Annuity within a SEP IRA

Submitted by Joseph Callan on Tue, 2020-11-03 10:20

My client purchased an annuity with $350000 from his SEP IRA. He also has a regular brokerage account in the SEP IRA.

Each year he receive a letter from each stating what the amount of the RMD amount is. The annuity RMD is $15000 but his contractual payment which he receives is approx $35000. Can the excess of the $35K over the$15K RMD be used to meet the RMD requirements of the brokerage account?

With the suspension of the RMD requirement for 2020, the annuity company has issued the $35K and would not alter it for the suspension. Can the payment be rolled into the brokerage account to avoid 2020 income tax? If so, can he redeposit the whole payment since he used the excess to meet the RMD for the brokerage account in other years? Or would he be limited to only the RMD amount of the annuity?

Since the annuity company would not reduce the payment by the RMD amount, is there any other way to avoid tax in 2020 on the amount received?

If both the brokerage account and the annuity are in the SEP IRA, do they stand on their own for RMD purposes?



Submitted by Alan - IRA critic on Tue, 2020-11-03 15:28

  • Each IRA account generates it’s own RMD calculation, but in RMD years these RMDs can be aggregated over all IRAs. SEP IRAs are treated as TIRAs with respect to RMDs. Since all 2020 RMDs are waived, if the annuity total distribution is still within 60 days it can be rolled over to the brokerage IRA account, but subject to the one rollover limitation per 12 months. If allowable, it will also eliminate any other 60 day rollovers for the next 12 months. 
  • I am assuming that the annuity is not annuitized, and the excess over the RMD calculation is due to a guaranteed living benefit of some sort. Such benefits are eligible for rollover to the brokerage IRA account.
  • While non annuitized annuity RMDs can be aggregated between IRA accounts per IRS rules, when the insurance company distributes the full RMD amount for the annuity, the flexibility of aggregation of the RMDs in an RMD year is lost. 

Submitted by Alan - IRA critic on Fri, 2020-11-13 20:40

  • With all the fringe benefits offered in today’s annuities, it is not always easy to tell if the annuity has actually been annuitized. If it has, then the annuity distributions satisfy the RMD for the annuity IRA only and other accounts must separately meet their own RMD requirements. This is the consensus of retirement plan experts because the IRS has not clarified this issue. If annuitized, there is no actual year end balance owned by the annuity owner, it has been turned over to the insurance company in exchange for a fixed payment for life, joint life, or period certain. 
  • The IRS term for a non annuitized contract including contracts distributing some forms of lifetime income is an “individual contract”. The insurance company must use IRS guidelines to determine the value including certain fringe benefits, from which to determine the RMD. Distributions in excess of this RMD figure can be rolled over since they are not RMDs.  DIrect transfers can also be made to non annuity IRA accounts since these are not distributions, not reported on a 1099R, and are not RMDs. Therefore, the key is determining if the insurance company considers the contract annuitized or not, since that determines what the RMD is.
  • Some insurance companies report a year end value of these accounts on Form 5498 which makes it look like the contract has not been annuitized. The IRS has not authorized them to use present value or other artificial methods to make it look like the contract has not been annuitized, when it has been.  In your case, it is not clear whether the contract has been annuitized or not. That will have to come from the insurance company.

Submitted by Joseph Callan on Fri, 2020-11-13 23:28

If the client is receiving annual payments after 70.5 years old, I believe this means it is annuitized.Can the excess of the total payment over the RMD be used to offset the brokerage RMD?  I believe your answer is no if it has been annuitized.  Is no the correct answer.  If it were your client what would you advise.  II believe that you are saying that the RMD portion can be rolled over into the brokerage account.  Would you say that the whole payment can be rolled over> Can you point me to the IRS cite that covers this topic?

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