Many Say that Annuities Are Complex – Add Required Minimum Distributions (RMDs) to an Annuity and Confusion Reigns
RMD Rules – Simplified Version
Taxpayers who turn age 70 ½ on or after January 1, 2020 are required to begin taking RMDs from their Individual Retirement Accounts (IRAs) in the year that they turn age 72. Unfortunately for taxpayers who turned age 70 ½ before January 1, 2020, they will continue to be bound by the old IRA RMD rules – RMDs required to begin at age 70 ½.
Immediate Annuity RMD Rules for Traditional IRAs
If a taxpayer purchases an immediate annuity, he has a contract in which he contributed a lump sum of money in return for a stream of fixed annuity payments that begin immediately. In other words, the date of the single contribution is when the contract is annuitized, or shortly thereafter. As such, the contract never has a cash value, and therefore has no basis for determining an RMD. Thus, an immediate annuity does not figure in the calculation of the taxpayer’s RMDs and has no RMD requirement of its own.
RMD Rules if a Taxpayer Annuitizes a Traditional IRA
If a taxpayer has only one IRA account that is annuitized, the answer is simple. The annuitized amount that comes out of the IRA each year will satisfy your RMD obligation.
What happens if you are required to take RMDs and you have two IRA accounts? Let’s assume IRA “A” has a $100,000 value and IRA “B has a $90,000 value as of December 31 of the preceding calendar year? Let’s assume your combined RMD distributions would equal $8,000. If your IRAs weren’t annuitized, you’d be able to take the full $8,000 total from either of your IRAs separately or, between the two IRA in any amounts you prefer, as long as the total distributions were at least $8,000.
What if, however, you happen to annuitize IRA “A” and start to receive $9,000 a year? Will the $9,000 you receive from IRA “A” annuity satisfy your total RMD of $8,000? Good question.
Ed Slott, a well-known IRA expert, says “there is
actually some debate over whether or not a distribution from an annuitized
annuity can be used to satisfy RMDs for other IRAs in the year of
annuitization. On one hand, once annuitized, IRA annuities generally
follow defined benefit plan rules instead of the defined contribution rules.
That would lead you to believe the answer is no. On the other hand, RMDs are
based off of prior year-end balances. Since the annuitized annuity did have a
prior year-end balance and wasn’t annuitized at the time, that might lead you
to believe yes. In light of the grayness in this area, the conservative
approach is to take the $8,000 annuity distribution from IRA “A” and an additional
distribution from IRA “B” based on its prior year-end balance.
“After the year of annuitization, things begin
to become a little clearer. Most experts agree that there is no way to
use the income from the annuitized annuity in IRA “A” to offset any of the RMD
that must be taken from IRA “B.” In this situation, your annuity payout will
only satisfy the RMD for IRA “A.” To put it another way, under the defined
benefit plan rules that the annuitized IRA now follows, the annuity payment is
the RMD for that IRA account. Your RMD for IRA B, with a total value of $90,000,
would be just under $4,000 next year.” The $1,000 “excess” from IRA “A” could
not be used to offset part of IRA “B’s” RMD, and hence, $4,000 would need to
come out of IRA “B” to satisfy the RMD requirements.
RMD Rules if a Taxpayer Takes Withdrawals from a Traditional IRA
If we assume the same facts as above, but instead of annuitizing IRA “A”, the taxpayer makes an election to take lifetime withdrawals from IRA “A” of $11,000 per year. The $11,000 withdrawal satisfies IRA “A” RMD requirement of $8,000. The question is can the excess $3,000 be used to satisfy $3,000 of the $4,000 RMD of IRA “B”?
We believe the answer is “yes”. When a policy is annuitized, it is an amount paid over a period certain. Common periods for a period certain annuity are 10, 15 or 20 years. There are no benefits paid after that time period. On the other hand, when a lifetime withdrawal benefit is taken, the period of time for those withdrawals is unknown since it is paid over one’s lifetime. Upon death, those payments cease.
Tax Planning Tip #1:
While your investment advisor may calculate your RMD, it is ultimately your responsibility to ensure that the proper amount is annually withdrawn from your IRA account. You should consider asking your tax professional to check the RMD computation.
Tax Planning Tip #2:
If you have an annuity IRA, check and double-check with the insurance carrier, your investment advisor and your tax professional regarding the RMD rules.
Tax Planning Tip #3:
Talk to your investment advisor and tax professional about creating a Qualified Longevity Annuity Contract (QLAC) which we wrote about in our July 22, 2014 blog. A QLAC allows you to use a portion of your savings to purchase a deferred annuity to create an income stream of regular income for the rest of your life. It also allows you to delay your RMDs by 15 years until age 85.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
