RMD from a Tax Deferred Annuity

[dmb]

A client has a Tax Deferred Annuity for an IRA. He turns 70 1/2 during 2001. He has mentioned that it is a Non-Qualified IRA. Is there such a thing as a Non-Qualified IRA?? If not, how must his RMD be calculated and can it be taken from one of his non-annuity traditional IRAs?? Thanks.

[Guest benji]

Not sure there is such a thing as a Non-Qualified annuity inside of an IRA. They may be referring to a non-deductible contribution where the basis is not subject to taxation. But, if it is an IRA they are subject to RMD's. You can take the distribution from other traditional IRA's. The rules have changed for RMD's here is a like that has an RMD calculator.

http://207.127.31.7/MasteryWeb_Distrib/scr...Intro=RMD_Intro

[Michael Devault]

Recommend that you take a look at the annuity contract, or an account statement from the insurance company, to determine what the annuity represents. It could be that it's a non-qualified annuity that the client thinks is an IRA.

As benji points out, IRAs are subject to the RMD rules, regardless if the contributions were deductible. However, if it's truly a non-qualified annuity and not an IRA, then the RMD rules don't apply... the client can keep the money there until they die, if desired.

Hope this is of some help to you.

[Guest Mary Ann]

I had always thought that an IRA should not have investments in a tax deferred annuity. However, is there some other kind of annuity that makes sense to put in an IRA?

[Michael Devault]

I think there is an issue of semantics here. Annuities which are issued by an insurance company are included among the allowable investments for IRAs. To the best of my knowledge, there are only two types of annuities: fixed and variable. The only distinction between the two is how the ultimate value of the annuity is determined. However, they are both considered "tax deferred" due to the operation of section 72 of the Internal Revenue Code.

[Guest benji]

Although Annuities are allowable in IRAs, Some planners feel it is like wearing a belt and suspenders at the same time.

Annuities carry higher management fees, as well as, M & E (Mortality and Expense) fees.

[jlf]

Benji........

You bring up an important point. From 1959 through 1974 the only funding vehicle allowed for 403(B)s was the annuity product. This is why, notwithstanding the fact that mutual funds have been an alternative 403(B) funding vehicle since 1975, 403(B) arrangements are commonly referred to as Tax-Sheltered Annuities or TSAs. The 16 year head start has enabled the annuity providers to remain the dominant player in the 403(B) market 42 years after section 403(B) was added to the Code.

The reverse is true when it comes to IRAs which first came on the seen in 1975. This is the result of competing from day one with the alternative funding vehicles.

Best wishes,

Joel L. Frank