{"id":3759,"date":"2020-01-14T12:56:43","date_gmt":"2020-01-14T17:56:43","guid":{"rendered":"https:\/\/keysolutions.us\/blog\/?p=3759"},"modified":"2020-01-14T12:56:44","modified_gmt":"2020-01-14T17:56:44","slug":"annuity-annuitizations-and-rmds","status":"publish","type":"post","link":"https:\/\/keysolutions.us\/blog\/annuity-annuitizations-and-rmds\/","title":{"rendered":"Annuity Annuitizations and RMDs"},"content":{"rendered":"\n

Many Say that Annuities Are Complex \u2013 Add Required Minimum Distributions (RMDs) to an Annuity and Confusion Reigns<\/strong><\/p>\n\n\n\n

RMD Rules \u2013 Simplified Version<\/strong><\/p>\n\n\n\n

Taxpayers who turn age 70 \u00bd 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 \u00bd before January 1, 2020, they will continue to be bound by the old IRA RMD rules \u2013 RMDs required to begin at age 70 \u00bd. <\/p>\n\n\n\n

<\/p>\n\n\n\n

Immediate Annuity RMD Rules for Traditional IRAs<\/strong><\/p>\n\n\n\n

If a taxpayer purchases an immediate annuity<\/strong>, 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\u2019s RMDs and has no RMD requirement of its own<\/strong>.<\/p>\n\n\n\n

RMD Rules if a Taxpayer Annuitizes a Traditional IRA<\/strong><\/a><\/p>\n\n\n\n

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.<\/p>\n\n\n\n

What happens if you are required to take RMDs and you have two IRA accounts? Let\u2019s assume IRA \u201cA\u201d has a $100,000 value and IRA \u201cB has a $90,000 value as of December 31 of the preceding calendar year? Let\u2019s assume your combined RMD distributions would equal $8,000. If your IRAs weren\u2019t annuitized, you\u2019d 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.<\/p>\n\n\n\n

What if, however, you happen to annuitize<\/strong>\nIRA \u201cA\u201d and start to receive $9,000 a year? Will the $9,000 you receive from IRA\n\u201cA\u201d annuity satisfy your total RMD of $8,000? Good question.<\/p>\n\n\n\n

Ed Slott, a well-known IRA expert, says \u201cthere is\nactually some debate over whether or not a distribution from an annuitized\nannuity can be used to satisfy RMDs for other IRAs in the year of\nannuitization<\/em>. On one hand, once annuitized, IRA annuities generally\nfollow defined benefit plan rules instead of the defined contribution rules.\nThat would lead you to believe the answer is no. On the other hand, RMDs are\nbased off of prior year-end balances. Since the annuitized annuity did have a\nprior year-end balance and wasn\u2019t annuitized at the time, that might lead you\nto believe yes. In light of the grayness in this area, the conservative\napproach<\/em> is to take the $8,000 annuity distribution from IRA \u201cA\u201d and an additional\ndistribution from IRA \u201cB\u201d based on its prior year-end balance.
\n
\n\u201cAfter the year of annuitization, things begin\nto become a little clearer. Most experts agree<\/em> that there is no way to\nuse the income from the annuitized annuity in IRA \u201cA\u201d to offset any of the RMD\nthat must be taken from IRA \u201cB.\u201d In this situation, your annuity payout will\nonly satisfy the RMD for IRA \u201cA.\u201d To put it another way, under the defined\nbenefit plan rules that the annuitized IRA now follows, the annuity payment is\nthe RMD for that IRA account. Your RMD for IRA B, with a total value of $90,000,\nwould be just under $4,000 next year.\u201d The $1,000 \u201cexcess\u201d from IRA \u201cA\u201d could\nnot be used to offset part of IRA \u201cB\u2019s\u201d RMD, and hence, $4,000 would need to\ncome out of IRA \u201cB\u201d to satisfy the RMD requirements.<\/p>\n\n\n\n

RMD Rules if a Taxpayer <\/strong><\/a>Takes Withdrawals from a Traditional IRA<\/strong><\/p>\n\n\n\n

If we assume the same facts as above, but\ninstead of annuitizing IRA \u201cA\u201d, the taxpayer makes an election to take lifetime\nwithdrawals from IRA \u201cA\u201d of $11,000 per year<\/strong>. The $11,000 withdrawal\nsatisfies IRA \u201cA\u201d RMD requirement of $8,000. The question is can the excess\n$3,000 be used to satisfy $3,000 of the $4,000 RMD of IRA \u201cB\u201d? <\/p>\n\n\n\n

We believe the answer is \u201cyes\u201d. 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\u2019s lifetime. Upon death, those payments cease. <\/p>\n\n\n\n

Tax Planning Tip\n#1: <\/strong><\/p>\n\n\n\n

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<\/strong>. You should consider asking your tax professional to check the RMD computation.<\/p>\n\n\n\n

Tax Planning Tip #2: <\/strong><\/p>\n\n\n\n

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. <\/p>\n\n\n\n

Tax Planning Tip #3: <\/strong><\/p>\n\n\n\n

Talk to your investment advisor and tax professional about creating a Qualified Longevity Annuity Contract (QLAC)<\/a> <\/strong>which we wrote about in our July 22, 2014 blog<\/a><\/strong>. 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.<\/p>\n\n\n\n

<\/p>\n\n\n\n

If you would like to discuss your business or personal tax planning<\/a>, tax preparation<\/a> and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601<\/a> today to make an appointment at our Exton PA CPA office<\/a> to discuss your situation. You can also schedule a consultation at Click Here<\/a>. <\/p>\n\n\n\n

Copyright \u00a9 2020 Keystone Financial Solutions, Inc.  All rights reserved. <\/strong><\/p>\n\n\n\n

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently<\/strong>. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.<\/strong><\/p>\n\n\n\n

About F. Bryan Haarlander, EA, CTRS:<\/strong><\/p>\n\n\n\n

Bryan\nHaarlander is an IRS licensed Enrolled Agent and who owns and operates a\nspecialized tax services firm serving clients in the western suburbs of\nPhiladelphia, PA, which includes the cities of Chester Springs, Coatesville,\nCollegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia,\nPhoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks,\nChester,  Delaware, Montgomery and\nPhiladelphia Counties, as well as clients in Delaware, New Jersey, New York and\nthroughout the continental USA. <\/p>\n\n\n\n

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. <\/strong><\/a><\/em><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

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Many Say that Annuities Are Complex \u2013 Add Required Minimum Distributions (RMDs) to an Annuity and Confusion Reigns RMD Rules \u2013 Simplified Version Taxpayers who turn age 70 \u00bd 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. […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[3],"tags":[132,69,73,63,33,34,21,64,71,31,72,66,23,41,65,32,40,39,67,68,38,70,151,37,36,35,150,42,28],"class_list":{"0":"post-3759","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-irs-tax-planning-ideas-tips-news","7":"tag-accuracy-related-penalty","8":"tag-audits","9":"tag-bankruptcy","10":"tag-bryan-haarlander","11":"tag-chester-county-cpa","12":"tag-exton-accountant","13":"tag-exton-cpa","14":"tag-f-bryan-haarlander","15":"tag-first-time-abatement","16":"tag-frank-haarlander","17":"tag-innocent-spouse","18":"tag-installment-agreements","19":"tag-irs","20":"tag-irs-tax-debts","21":"tag-irs-tax-payments","22":"tag-keystone-financial-solutions","23":"tag-offer-in-compromise","24":"tag-oic","25":"tag-partial-installment-agreements","26":"tag-penalty-abatement","27":"tag-philadelphia-cpa","28":"tag-reasonable-cause","29":"tag-tax-adviser-near-me","30":"tag-tax-blog","31":"tag-tax-expert","32":"tag-tax-planning","33":"tag-tax-professional-near-me","34":"tag-tax-resolution","35":"tag-west-chester-cpa","36":"entry"},"aioseo_notices":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9W9tf-YD","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/3759","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/comments?post=3759"}],"version-history":[{"count":19,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/3759\/revisions"}],"predecessor-version":[{"id":3782,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/3759\/revisions\/3782"}],"wp:attachment":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/media?parent=3759"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/categories?post=3759"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/tags?post=3759"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}