IRA balance, that the annuity payout must be treated as the RMD for the annuity only, and that no RMD aggregation can be applied between other IRAs and annuity IRA accounts.  Who knows what method the insurance company uses when they indicate a year end balance for an IRA annuity, when there is no nominal balance. They might be using the present value of the expected annuity cash flow for the assumed mortality of the IRA owner. Whatever amount they show should be ignored because the distribution will be fixed according to their calculations at issue, none of which reflect IRS RMD tables. I guess annuitizations in the past have been rare enough for the IRS not to bother clarifying any of these issues (including how Form 8606 should be completed to reflect any IRA basis).
  • Client could have aggregated his RMDs for 2018 (year of annuity purchase) since there was a bona fide 12/31/2017 value from which to calculate the 2018 RMD. This is only available for the year of annuity purchase. All years thereafter the RMD for the annuity IRA will be the amount distributed and any other IRAs will determine their RMDs in the usual manner.
  • Q 1 – No, the immediate annuity value, however determined, does not affect the RMD for the following year. It is an unrelated and useless figure. But note if a 60 day rollover was used to create the annuity IRA, a 5498 must report the receipt of that rollover. This is unrelated to RMDs.
  • Q 2 – Unless the client has an immediate annuity that expires prior to the age 70.5 year, a rollover of the periodic distribution is not allowed because that distribution is an RMD, even when the payouts begin prior to age 70. Reg 1.401(a)(9)-6 states that the start of annuity payments moves the RBD date to the date of the first payment even if that payment is well before age 70.5. As such these are RMDs and RMDs are never rollover eligible. Client should be reporting the payments as taxable income and these rollovers are creating an excess regular IRA contribution. If automatic direct transfers were arranged there might not even be a 1099R issued, which would indicate that the custodian is unaware of the RMD rules. Client should end this process and take steps to correct any infractions. First thing to do is have a frank discussion with the insurance company. Again, if 2018 was the first year, RMDs can be determined in the normal manner. The annuity payments made in 2018 should be subtracted from the total RMD for all account and the remainder taken from the non annuity IRAs.

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