What Happens to My RMDs If I Annuitize my IRA Annuity?

Note: Earlier this year, in June, the IRS created a new type of retirement income annuity, called qualifying longevity annuity contracts (QLACs). QLACs have special rules with respect to RMDs. The annuities discussed in this article are not QLACs. For more information on QLACs, click here.

One common question both clients and advisors ask is “how will RMDs (required minimum distributions) be calculated from my IRA annuity after the annuitization?” If you have, say, only one IRA, with a $100,000 balance that is annuitized, the answer is simple. The annuitized amount that comes out of the IRA each year will satisfy your RMD obligation.

What if, on the other hand, you’re 74 – so you’re required to take RMDs – and have two IRAs, IRA “A” and IRA “B?” IRA “A” has a $100,000 value and IRA “B” has a $90,000 value, for a combined IRA total of $190,000. That would make your cumulative IRA RMD for this year about $8,000 and there’s no question that, if your IRAs weren’t annuitized, you’d be able to take the full $8,000 total from either of your IRAs separately or, between the two IRA in any amounts you prefer, as long as the total distributions were at least $8,000.

What if, however, you happen to annuitize IRA “A” and start to receive $9,000 a year as a lifetime income stream? Will the $9,000 you receive from the annuity satisfy your total RMD for all of 2014? Here’s where it starts to get a bit tricky.

Believe it or not, there is actually some debate over whether or not a distribution from an annuitized annuity can be used to satisfy RMDs for other IRAs in the year of annuitization. On one hand, once annuitized, IRA annuities generally follow defined benefit plan rules instead of the defined contribution rules. That would lead you to believe the answer is no. On the other hand, RMDs are based off of prior year-end balances. Since the annuitized annuity did have a prior year-end balance and wasn’t annuitized at the time, that might lead you to believe yes. In light of the grayness in this area, the conservative approach is to take the $9,000 annuity distribution from IRA “A” and an additional distribution from IRA “B” based on its prior year-end balance.

After the year of annuitization, things begin to become a little clearer. Most experts agree that there is no way to use the income from the annuitized annuity in IRA “A” to offset any of the RMD that must be taken from IRA “B.” In this situation, your annuity payout will only satisfy the RMD for IRA “A.” To put it another way, under the defined benefit plan rules that the annuitized IRA now follows, the annuity payment is the RMD for that IRA account. Your RMD for IRA B, with a total value of $90,000, would be just under $4,000 next year.

Annuitizing an IRA annuity isn’t a good or bad decision in a broad sense. It’s one that must be looked at separately, in each case, based on its own merits. Either way though, you should understand its effect on your RMDs.

– By Jeffrey Levine and Jared Trexler