Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
RMD in form of lifetime annuity contract?
Posted by: wanttoknow, January 28, 2011 09:10PM
I have a traditional IRA, in the form of a deferred annuity IRA, on which I must take an RMD. (I'm 75 years old.) Let's say the IRA is worth $100,000, and the RMD for this year is $4,545.

If I take the $4,545 and apply it to an immediate lifetime annuity, does that satisfy the RMD requirement and also allow me to escape the income tax on the $4,545 RMD? (I would then be taxed on each year's annuity payment.)

The 2008 Pub. 575 says: "Distribution of an annuity contract from your IRA account. You can tell the trustee or custodian of your traditional IRA account to use the amount in the account to buy a annuity contract for you. You are not taxed when you receive the annuity contract (unless the annuity contract is being converted to an annuity held by a Roth IRA). You are taxed when you start receiving payments under that annuity contract."

However, this does not address the question of satisfying the RMD.

Re: RMD in form of lifetime annuity contract?
Posted by: Alan S., January 29, 2011 02:42AM
Unless you have basis in your IRA, all distributions are taxable. The first distributions in a given year are applied automatically against the RMD amount, which is apparently 4,545 for 2011. If all you want to withdraw this year is the RMd of 4,545, you would have to work closely with the insurance company on the timing of the distributions, since you cannot roll over any part of the RMD and you also cannot do more than one rollover in 12 months.

You would have to determine what the monthly annuitized payment is and delay the annuitization until that amount covers the RMD. For example, if the monthly annuity payment is $500, then 9 payments would fall $45 short of your RMD. You could take out the $45 first, then start the payments in March and you will satisfy the RMD. Perhaps the insurance company has a more efficient way of handling this transition to annuitization of your IRA in the first year. After 2011, the annual payment IS your RMD and you don't need to worry about it anymore or do any calculations. The first year is the tough one because your RMD was determined from 12/31/2010 value and after 2011 your IRA will no longer have a stated year end value.

Another easier solution is to arrange for the 2011 payment to be made at one time. If it is less than 4,545, then take out the difference needed for your RMD first and annuitize the rest. If it is more than 4,545, get the payment and roll over the excess amount. Then in 2012, you can get the payments made monthly or whatever frequency they offer.

Just remember that you cannot start the annuity anytime and when you reach the 4,545 start rolling the payments over because you can only do ONE such rollover. Therefore, it is better to handle it up front to avoid the rollover trap.

Re: RMD in form of lifetime annuity contract?
Posted by: Bill Brown, January 29, 2011 12:05PM
Alan, the OP isn't taking a distribution to buy the annuity. The annuity would be purchased inside the IRA.

For the OP: The RMD amount is determined by an IRS formula. Whether the annuity payment is enough to cover the RMD is an open question.

Re: RMD in form of lifetime annuity contract?
Posted by: Alan S., January 29, 2011 05:54PM
If the annuity is a life annuity, it will become the RMD, but only starting in the year after annuitization. Therefore, all the complexity here is limited to the year of annuitization.

The 2004 IRS Release on RMD requirements for annuities and DB plans is highly complex, yet it fails to address these transition year issues adequately. Any payout formula for a period certain less than the IRA owner's life expectancy will more than meet IRS RMD requirements. Where you run into trouble is when the payout is based on joint life expectancies with the spouse more than 10 years younger than the IRA owner. Nonetheless, the insurance company must understand these rules and it is wise to get written assurance from them that the payout method meets IRS RMD requirements.

Re: RMD in form of lifetime annuity contract?
Posted by: wanttoknow, January 30, 2011 03:36AM
Thanks, Alan and Bill.

Bill, what is an "OP"?

Alan,

To sum up what, in part, I understand your explanation is saying:

A distribution from a T-IRA in the form of an immediate annuity contract is not income taxable; the annuity pay-outs are taxable.

The satisfaction of the T-IRA RMD for the year in which the immediate annuity contract is "distributed" depends not on the "price" of the contract, but on the sum of the annuity pay-outs in that year. There are ways to avoid taxation on more than the RMD amount involving timing and roll-over. After that first year there are no more RMDs.

(end of my summing up)

In my case, the lifetime annuity would be single, unless possibly I could get a joint life annuity also benefiting a non-spouse person more than 10 years younger.

Apparently you thought I was proposing to put the entire T-IRA into the immediate annuity. Note that I said "If I take the $4,545 (RMD) and apply it to an immediate lifetime annuity . . ." Obviously, there is no way that the first-year pay-out from an immediate annuity contract purchased with the amount of the T-IRA RMD can satisfy that RMD.

If I did put the entire T-IRA of $100,000 into a single-life immediate annuity, the first year's annuity pay-out would be about $767 per month--more than enough to satisfy the $4,545 RMD. With regard to not taking distribution of the excess, would the problem of not being able to roll over more than once per year not exist, given that it would be a direct transfer within the insurance co./IRA custodian?


Re: RMD in form of lifetime annuity contract?
Posted by: Alan S., January 30, 2011 04:43PM
Re last question: Yes, this is a possibility if the insurance company will do it. For example, you already have an IRA annuity. If the annuity company would spin off the amount you choose to annuitize, and after you have received 4,545, automatically directly transfer the excess back to the original IRA annuity, that would eliminate the multiple rollover problem. But you should talk to the company to see what their solution is. If they sell IRA annuities, they should be able to deal with the RMD situation in the year you annuitize. Otherwise, they are forcing you to distribute what may be more than the first year RMD amount.

Depending on how much you want to annuitize, another possibility is take your RMD from the existing annuity, report the taxable income and then purchase a non qualified immediate annuity with the proceeds. That won't get much of your account annuitized early on, but would eventually build up to a sizeable annuity. Since you are purchasing the NQ annuity with after tax money, only a small portion of your annuitized payments would be taxable.

Re "after the first year there are no more RMDs" - well, yes and no. There ARE RMDs from an IRA annuitized annuity, but a life time payout satisfies that RMD, ie you no longer have to worry about it. But you cannot roll over any of those annuitized payments after the first year because they ARE your RMD and RMDs cannot be rolled over.

Annuitized RMDs are basically level every year vrs a typical IRA RMD that starts out at less than 4% of the balance, reaches 5% by age 79, 6.5% by 84 and 8.8% by 90, 11.6% at 95 etc. At some point the regular RMD if you had not annuitized goes from being less than the level annuity payout to more. Probably in your early 80's.

OP = original poster.

Note: Even if the insuror allowed it, a joint annuity with someone more than 10 years younger would not meet the RMD requirements for you since a much younger person would reduce the payouts below the RMD requirement. The IRS does not care if you take out more, but you cannot take out less than what you own life or joint lives with someone close in age would produce.

Re: RMD in form of lifetime annuity contract?
Posted by: wanttoknow, January 30, 2011 09:08PM
Alan,

First of all, thanks for the meaning of "OP". The only thing I could think of was "old person".

You said "Annuitized RMDs are basically level every year . . . ." This seems totally theoretical to me, since once you have an immediate annuity, there is no year-end value. In my case the immediate annuity would be variable--based on a fund which is 60% equities, 40% fixed income. The annuity pay-outs would vary from year to year, or possibly even more frequently.

Your last paragraph:
"Note: Even if the insuror allowed it, a joint annuity with someone more than 10 years younger would not meet the RMD requirements for you since a much younger person would reduce the payouts below the RMD requirement. The IRS does not care if you take out more, but you cannot take out less than what you own life or joint lives with someone close in age would produce."

Is the "RMD requirement" you are referring to just for the first year of the immediate annuity, based on the year-end value of the deferred annuity IRA? If so, then the solution would be to take the RMD in cash before converting to the immediate annuity.

Note that the first year's annuity pay-out for my single life would be more than twice what is needed to satisfy the deferred annuity IRA RMD. ($9,200 vs. $4,545)



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