Traditional Ira converts to annuity — when to take RMD

Submitted by Ellen Schneider on Tue, 2019-01-15 00:09

I am changing my Traditional IRA to an annuity in 2019. Do I need to take my 2019 RMD before I annuitize?



Submitted by Alan - IRA critic on Tue, 2019-01-15 01:25

  • You are annuitizing your entire IRA, and have no other IRAs?  That would put a damper on your flexibility. If you do it, for this year only your RMD is set using the 12/31/2018 balance. Starting in 2019, presuming that the annuitization meets the IRS RMD requirements, you go on auto pilot because the annuity payments WILL be your RMD since there will no longer be a year end balance.
  • But for 2019, meeting your RMD will be tricky unless you decide to overshoot to guard against falling short. While you would need to distribute the shortfall between the annuity payouts and your RMD before annuitizing, the amount you annuitize and the shortfall are mutually dependent. Ask the insurance company if they have a suggested solution or formula to resolve this. Maybe they will ask you to transfer the entire account to them and they can figure out how much to distribute before you annuitize the rest.
  • Another option is to annuitize say 95% of your IRA and keep the rest wherever you have it. You can use it for emergency needs and you can also use it to complete the shortfall in your total RMD from the annuity payments and to meet your 2019 RMD. No complex math this way. 
  • If you fall short of your RMD and annuitize your entire IRA, there is no way to make up the difference, so you would have to pay the 50% penalty on the shortfall. You can only request a waiver after you have made up the late RMD and that is probably not possible after you annuitize.
  • If you could talk to them in advance, could you post back if they have simple solution to this?


Submitted by Ellen Schneider on Tue, 2019-01-15 15:23

Thanks so  much for the information! I do have a second Traditional IRA from which I  can take the RMD for 2019 for both IRAs. Since I have all my 12/31/18 statements, I have figured out how much I need to take for total RMD for 2019. So, I think I will take the RMD out before annuitizing. I certainly want to avoid a 50% penalty. I just wasnt sure if the annuity payment would cover an RMD every year. I will contact the insurance company and find out how they handle this. Hopefully, they fully understand the tax law. Of course, I will get back to you and let you know what they say. 



Submitted by Alan - IRA critic on Tue, 2019-01-15 16:49

Having the other IRA makes this much easier and avoid messy calculations. However, there is no need to complete your RMD from the non annuity account and then add an entire year of annuity payouts to that. What you can do is simply determine how much the annuity will pay out for the year (# of months times the monthly payout), then subtract that amount from your total RMD and take the difference from your non annuity IRA anytime before the end of the year.  Once the following year arrives, it is very simple as whatever the annuity pays you will be the RMD for that contract, and you will satisfy the RMD for your other IRA in the usual manner. In other words, after the annuitization year, the RMDs for each account are totally independent of each other.  You don’t have any “basis” in your IRA, do you?



Submitted by Ellen Schneider on Fri, 2019-01-18 01:50

The insurance company said I do not have to take an RMD provided that I annuitize the entire amount of my traditional IRA. This is what they wrote: :The reason your RMD will automatically be satisfied for your Traditional IRA if you annuitize your IRA accumulation in 2019 is because when you annuitize the accumulation, you automatically satisfy the requirement. There is no longer an RMD amount you need to take because you annuitized the accumulation, not because of the amount of the RMD. However, please note that in order to satisfy the requirement, you must annuitize your full accumulation. If you annuitize a portion of the accumulation, you will still be required to withdraw the RMD amount for any portion that was not annuitized. “
 



Submitted by Alan - IRA critic on Fri, 2019-01-18 04:35

  • We are all in agreement with respect to the IRA that you are not annuitizing. However, the IRS Regs are vague in several areas. For example, 1.401(a)(9)-6 states that annuitization must begin prior to your required beginning date. I think that you are past your required beginning date, meaning that the account balance on 12/31 established your RMD for the year. 
  • That said, if you can get this is writing from the insurance company, you will have insurance against any potential penalty since your IRA custodian is telling you this. By their interpretation, you could wait until December to annuitize and one monthly payment would satisfy your RMD. Makes sense only if you have not yet reached your required beginning date.
  • Nonetheless, there certainly are cases where annuitization occurs well past the RBD, maybe after age 80. The IRS has not said a word nor have they changed their temporary Regs from 2001 other than to add a section for QLACs. So you have very little risk, probably none if you can get their statement in writing.


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