RMD when purchasing immediate annuity with partial IRA funds

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Gill
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RMD when purchasing immediate annuity with partial IRA funds

Post by Gill » Fri Nov 14, 2008 1:05 pm

Suppose that an individual has a traditional IRA of $1 million. He utilizes $300k to purchase an immediate annuity for his life alone which will pay him $30k per year.

Assume further that he is now in his 70's and his RMD is 4%. How much will he have to withdraw from the remaining $700k of IRA assets? Is it $10k per year meaning the $40k RMD of the combined values less the annuity distribution of $30k or does he still have to take 4% from the $700k balance or $28k for a total distribution of $58k?

I've seen opinions both ways. One poster on Ed Slott's forum says he still must withdraw the $28k from the remaining assets whereas a representative in Vanguard's annuity department advises me he would only have to withdraw the remaining $10K.

I've actually simplified the question a bit because Vanguard says you would combine the value of the remaining IRA assets with the present value of the annuity (say, $277,000 after year 1) and then calculate the RMD on the combined values.

Any thoughts on this?
Bruce

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Post by chaz » Fri Nov 14, 2008 1:16 pm

I recommend you check with the IRS to do it right. IRS Publication 590 has tables showing the annual %ages that must be withdrawn to avoid penalties.

Good luck.
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Re: RMD when purchasing immediate annuity with partial IRA f

Post by LH2004 » Fri Nov 14, 2008 1:34 pm

MBMiner wrote:Suppose that an individual has a traditional IRA of $1 million. He utilizes $300k to purchase an immediate annuity for his life alone which will pay him $30k per year.
Well, what do you mean by "utilizes?" Who buys the annuity, him or his IRA?

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by Gill » Fri Nov 14, 2008 2:40 pm

LH2004 wrote:
MBMiner wrote:Suppose that an individual has a traditional IRA of $1 million. He utilizes $300k to purchase an immediate annuity for his life alone which will pay him $30k per year.
Well, what do you mean by "utilizes?" Who buys the annuity, him or his IRA?
The IRA buys the annuity, or I think to be more specific, a portion is rolled over into an annuity. You certainly wouldn't want to withdraw $300k from the IRA and then buy the annuity.
Bruce

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Post by Gill » Fri Nov 14, 2008 2:47 pm

chaz wrote:I recommend you check with the IRS to do it right. IRS Publication 590 has tables showing the annual %ages that must be withdrawn to avoid penalties.

Good luck.
Yes, I'm familiar with the RMD tables. However, the question in a nutshell is: Do the distributions from the immediate annuity satisfy in whole or in part the RMD required from the remaining IRA account? The IRS doesn't seem to address this.

Bruce

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by LH2004 » Fri Nov 14, 2008 3:14 pm

MBMiner wrote:The IRA buys the annuity, or I think to be more specific, a portion is rolled over into an annuity. You certainly wouldn't want to withdraw $300k from the IRA and then buy the annuity.
That's two different things.

If the annuity is an individual retirement annuity, then you have separate RMD's from that and from your remaining individual retirement accounts; presumably the annuity payments are set to satisfy the annuity RMD's. If based on your age your individual retirement account RMD is 4% of the account value, and the individual retirement account was worth $700,000, then he has to take out 4% of $700,000 from the individual retirement account(s), which is separate fro what happens with the annuity.

If the annuity is held by an individual retirement account, then the withdrawal would be 4% of the total value of the individual retirement account, which would require having a value for the annuity.

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by Gill » Fri Nov 14, 2008 4:23 pm

LH2004 wrote: ...presumably the annuity payments are set to satisfy the annuity RMD's.

That is incorrect. The annuity payments are no different than any other immediate annuity - based on an internal rate of return and mortality tables. At age 70 the current payout is near 10% which far exceeds the RMD at that age of less than 4%. The payment from the annuity has nothing to do with RMD's.

Bruce

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by LH2004 » Fri Nov 14, 2008 4:52 pm

MBMiner wrote:LH2004 wrote: ...presumably the annuity payments are set to satisfy the annuity RMD's.

That is incorrect. The annuity payments are no different than any other immediate annuity - based on an internal rate of return and mortality tables. At age 70 the current payout is near 10% which far exceeds the RMD at that age of less than 4%. The payment from the annuity has nothing to do with RMD's.
Ummm...what? You're saying your annuity does not satisfy the RMD rules?

Do you understand what the RMD rules are for annuities (and if so, what is your question)?

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by Gill » Fri Nov 14, 2008 5:26 pm

LH2004 wrote:
MBMiner wrote:LH2004 wrote: ...presumably the annuity payments are set to satisfy the annuity RMD's.

That is incorrect. The annuity payments are no different than any other immediate annuity - based on an internal rate of return and mortality tables. At age 70 the current payout is near 10% which far exceeds the RMD at that age of less than 4%. The payment from the annuity has nothing to do with RMD's.
Ummm...what? You're saying your annuity does not satisfy the RMD rules?

Do you understand what the RMD rules are for annuities (and if so, what is your question)?
Yes, I understand that the annuity distribution satisfies the RMD for the annuity. My question is as outlined in the original post.
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Re: RMD when purchasing immediate annuity with partial IRA f

Post by LH2004 » Fri Nov 14, 2008 6:09 pm

MBMiner wrote:LH2004 wrote: ...presumably the annuity payments are set to satisfy the annuity RMD's.

That is incorrect.
MBMiner wrote:Yes, I understand that the annuity distribution satisfies the RMD for the annuity. My question is as outlined in the original post.
OK, I say again: if the annuity is an individual retirement annuity, its payments have nothing to do with your RMD for individual retirement accounts; if you have $700,000 in individual retirement accounts and are required to withdraw 4% of that amount, that's what you have to do. I would certainly guess that that is the case.

If the annuity is held by an individual retirement account, then the requirement would be to withdraw 4% of the value of the individual retirement account, which would include the value of the annuity (and so be more than 4% of $700,000, since it sounds like that did not include the value of the annuity); in that case, the annuity's payments should already be going to the individual retirement account, not to you personally.

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by Gill » Fri Nov 14, 2008 7:43 pm

LH2004 wrote:
MBMiner wrote:LH2004 wrote: ...presumably the annuity payments are set to satisfy the annuity RMD's.

That is incorrect.
MBMiner wrote:Yes, I understand that the annuity distribution satisfies the RMD for the annuity. My question is as outlined in the original post.
OK, I say again: if the annuity is an individual retirement annuity, its payments have nothing to do with your RMD for individual retirement accounts; if you have $700,000 in individual retirement accounts and are required to withdraw 4% of that amount, that's what you have to do. I would certainly guess that that is the case.


If the annuity is held by an individual retirement account, then the requirement would be to withdraw 4% of the value of the individual retirement account, which would include the value of the annuity (and so be more than 4% of $700,000, since it sounds like that did not include the value of the annuity); in that case, the annuity's payments should already be going to the individual retirement account, not to you personally.
LH2004 - Obviously we don't understand each other. Perhaps I am not phrasing the question correctly.

IRA funds can be used to purchase an immediate annuity which is no longer part of the original IRA. The payments to the individual satisfy the RMD with respect to these funds. The question is: Now that the individual has an immediate annuity outside of the IRA but purchased with IRA funds, is it correct to combine the value of the two accounts for RMD purposes and only withdraw the excess from the IRA rather than having to withdraw a full 4% (in my example) from the IRA in addition to the amount being paid from the immediate annuity?

I hope I've clarified the question in this fact situation. I fully understand if you don't know the answer.
Bruce

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by LH2004 » Fri Nov 14, 2008 8:24 pm

MBMiner wrote:LH2004 - Obviously we don't understand each other. Perhaps I am not phrasing the question correctly.

IRA funds can be used to purchase an immediate annuity which is no longer part of the original IRA. The payments to the individual satisfy the RMD with respect to these funds. The question is: Now that the individual has an immediate annuity outside of the IRA but purchased with IRA funds, is it correct to combine the value of the two accounts for RMD purposes and only withdraw the excess from the IRA rather than having to withdraw a full 4% (in my example) from the IRA in addition to the amount being paid from the immediate annuity?

I hope I've clarified the question in this fact situation. I fully understand if you don't know the answer.
I can tell you the law. I can't tell you what your facts are.

As I said, it sounds like you have an individual retirement annuity. I have been taking your word for it that you understand the RMD rules for annuities. As you know, those are completely independent of the RMD's for individual retirement accounts. Therefore, your RMD from your individual retirement accounts would be completely unaffected by the fact that you have an individual retirement annuity. If you have $700,000 in individual retirement accounts, and you have a 4% RMD for the current year, then you have to withdraw 4% of $700,000, or $28,000, from your individual retirement accounts; separately, you have to take the required minimum distribution from your individual retirement annuity, which your life-only payment will satisfy.

If, instead, you have an annuity owned by an individual retirement account, then you have 1 RMD, which will be under the individual retirement account rules; the amount of that RMD will be 4% of the aggregate value of your individual retirement accounts, which will include the fair market value of the annuity; if you just bought the annuity for $300,000, then its fair market value is going to be something in the neighborhood of that; so your single RMD would be around 4% of $1 million, or $40,000; if $30,000 of that is already being distributed to you, then you need to withdraw another $10,000 or so. If you are concerned about RMD's, then that will have been a smarter thing to do, but, like I said, I would guess that you have an individual retirement annuity instead. But I am only guessing about your facts.

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by Gill » Fri Nov 14, 2008 8:42 pm

"If, instead, you have an annuity owned by an individual retirement account, then you have 1 RMD, which will be under the individual retirement account rules; the amount of that RMD will be 4% of the aggregate value of your individual retirement accounts, which will include the fair market value of the annuity; if you just bought the annuity for $300,000, then its fair market value is going to be something in the neighborhood of that; so your single RMD would be around 4% of $1 million, or $40,000; if $30,000 of that is already being distributed to you, then you need to withdraw another $10,000 or so. If you are concerned about RMD's, then that will have been a smarter thing to do, but, like I said, I would guess that you have an individual retirement annuity instead. But I am only guessing about your facts."

Your answer seems to imply that an immediate annuity can be owned by an IRA with the distribution from the annuity being paid directly to the current beneficiary/owner. I guess maybe I'm not clear on what entity is created, if any, when IRA funds are used to purchase an immediate annuity. Is that annuity then considered an asset of the IRA? Your answer seems to imply that it does. If the annuity distribution were to be then paid to the owner that would make it quite easy and would answer my question. Somehow I don't think that's the case, however. It would seem the owner of the annuity is then the IRA and the benefit is paid to the IRA.
Bruce

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Re: RMD when purchasing immediate annuity with partial IRA f

Post by Mel Lindauer » Fri Nov 14, 2008 9:35 pm

MBMiner wrote:"If, instead, you have an annuity owned by an individual retirement account, then you have 1 RMD, which will be under the individual retirement account rules; the amount of that RMD will be 4% of the aggregate value of your individual retirement accounts, which will include the fair market value of the annuity; if you just bought the annuity for $300,000, then its fair market value is going to be something in the neighborhood of that; so your single RMD would be around 4% of $1 million, or $40,000; if $30,000 of that is already being distributed to you, then you need to withdraw another $10,000 or so. If you are concerned about RMD's, then that will have been a smarter thing to do, but, like I said, I would guess that you have an individual retirement annuity instead. But I am only guessing about your facts."

Your answer seems to imply that an immediate annuity can be owned by an IRA with the distribution from the annuity being paid directly to the current beneficiary/owner. I guess maybe I'm not clear on what entity is created, if any, when IRA funds are used to purchase an immediate annuity. Is that annuity then considered an asset of the IRA? Your answer seems to imply that it does. If the annuity distribution were to be then paid to the owner that would make it quite easy and would answer my question. Somehow I don't think that's the case, however. It would seem the owner of the annuity is then the IRA and the benefit is paid to the IRA.
Bruce
Also, another thing that would help determine if it's an individual annuity or not is if you received a 1099 for the initial distribution amount that purchased the annuity.

Regards,

Mel

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Post by Gill » Sat Nov 15, 2008 2:30 pm

Do you mean a 1099 reporting $300,000 as income??

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Post by LH2004 » Sat Nov 15, 2008 3:30 pm

It could be an ordinary annuity held by a separate individual retirement account with a direction to distribute the annuity payments to you. That would also be a rollover and so wouldn't be distinguishable by the 1099.

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Post by Ron » Sat Nov 15, 2008 3:47 pm

Last year, I executed a contract for an SPIA with Fidelity (they had the best terms, over other companies such as Genworth, Vanguard, etc. at the time).

Anyway, the annuity was "paid" for directly from my Fidelity IRA. I did not receive a 1099 for the full purchase, but I did receive a 1099 for the monthly payments made in 2007 (directly deposited to a bank account).

From a tax view, the amount taken from the IRA would reduce the amount of RMD at age 70.5. since the "buy in" has been removed from the value of the IRA. Additionally, in my case, RMD's are not even a consideration since I will be taking more out than required, just to fund my anticipated living expenses.

The SPIA is based upon my/wife's lifespan (it is a 100% joint/survivor, with a 28 year "guarantee period") and will pay out a bit more than twice the "purchase price" over that period of time (more, if we live longer).

Not saying what will happen in the OP's case. Just to show a "real life" situation.

- Ron

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Post by LH2004 » Sat Nov 15, 2008 7:15 pm

Ron wrote:Last year, I executed a contract for an SPIA with Fidelity (they had the best terms, over other companies such as Genworth, Vanguard, etc. at the time).

Anyway, the annuity was "paid" for directly from my Fidelity IRA. I did not receive a 1099 for the full purchase, but I did receive a 1099 for the monthly payments made in 2007 (directly deposited to a bank account).

From a tax view, the amount taken from the IRA would reduce the amount of RMD at age 70.5. since the "buy in" has been removed from the value of the IRA.
If there was no 1099 for a rollover (or withdrawal), it sounds like you just had the individual retirement account purchase the annuity; in that case, the value of the annuity is still in the individual retirement account, so its value needs to be counted in calculating the individual retirement account RMD.

It's very confusing when people use the term "IRA" when we're talking about the difference between individual retirement accounts and individual retirement annuities, since, at least in IRS usage, the abbreviation includes both.

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Post by Ron » Sat Nov 15, 2008 8:05 pm

LH2004 wrote:If there was no 1099 for a rollover (or withdrawal), it sounds like you just had the individual retirement account purchase the annuity; in that case, the value of the annuity is still in the individual retirement account, so its value needs to be counted in calculating the individual retirement account RMD.

It's very confusing when people use the term "IRA" when we're talking about the difference between individual retirement accounts and individual retirement annuities, since, at least in IRS usage, the abbreviation includes both.
No, the SPIA was purchased with "qualified funds" (e.g. the IRA). They are no longer part of that IRA. I get no statement specifying the "value" of that SPIA, other than an annual 1099 for the monthly payments.

There is no way to establish what the current "value" is, unlike an IRA, in which you do receive an established "value" each year.

Additionally, there is no such thing as an Indivudial Retirement Annuity, as you stated. The annuity is actually jointly held - something that can't be done with an IRA.

And remember that it is a "life annuity". Unlike an IRA, it cannot go to "the next generation', and meets the criteria to take distributions from your IRA, rather than hold them for an extended period of time. Again, it will pay as long as I/my wife are alive, with a 28 year minimum payout. If per chance we both pass before that 28 year period ends, the remainder (payable as a lump sum, or monthly benefit, based upon the decision of the beneficiary) is fully taxable. The "government" will get their "pound of flesh".

Here's a reference article on the subject:

http://seniorfinances.blogspot.com/2006 ... inate.html

(No, it's not me - I am not an annuity salesman :lol: ). I just used it as a reference other than my own rantings...

On a personal note, RMD's would not affect me, including the SPIA, due to my expected rate of withdrawl. I'll be taking out a bit more than is projected to be my RMD at 70.5. That was known even before I purchased the SPIA. I purchased it due to my early retirement and not planning on taking SS till age 70 in order to provide a constant stream of income without having to worry about the market (in periods such as these :lol: ). BTW, I did purchase it before the market "went south" - so much for dumb luck...

- Ron

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Post by LH2004 » Sat Nov 15, 2008 9:30 pm

Ron wrote:Additionally, there is no such thing as an Indivudial Retirement Annuity, as you stated.
Very interesting. Somebody should tell the IRS, since Pub. 590 tells all about them. And Congress, since the Internal Revenue Code does too.

I strongly suspect that you own one, in fact, which I would have thought would have meant you should have gotten a 1099 showing the rollover in the year of purchase, but maybe there's an exception where it's the same custodian.

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Post by Gill » Sat Nov 15, 2008 9:36 pm

LH2004 - You don't receive a 1099 with a rollover.
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Post by LH2004 » Sat Nov 15, 2008 10:40 pm

MBMiner wrote:LH2004 - You don't receive a 1099 with a rollover.
You're right -- I was confused with rollovers from qualified plans. In that case, I'm not sure why Mel thought that whether or not there was a 1099 would be helpful; and I think it's pretty clear Ron has an individual retirement annuity, and you probably do too.

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Post by Oicuryy » Sat Nov 15, 2008 10:44 pm

Vanguard/AIG wrote: If you are age 70½ or older and are purchasing your annuity with qualified assets (excluding Roth IRA assets), you may have to take a required minimum distribution (RMD) from the qualified account before the purchase occurs. Thereafter, your income annuity payout will satisfy your RMD for this IRA annuity contract only. [bold and underline added]
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Post by sscritic » Sun Nov 16, 2008 12:40 am

Perhaps an example will help. You have a rollover IRA at TIAA-CREF worth $300,000. You have your own IRA at Vanguard worth $700,000. At age 70 you convert your TIAA IRA to a lifetime payout annuity. The payout on the lifetime annuity from TIAA covers its own RMD (the RMD percentages don't apply). You then figure out your RMD on your assets in your Vanguard IRA. The present value of your annuity contract is not used to determine the required withdrawal from Vanguard, nor are the payments on your annuity contract counted as "withdrawals" to meet your RMD from Vanguard.

Now consider person B who has all $1 million in one IRA. The IRS is not going to treat you and person B differently. If person B buys a single premium lifetime payout annuity with $300,000 and keeps the remaining $700,000 in the IRA, the RMD is based on the $700,000 and the payments from the lifetime payout annuity are not counted as meeting any part of that RMD.

I believe that Ron's quote from Vanguard/AIG is in part addressing the situation when you are in the middle of RMDs, e.g., you are 73, when you purchase your annuity. Since the money used to purchase the annuity was in the account the previous December 31, the value is part of the account total used to determine the RMD. Once the money has been paid to the annuity provider, the value of the annuity is not part of the RMD calculation for the following year. (I am focusing more on the portion of the quote not bolded.)

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Post by Gill » Sun Nov 16, 2008 6:57 am

I guess I've finally "got religion" and agree that the original advice given to me by Vanguard was incorrect. I was quite surprised at their advice because it conflicted with my understanding that the two entities were treated separately once the annuity was purchased.

It seems quite clear that, for an individual trying to withdraw the minimum from his IRA, the annuity forces more out of the IRA resulting in increased income tax on the combined distributions.

Contrary to some earlier assumptions, I don't have this arrangement but had only been considering it.

Bruce

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Post by LH2004 » Sun Nov 16, 2008 11:32 am

Again, these are 2 different transactions with 2 different sets of tax consequences. You can pick which you want depending on what you do.

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Post by Gill » Sun Nov 16, 2008 11:48 am

LH2004 wrote:Again, these are 2 different transactions with 2 different sets of tax consequences. You can pick which you want depending on what you do.
Huh? LH2004 - I believe you're a lawyer, as am I, but I don't know what the heck you're saying!
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Post by LH2004 » Sun Nov 16, 2008 12:34 pm

MBMiner wrote:
LH2004 wrote:Again, these are 2 different transactions with 2 different sets of tax consequences. You can pick which you want depending on what you do.
Huh? LH2004 - I believe you're a lawyer, as am I, but I don't know what the heck you're saying!
Once again:

You have 2 different things you could do.

You could roll over part of the individual retirement account to an individual retirement annuity; then, you have DB-rules distributions from the annuity, and a reduced balance in the account subject to RMD's under the regular, DC rules. This is the scenario apparently described to you at Ed Slott's forum.

Or, the account could invest in an ordinary annuity (with an appropriate custodian; I wouldn't be surprised if Vanguard was incapable of this); then, you continue to have RMD's, under the DC rules, from the account, on its full value, which includes the FMV of the annuity. This is closer to the scenario Vanguard described to you, though it sounds like they left out the inclusion of the annuity value in calculating the account RMD.

If you have a straight, nonincreasing single-life annuity, as you have described, then its payments will be more front-loaded than DC-rules RMD's; therefore, the second scenario results in lower total distributions, which is what you probably want (at the cost of substantially more complexity). The result could be different if you had a more creatively structured annuity.

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Post by Gill » Sun Nov 16, 2008 3:32 pm

LH2004 - Excuse my ignorance and thank you for trying to enlighten me, but what do you mean by "DB-rules" and "DC-rules"?

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Post by LH2004 » Sun Nov 16, 2008 5:32 pm

MBMiner wrote:LH2004 - Excuse my ignorance and thank you for trying to enlighten me, but what do you mean by "DB-rules" and "DC-rules"?
The RMD rules for individual retirement accounts are the same as the rules for defined contribution plans and are explained in IRS Pub. 590; that means, primarily, distributing each year the previous Dec. 31 aggregate fair market value divided by uniform life expectancy.

Pub. 590 says about individual retirement annuities just: "If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries and IRS offices."

Reg. sec. 1.401(a)(9)-6 is the RMD rules for defined benefit plans and for annuities (with minor differences between them). These rules operate completely differently from the rules for defined-contribution plans and for individual retirement accounts. Instead of requiring a certain distribution based on a fraction of fair market value, the requirement is that the pattern of distributions fit one of a limited set of patterns -- they can last for life, for life with a death benefit for deaths before life expectancy, for joint lives with a beneficiary, for individual life expectancy, or for the greater of individual life expectancy and individual or joint lives; payments can increase only in specified ways -- the initial payment has to be at least the value being annuitized divided by initial life expectancy, and increases can only be inflation adjustment or by fixed percentages or by actuarial experience (which covers participating, variable and indexed annuities), and if it's by actuarial experience, credits have to be paid out within a year or over the remaining life of the contract; joint life annuities with a nonspouse beneficiary have to cut payments to the beneficiary if there's an age gap over 10 years; etc.

So if you move money from an individual retirement account to an individual retirement annuity, you take it entirely out of the percentage-of-value rules that apply to individual retirement accounts, and into the world where it just has to be distributed in the form of, among other things, a flat life annuity. Generally speaking that will result in a greater distribution.

In contrast, an individual retirement account can hold an annuity; if you do that, you stay with the familiar RMD rules; you have the annoyance of having to somehow calculate value annually (but you can probably use interpolated tax reserve values, which the insurance company can probably provide), but that means, probably, lower total required distributions.

Another way to keep the distributions low would be to replace the simple life annuity with one whose payments will either last longer or be increasing, so that, for a given total value, the initial payment is lower. So you could pick a period certain or joint lives, to have payments last longer, or inflation adjustments, scheduled percentage increases, or a variable or equity indexed annuity to have payments expected to increase over time.

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Post by Hexdump » Mon Nov 17, 2008 7:59 am

LH2004 wrote:
In contrast, an individual retirement account can hold an annuity; if you do that, you stay with the familiar RMD rules; you have the annoyance of having to somehow calculate value annually (but you can probably use interpolated tax reserve values, which the insurance company can probably provide), but that means, probably, lower total required distributions.
LH2004, thank you for trying to clarify this for me though what you are saying seems to be at odds with this from SSCritic above:
=================================
Now consider person B who has all $1 million in one IRA. The IRS is not going to treat you and person B differently. If person B buys a single premium lifetime payout annuity with $300,000 and keeps the remaining $700,000 in the IRA, the RMD is based on the $700,000 and the payments from the lifetime payout annuity are not counted as meeting any part of that RMD.
=============================
My situation is close to that. I have 1,000,000.00 in an IRA and was thinking of buying an annuity, say 300,000.00 within the IRA, so that the payments from the annuity satisfy the RMD on the full 1,000,000.00

SSCritic seems to say that the RMD would be based upon 700,000.00

Color me confused.

thanks

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Post by LH2004 » Mon Nov 17, 2008 8:11 am

Hexdump wrote:LH2004, thank you for trying to clarify this for me though what you are saying seems to be at odds with this from SSCritic above:
=================================
Now consider person B who has all $1 million in one IRA. The IRS is not going to treat you and person B differently. If person B buys a single premium lifetime payout annuity with $300,000 and keeps the remaining $700,000 in the IRA, the RMD is based on the $700,000 and the payments from the lifetime payout annuity are not counted as meeting any part of that RMD.
=============================
My situation is close to that. I have 1,000,000.00 in an IRA and was thinking of buying an annuity, say 300,000.00 within the IRA, so that the payments from the annuity satisfy the RMD on the full 1,000,000.00

SSCritic seems to say that the RMD would be based upon 700,000.00
Again, it's confusing when you use the term "IRA"; I wish people would avoid that when we're talking about the difference between accounts and annuities. What sscritic described is the outcome when there's a rollover from an individual retirement account to an individual retirement annuity.

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Post by Hexdump » Mon Nov 17, 2008 8:31 am

LH2004 wrote:
Hexdump wrote:LH2004, thank you for trying to clarify this for me though what you are saying seems to be at odds with this from SSCritic above:
=================================
Now consider person B who has all $1 million in one IRA. The IRS is not going to treat you and person B differently. If person B buys a single premium lifetime payout annuity with $300,000 and keeps the remaining $700,000 in the IRA, the RMD is based on the $700,000 and the payments from the lifetime payout annuity are not counted as meeting any part of that RMD.
=============================
My situation is close to that. I have 1,000,000.00 in an IRAccount, mixed equities, CDs, and bonds, and I was thinking of buying an IRAnnuity, say 300,000.00 within the IRAccount, so that the payments from the IRAnnuity satisfy the RMD on the full 1,000,000.00

SSCritic seems to say that the RMD would be based upon 700,000.00
Again, it's confusing when you use the term "IRA"; I wish people would avoid that when we're talking about the difference between accounts and annuities. What sscritic described is the outcome when there's a rollover from an individual retirement account to an individual retirement annuity.
OK, I corrected the alphabet soup, and rereading SSCritic, I think I see that you and he agree. The rolled over, Individual Retirement Annuity, would have it's own RMD.

So, in my case where the IRAnnuity is still within the IRAccount, and was purchased with 300,000.00 of the IRAccount balance, it seems that the payout of the IRAnnutiy could be used to satisfy the RMD for the full 1,000,000.00.

thanks again

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Post by abceater » Mon Nov 17, 2008 9:31 am

Let's see if I can attempt to clear up the confusion. First of all, everything that LH2004 has said is correct, but maybe hearing it slightly different might be beneficial.

We have to start by understanding "IRA" does not stand for "Individual Retirement Account". It stands for "Individual Retirement Arrangement."

There are two types of Individual Retirement Arrangements. 1) Individual Retirement Account and Individual Retirement Annuity.

The RMD rules for these two types of Individual Retirement Arrangements are different. Individual Retirement Accounts have RMDs that are based upon the account value and life expectancy. The RMDs from an Individual Retirement Annuity are satisfied by the annuity payout. The distribution from one can't be used to satisfy the requirement of the other.

What happens when one uses money from an Individual Retirement Account to buy an immediate annuity? They are almost always buying an Individual Retirement Annuity. With an Individual Retirement Annuity, the money gets paid to the owner. This payment, as has been discussed, satisfies the RMD from this Individual Retirement Annuity.

This next part is confusing, but it probably doesn't impact anyone who is reading this:

What very few people have and very people know about is an immediate annuity that is inside of a Individual Retirement Account. What makes this different is that the annuity payments don't get paid to the account owner. They actually get paid to the Individual Retirement Account. When this money gets paid, there are no taxes due because it is stil within the Individual Retirement Account. Because this money stays within the Individual Retirement Account, the annuity doesn't meet the definition of an Individual Retirement Annuity. The payout does not have to be removed from the Individual Retirement Account. Therefore, in this case, the present value of the annuity must be calculated so that the value of the Individual Retirement Account can be determined so that the RMD can be determined. The payout of the annuity doesn't matter because it doesn't get paid outside of the IRA.

Example with made up numbers:
Joe has $100,000 inside of an Individual Retirement Annuity. It pays $7,000 to him. This meets the definition for his RMD.

Jack has $100,000 inside of an Individual Retirement Account. He uses this money to purchase an immediate annuity that is still within this Individual Retirement Account. It pays $7,000 to the account. His RMD is based upon $100,000. If his RMD is $4000, he only has to take out $4000 and the remainder can be reinvested within his Individual Retirement Account.

To the best of my knowledge, Vanguard does not allow someone to invest in an immediate annuity inside of an Individual Retirement Account. In other words, if Individual Retirement Account money is being used to purchase an immediate annuity, the money actually has to leave the account and purchase an Individual Retirement Annuity.

Personal opinion: I love the concept of using an immediate annuity inside of an Individual Retirement Account because it gives someone a guaranteed payout, but if they don't need the money, to the extent that it's above the RMD, they can leave it in the account to grow tax deferred.

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Post by LH2004 » Mon Nov 17, 2008 10:26 am

Thanks, abceater. (For the record, the IRS publications define "IRA" to mean "individual retirement arrangement," a term that is used a couple of times in the regulations, but without "IRA" standing for it; in at least one place in the statute headings, "IRA" is used where it is only talking about individual retirement accounts; the body of the statute does not use the term "IRA," except in "Roth IRA," and doesn't tell us what it stands for there; the regulations in some places use "IRA" to mean "individual retirement account or individual retirement annuity," but I think there are others where it just means "individual retirement account. I have no objection to using "IRA" for "individual retirement account" in general, but it is very ambiguous when we're specifically talking about the difference between individual retirement accounts and individual retirement annuities.)
Hexdump wrote:So, in my case where the IRAnnuity is still within the IRAccount, and was purchased with 300,000.00 of the IRAccount balance, it seems that the payout of the IRAnnutiy could be used to satisfy the RMD for the full 1,000,000.00.
You can't have an I.R.Annuity inside an I.R.Account -- that would be like an I.R.Account inside an I.R.Account. You can either have an I.R.Annuity that's separate from your I.R.Account, or you can have a regular, ordinary annuity that's owned by the I.R.Account. In some cases that is what you want to have, but you're pretty unlikely to get it by accident, and, as abceater said, Vanguard probably can't do it at all.

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Boy, that really clears it up

Post by Hexdump » Mon Nov 17, 2008 5:15 pm

and thanks again. When I was researching annuities and was asked if I was going to fund it with qualified funds, I answered yes thinking that the purchased annuity would still reside within the IRAccount. I probably got that wrong.

I would still have an RMD on the balance left in the IRAccount which would be smaller since the IRAnnuity would no longer be part of it. (I think).

HMMM, on an IRAccount, is the RMD recalculated each year ?

hex

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Post by GG » Mon Nov 17, 2008 9:18 pm

With all the brains here, this got way too complicated.

If an SPIA is purchased with qualified funds - it's totally removed from the RMD equation. That's it - not other discussion needed. Take $1M account - if 1/2 is used to fund an imediate annuity - cool - all that's lef tin teh IRA is $500k and that's what the IRS see - $500k. Now the RMD is based on that alone.

This is not complicated - don't be confused

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Post by abceater » Tue Nov 18, 2008 8:40 am

HMMM, on an IRAccount, is the RMD recalculated each year ?
Yes. It's based upon the prior year's ending balance.

If an SPIA is purchased with qualified funds - it's totally removed from the RMD equation. That's it - not other discussion needed.
This is correct, most of the time. Most of the time the qualified funds are being used to purchase a SPIA that is an Individual Retirement Annuity.

However, it is possible to purchase a SPIA inside of an Individual Retirement Account This is not an Individual Retirment Annuity. The present value of the annuity in this situation must be calculated to determine the RMD.

For anyone who is confused by this, if the annuity pays to the owner, it is an Individual Retirement Annuity. If the annuity pays to the account, it is part of an Individual Retirement Account. This solves the problem of having RMDs that are too large in the early years while still giving a guaranteed income.

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Post by sscritic » Tue Nov 18, 2008 9:38 am

GG wrote:With all the brains here, this got way too complicated.

If an SPIA is purchased with qualified funds - it's totally removed from the RMD equation. That's it - not other discussion needed. Take $1M account - if 1/2 is used to fund an imediate annuity - cool - all that's lef tin teh IRA is $500k and that's what the IRS see - $500k. Now the RMD is based on that alone.

This is not complicated - don't be confused
But what about the timing? Suppose the annuity purchase is in 2008. On Dec. 31 2007 the balance was $1M. On Dec 31, 2008, the balance will be $500k. The RMD for 2009 is based on the $500k balance, but what is the RMD for 2008? Based on $1M? $500k? Satisfied in its entirety by the $500k purchase? Assume the annuity payments are to you outside the IRAccount (i.e., you purchase a IRAnnuity).

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Post by LH2004 » Tue Nov 18, 2008 9:48 am

sscritic wrote:Suppose the annuity purchase is in 2008. On Dec. 31 2007 the balance was $1M. On Dec 31, 2008, the balance will be $500k. The RMD for 2009 is based on the $500k balance, but what is the RMD for 2008? Based on $1M? $500k? Satisfied in its entirety by the $500k purchase? Assume the annuity payments are to you outside the IRAccount (i.e., you purchase a IRAnnuity).
Unless there's some special rule I can't think of, the Account 2008 RMD amount should not be rollover-eligible, and you have a year to start Annuity distributions. So the Account RMD would be a percentage of $1 million, and there would not need to be an Annuity distribution in 2008.

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Post by sscritic » Tue Nov 18, 2008 11:03 am

LH2004 wrote:
sscritic wrote:Suppose the annuity purchase is in 2008. On Dec. 31 2007 the balance was $1M. On Dec 31, 2008, the balance will be $500k. The RMD for 2009 is based on the $500k balance, but what is the RMD for 2008? Based on $1M? $500k? Satisfied in its entirety by the $500k purchase? Assume the annuity payments are to you outside the IRAccount (i.e., you purchase a IRAnnuity).
Unless there's some special rule I can't think of, the Account 2008 RMD amount should not be rollover-eligible, and you have a year to start Annuity distributions. So the Account RMD would be a percentage of $1 million, and there would not need to be an Annuity distribution in 2008.
So in the case where you wanted to use the whole amount to purchase an annuity with payments beginning in 2009, you would have to take the 2008 RMD first, and then make the annuity purchase with the remaining balance. This is consistent with the quote previously posted by Oicuryy.
Vanguard/AIG wrote:If you are age 70½ or older and are purchasing your annuity with qualified assets (excluding Roth IRA assets), you may have to take a required minimum distribution (RMD) from the qualified account before the purchase occurs. Thereafter, your income annuity payout will satisfy your RMD for this IRA annuity contract only.

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Post by Ron » Tue Nov 18, 2008 11:08 am

GG wrote:With all the brains here, this got way too complicated.

If an SPIA is purchased with qualified funds - it's totally removed from the RMD equation. That's it - not other discussion needed. Take $1M account - if 1/2 is used to fund an imediate annuity - cool - all that's lef tin teh IRA is $500k and that's what the IRS see - $500k. Now the RMD is based on that alone.

This is not complicated - don't be confused
My goodness - a response that is what I believe in, and as an SPIA holder (purchased with qualified funds, at age 59.5) I am "living" this situation.

- Ron

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Post by LH2004 » Tue Nov 18, 2008 11:19 am

Ron wrote:
GG wrote:With all the brains here, this got way too complicated.

If an SPIA is purchased with qualified funds - it's totally removed from the RMD equation. That's it - not other discussion needed. Take $1M account - if 1/2 is used to fund an imediate annuity - cool - all that's lef tin teh IRA is $500k and that's what the IRS see - $500k. Now the RMD is based on that alone.

This is not complicated - don't be confused
My goodness - a response that is what I believe in, and as an SPIA holder (purchased with qualified funds, at age 59.5) I am "living" this situation.
You don't get to change the law by not believing in it.

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Post by abceater » Tue Nov 18, 2008 2:55 pm

Unless there's some special rule I can't think of, the Account 2008 RMD amount should not be rollover-eligible, and you have a year to start Annuity distributions. So the Account RMD would be a percentage of $1 million, and there would not need to be an Annuity distribution in 2008.
What do you mean by not "rollover-eligilble"? I'm assuming that you are saying that a rollover can't take place until the RMD is removed. This is true with 401(k) RMDs, but it's not with IRAs. The reason is that a 401(k) has an RMD. A specific IRA doesn't have one.

What I mean by that is that since all IRAccounts are combined for RMD purposes, a custodian of an IRAccount never knows if a person has taken out their RMD, nor do they know the amount that the RMD should be. Therefore, it may be rolled over before the RMD has taken place.

Now, what I don't know is what happens if someone has $1,000,000 in their one and only IRAccount and rolls the entire amount over to a IRannuity. There is now no way to take money out for an RMD.

I believe that this is a "no harm/ no foul situation" since the SPIA payout is higher than what the RMD would have been. I have no knowledge of this ever being an issue with the IRS.

If someone is worried about an RMD for 2009, they can handle this problem by either purchasing the IRAnnuity before 12/31/2008 or if they are going to buy the IRAnnuity in 2009, take the RMD before purchasing the annuity.

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Post by LH2004 » Wed Nov 19, 2008 12:01 pm

abceater wrote:
Unless there's some special rule I can't think of, the Account 2008 RMD amount should not be rollover-eligible, and you have a year to start Annuity distributions. So the Account RMD would be a percentage of $1 million, and there would not need to be an Annuity distribution in 2008.
What do you mean by not "rollover-eligilble"? I'm assuming that you are saying that a rollover can't take place until the RMD is removed. This is true with 401(k) RMDs, but it's not with IRAs. The reason is that a 401(k) has an RMD. A specific IRA doesn't have one.

What I mean by that is that since all IRAccounts are combined for RMD purposes, a custodian of an IRAccount never knows if a person has taken out their RMD, nor do they know the amount that the RMD should be. Therefore, it may be rolled over before the RMD has taken place.
The custodian doesn't have to enforce it, you just aren't allowed to roll over the amount that you are required to withdraw. It should be the same as with a rollover to a Roth IRA.
Now, what I don't know is what happens if someone has $1,000,000 in their one and only IRAccount and rolls the entire amount over to a IRannuity. There is now no way to take money out for an RMD.

I believe that this is a "no harm/ no foul situation" since the SPIA payout is higher than what the RMD would have been.
I don't see how. An annuity purchased in 2008 wouldn't have to give any distribution until 2009.

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Post by pkincy » Wed May 20, 2009 8:51 pm

A most interesting topic I found while using Google to see if such a thing as a Qualified SPIA exists....i.e., a SPIA that can be owned by an IRAccount Trust and paid to an IRA Acct so that the funds used to purchase the SPIA can be qualified and not subjected to taxation when used to buy the SPIA.

The client in question is an 86 year old with no heirs and would love the higher payout of an annuity with no chance to outlive the payments for piece of mind.

My advice to her advisor was to see if such a thing as a qualified single premium annuity exists so that the purchase of the SPIA would not cause immediate taxation of the annuity purchase price.

The discussion of the IRAnnuity is most interesting but I think the discussion is not very relevant as I think the IRAnnuity went the way of the Dodo bird many years ago. It was an insurance company participating product during the middle of the last century that was designed to accumulate retirement funds and than pay them out over the life of the retiree. I will check out their remaining availability tomorrow and get back to you.

I also have a query in through the clients advisor as to whether there are any major companies selling qualified SPIAs that can be purchased and kept in an IRAccount.

Perry

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Can an nnuity satisfy RMD ?

Post by Taylor Larimore » Wed May 20, 2009 9:35 pm

"Simplicity is the master key to financial success." -- Jack Bogle

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Post by pkincy » Wed May 20, 2009 11:11 pm

That link is certainly appreciated but mostly applies to the valuation of deferred annuities with living or death benefits that now need to be valued. The IRS has certainly been active in the last 3 or 4 years in giving us guidance on establishing fmv of insurance products for different purposes with the most recent guidance coming out in a revenue ruling 2 weeks ago for settled life contracts.

Of great interest to me and I think the OP has alluded that it is possible, that a qualified SPIA exists and can be owned by an IRAcct. Again I should find out for sure tomorrow and should even be able to have an idea of who has such a product.

Perry

PS: after much research the answer seems clear yet no clear sites from the code are available to back it up. A deferred annuity can be annuitized or a balance in an IRAcct can be used to purchase a spia. If you do so the spia payment covers the rmd of this zero balance account. All other balances would need their own RMD calculated separately off of their balances. Many commentators recommend that the spia be purchased from a separate IRAcct. I.e., separate the $300,000 from the $700,000 into 2 IRAccts. Use the $300,000 to purchase the qualified spia. Its annual payout will satisfy the RMD of this zero balance acct. The $700,000 would need its own RMD based on the normal divisor.

I saw where commentators speculated that the FMV of the future income stream could be used to come up with a value, but those same commentators said that they had never seen the IRS suggest this as a solution and that the IRS does accept the separately calculated RMDs.

And apparently Vanguard is active in this business through 2 insurance companies of marginal to adequate strength.

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Post by J.smit » Thu May 21, 2009 7:39 am

The IRAnnuity has not gone the way of the dodo bird. When someone purchases a SPIA using qualified money and it is outside of an Individual Retirement Account, they own an IRAnnuity.

If it is inside of an Individual Retirement Account, it is not an IRAnnuity. It is rare that they are in an Individual Retirement Account, but I'm seeing this more often.

An IRAnnuity pays to the owner.
A SPIA inside of an Individual Retirement Account pays to the Individual Retirement Account.

The RMD for an IRAnnuity is the annuity payout.
The RMD for a SPIA inside of an Individual Retirement Account is calculated based upon the previous year end present values of the annuity payments + the value of all other holdings in the Individual Retirement Account + the value of all other Individual Retirement Accounts. The total value and the life expectancy factor will then determine the amount of the RMD.

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Really?

Post by AR50 » Thu May 21, 2009 1:10 pm

Do I understand this correctly?

I can use the funds in my Individual Retirement Account to fund an Immediate Guaranteed Annuity that will provide me a yield of 9% or so for the remainder of my life with no chance of running out of funds. I would expect to pay taxes on the payments and some question of how to compute the RMD can be resolved later. Normally, a withdrawal rate greater than 4% is all one can expect and be assured of some income for a lifetime, but 9-10% and funded by my Individual Retirement Account with no penalty is great. Why would I ever want to fund an annuity with after tax monies when I can use my IRA.
What have I missed?

George

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