"Annuitized" IRA annuity & RMD's | Ed Slott and Company, LLC

"Annuitized" IRA annuity & RMD's

A client elected to annuitize their IRA annuity in 2009. They also have other IRA's in brokerage accounts. We are confident that the payout from the IRA annuity in 2010 is enough to cover RMD's for all of their IRA accounts. However, the insurance company says that once an annuity payout option has been elected, they can no longer calculate year end policy values, meaning we have nothing to base RMD calculations off of. Is this standard practice for the insurance industry? Are insurance companies still required to send form 5498 on a policy in payout?

Yes, it is standard practice. Once annuitized, the IRA annuity should be in a separate account and the annual annuity payout satisfies the RMD for the annuity and the other IRA with the balance has a separate RMD calculated in the usual fashion. The only year these RMDs can be aggregated is the year the immediate annuity is purchased and only because there was an actual prior year end balance for that first year. Of course, for 2009 the RMD was waived. Because an immediate annuity results in a fairly level payout over the remaining lifetime, the payout is much higher than for an account with a balance that starts out at less than 4% and then grows each year. As a result the client's RMDs will be higher initially and later on will be lower than someone who has not annuitized. I could not locate any specific 5498 instructions for annuitized IRAs, but there is obviously no year end balance to state. As for the amount of the RMD, since it is the same as the amount that will be distributed, it seems like a waste of time to advise the IRA owner what it is. Still, I did not see any specific exemption from the disclosure requirements on annuitized IRAs.

I have an "annuitized" 10-year certain IRA, but unlike the referenced message string, the (major, conservative) insurer declares the "Fair Market Value" each December 31st. Even though it follows that practice, it states that the payment stream does not qualify for aggregation of RMAs required from other IRA accounts, which are currently in accumulation mode. The issue is important because one of the other IRA accounts is held by an equally prestigious mutual fund/variable annuity collaboration, in which its advisors state that there are two theories--one being the position of the first company, and the other, that the declared year-end value of the annuitized IRA qualifies its total annual payments for aggregation with the second company's IRA for calculating total RMD from the several funds. Based on the fact that the annual Fair Market Value of the annuitized IRA is disclosed, as well as the advice of the second company, could it be that the first company is taking an overly conservative position based on its own interests rather than that of its annuitants? 

If an IRA is annuitized there is no longer a prior year end value, except for the one year that the annuitization took place. After that the annuity IRA satisfies it's own RMD. Since the annuitized IRA satisfies it's own IRA, that makes aggregation a moot point. But for that first year only, the RMD can be aggregated.It's not clear why the carrier declares a year end value for an annuitized contract. There is no provision I know of that allows recognition of that figure. If they are doing this, I think the larger issue is whether they are suggesting that the actual RMD is based on that value and therefore some of the annuity payout could be aggregated to reduce the other RMD or could be rolled over because it exceeds the actual RMD for the contract. I know of no IRS Reg that addreses this for period certain annuities less than life expectancy. It would be interesting to get the carrier to reply specifically to these questions.

"It's not clear why the carrier declares a year end value for an annuitized contract" Many Fixed Period Immediate Annuities offer settlement benefits such as Cash Refund to beneficiaries should the Owner die prior to completion of the payments. Therefore there is a fair Market value to the contract and that is reported each year. Therefore, it seems, the RMD for the Fair Market Value can be calculated and the payout will obviously be greater than the RMD based on the declining FMV year after year.  The code seems to be really unclear on this point, at least beyond my ability to understand, however If there is a FMV then an RMD can be calculated and clearly the amount paid out is in excess of thaat RMD and sense it is a distribution why can it not be used to aggregate? It is understandable a life payout or life with period certain would be less likely to qualify because you are taking the IRA off the table, so to speak, and yet I have insurance companies declaring the remaining balance in the life annuity year after year and CPAs that do the aggregation.  Is there really no answer to this question?

The life insurers are churning out all kinds of annuity variations and the IRS is far behind the curve in addressing their affect on RMDs. If the IRS receives a 5498 showing a FMV, it is unlikely that they would question how it was determined, so there is probably not much risk in using these statements to determine RMDs, and therefore aggregation with other IRA accounts. This would also resolve a companion issue when the IRA contains basis. The annuity and DB plan Regs under 1.401(a)(9)-6 were dedicated primarily to preventing annuity payments from falling too far short of the what the IRA annuity owners life expectancy would dictate, and in the process overlooked the opportunity to address other annuity RMD issues. A return of premium feature would depress the annuity payments and back load the distributions to the DOD, so the value shown on the 5498 or equivalent statement might not result in as much of a shortfall as the actual distributions before the DOD. It would really be interesting to have one of these insurers put the entire issue into perspective with respect to RMD compliance. 


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