Annuity within IRA

Submitted by Peter Brandt on Tue, 2019-03-12 20:22

I have an Allianz annuity within my IRA acquired with funds within the IRA. In 2012, I annuitized it over a period of ten years (121 equal monthly payments). Since then, I have calculated the annuity payments as contributing to my RMD with that RMD calculated at the beginning of each year based on the value of all other assets in the IRA plus the value of the remaining unpaid annuity payments. Seems logical! Now someone comes along and tells me I can’t do that. I was told that once an annuity in an IRA is annuitized it is considered to “have no value,” and its payments can not be used to count toward RMD for the IRA. Thus I need to satisfy the RMD from the remainder of the assets in the IRA separately from the annuity as though it no longer even existed. When I asked for the authority (i.e., US Statute) covering this, it was suggested I contact Ed Slott, “He’d know all about it.” Your comments please.



Submitted by Alan - IRA critic on Tue, 2019-03-12 21:36

  • The IRS never fully clarified the annuitized contract RMD situation, so several different improvisations have surfaced. Some life insurance companies use a present or imputed year end value of the annuity for RMD determination, but most authorities think that the annuity RMD must be satisfied totally separate from the other IRA investments with a year end value. The IRS Regs for RMDs for annuity and DB contracts are contained in Reg 1.401(a)(9)-6, but these Regs fail to connect all the dots. Your approach is very similar to some of the others, and I never seem to hear about the IRS challenging any of these. Since you annuity term being 10 years is much shorter than an individual or joint life expectancy, your annual distributions will be higher than usual, but the question as you stated is how much of the higher distributions can be applied to the rest of your IRA. Unfortunately, life insurers never seem to want to disclose the possible RMD issues connected with annuitizing, more particularly annuitizing for a limited term. The IRS Regs are committed mostly to establishing safeguards about period certains that are too long, or joint annuities with a beneficiary too much younger. They fail to discuss the effect of shorter terms that are not completed prior to 70.5, thus this situation with no clear authority.
  • Natalie Choate authored the following paragraph a couple years ago:
  • “An immediate annuity is treated entirely differently. Such “true” annuities have their own set of minimum distribution rules. Those special rules dictate what type of true annuity may legally be purchased inside an IRA. The menu of available options includes most of the standard annuities people purchase, such as monthly payments for the life of the IRA owner, or joint lives of the IRA owner and his or her spouse or other beneficiary, or for a fixed term of years, with or without a minimum guaranteed term. The regulations permit all of these, provided the regular payments begin no later than approximately age 70 1/2, the payments are level (non-increasing) (though cost-of-living adjustments or small percentage increases are permitted), and any term or minimum guaranteed term does not extend past approximately the IRA owner’s age 96. Once the permitted type of annuity is purchased in the IRA, the purchase price and value of that annuity contract are removed from the IRA’s value permanently for purposes of calculating required minimum distribution on the rest of the account. And the annuity payments under the contract themselves become the “required minimum distributions” with respect to the annuitized portion of the account.”    


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