Use the Right Value for IRA Annuity RMDs and Conversions

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

IRA valuation is critical when determining your required minimum distributions (RMDs), which are based on the prior year-end fair market value (FMV) of IRA assets. It is also critical for Roth conversions, because the resulting tax bill is based on the FMV of your IRA assets on the date of your conversion.

Valuing certain deferred annuities owned inside your IRA can be tricky, though. Many of the deferred annuities offered today have a number of different values associated with them, all of which may be important for you to know about and understand. For instance, many annuities have one value – often referred to as an accumulation value – which might represent the fair value of the assets held within the annuity. This may or may not be different from the fair value of your entire IRA annuity, valued as a whole. There may also be a separate value tied to an added benefit, sometimes referred to as the benefit base or rider value. For RMD and Roth conversion purposes, it’s possible that neither of these values may be acceptable for an IRA valuation.

Example:
You hold a deferred annuity in your traditional IRA that has an accumulation value of $20,000. Your annuity also has an added benefit that promises to pay you $10,000 a year for life if you begin to take distributions from your annuity.

Clearly the annuity rider has some value in and of itself, so while $20,000 may be the maximum you can withdraw from your contract in one lump sum, it’s not the FMV of your annuity as a whole. In this case, it’s easy to see that the FMV will be some amount higher than the $20,000 accumulation value. But how much higher?

Arriving at a value that IRS will accept is not so easy and often involves advanced calculations. This is, as they say on TV, one of those “don’t try this at home” situations. Instead, you should put the onus on the insurance company issuing the annuity to provide a needed FMV. After all, if a Roth conversion is made, it’s the annuity company that’s going to be issuing the 1099-R for the FMV of that conversion. Plus, most insurers have software and actuaries to do these complex calculations.

By taking these steps and understanding that the fair market value is used to calculate RMDs and the tax impact of a Roth conversion, you can avoid surprises and create a more accurate and effective tax plan.