RMD Calculation

[rfahey]

My 90 year old client has 4 different IRA's. WE have been doing his RMD calculations.

One of his IRA's is a fixed annuity that cannot be retained any longer due to his age.

We may therefore settle this contract on a 5 year period certain payout in March.

How do we factor this into his future RMD calcluations since this really has no present "value" on December 31, 2013 ?

Do we simple disregard this and calculate on his other three accounts as usual ?

Thank you.

[ETA Consulting LLC]

Assuming that when you settle for the five year payout, the contract is (effectively) annuitized, then you simply disregard it and continue forward by calculating on the remaining three. Now, the first annuitized payment (alone) should be enough to satisfy the RMD for that particular contract for the first year.

Good Luck!

[Mike Preston]

Remember, all IRA's are combined for purposes of RMD's. Hence, if the 5 year payout exceeds the RMD based solely on the annuitized amount by $1, you can reduce a distribution from one of the other IRA's by $1. I don't buy the fact that the annuity has no stated value. Ask the annuity company what the interest rate is that they are using to develop the 5 year certain amount. That will tell you what the actual value is at the beginning of the annuity stream.

[ETA Consulting LLC]

Mike, I spoke loosely on this issue, because that applies only in the event the contract is not actually annuitized. You may take a stream of payments from an annuity without annuitizing the contract. Without know the particular details, I assumed the contract is actually annuitized (which may be over any period not extending beyond the taxpayer's life expectancy). So, I agree with your point, but there is a contingency based on whether the contract is actually annuitized or simply withdrawing funds.

You are right that annuitizing is generally life (with a 5 year or other period certainty). My assumption, which "may or may not have been reasonable given the limited detail", was that the contract was merely annuitized and removed from the combined calculation. My understanding is that: As a rule, all IRA's "may be" combined for RMD purposes. This makes it a viable alternative to merely remove the contract in question and calculate on the other 3.

Good Luck!

[rfahey]

Thanks Guys,

The contract is not being annuitized over his life expectancy. He is simple electing a 5 year payout over 60 months ( then it is finished ).

[ETA Consulting LLC]

In that case, Mike is spot on. You'd use the amount distributed from that particular contract to offset the entire amount that must be distributed from all 4 IRAs.

Good Luck!

[Gary Lesser]

Not so fast.

Aren't IR-Annuities and IR-Accounts treated differently for RMD purposes? Here, it appears that there are three individual retirement arrangements (IRAs) that are accounts and one IRA that is an annuity

If the IRA is an IR-Annuity (IRC 408(b)) and the other IRAs are IR-Accounts (IRC 408(a)), I believe the IR-annuity has to be looked at separately, and only the excess determined under that contract used to offset RMD amounts from the other three IRAs that are IR-Accounts. See Pub 590, Distributions from individual retirement annuities (p 32), referring to the "special rules" Treas. Reg. Section 1.401(a)(9). For an IRA that is an IR-annuity "[R]ules similar" to the 401(a)(9) RMD rules are used (see IRC 408(b)(3)). IOW, the value of all four IRAs would not be combined for RMD purposes.

Had an annuity (qualified or non qualified) contract been purchased in an IRA that is an account, then (imo) its 12/31 value must be used instead (fmv of all four IRAs combined for RMD purposes).

[ETA Consulting LLC]

They are treated differently when they are actually annuitized. In that instance, the RMD is deemed met (regardless of the amount) since you are annuitizing over the life (or joint lives) of the taxpayer (or taxpayer or beneficiary). When the annuity maintains an account balance, there is no requirement to maintain a separate calculation.

Good Luck!

[Gary Lesser]

RMD amounts distributed under IR-Annuities are rarely the same as the amount determined for IR-Accounts. It makes no difference that the annuity contract is annuitized or accumulating. The "special rules" allow annuity contracts to use anuity factors based on 401(a)(9). IR-Annuities also have rights and features that aren't taken into account under the IR-Account rules.

The RMD amount has to be determined separately for each IRA (i think here we agree). See 1.408-8, Q&A 9.

Since the RMD amounts for the annuity are calculated differently (under the contract), the offset procedure above, imo still does not work.

If an annuity (any type) is purchased in an IR-Account as an investment, then the offset (at it's face value) is okay. As an IR-Annuity (if that is what it is), the contract has a RMD amount that is required under it's terms (it does not have to be calculated by the account holder).

[ETA Consulting LLC]

Are you speacking of a fair market value question where the additional bells and whistles in the contract cause the contract to be valued at more than 120% of the account value.

I am trying to ascertain what you're getting at.

[Gary Lesser]

Assume that the divisor for an an IR-Account RMD is 4, next year it is 3. There is $200,000 remaining in the account (12/31 FMV), so we distribute $50,000.

Now, in addition, lets assume, that an IR annuity was purchased some time ago. It calls for say a lifetime distribution of $44,000 under its RMD provision (based on its unique annuity factors used by insurance company). It has no real account value, but an interpolated terminal reserve (ITR) of $85,000. Now, the individual arranges to have $50,000 distributed from this IR-Annuity for next 4 years. What I am saying is that the IR-Account distribution can be reduced by just $6,000 ($50,000 - $44,000) and still meet RMD rules. The IR-Account will ceased distributions at age 110 (distribution factor is 1), whereas the IR-Annuity could make payments for life (say age 120) without violating the RMD rules.

Only if the annuity contract were purchased in an IR-Account as an investment, would the contracts FMV (ITR) be used for purposes of calculating the RMD.

Since we arrive at different numbers to satisfy the RMD rules, one of us is wrong! The offset, imo, is the amount by which the amount distributed ($50,000) exceeds the RMD required under the IR-Annuity contract (unknown, as determined by insurance company).

[rfahey]

Hi Gents,

I asked the original question so I will summarize again as I am getting confused.

Client has 3 IRA accounts and one IRA annuity.

He will "settle" the IRA annuity by taking a 5 year period certain payout. The insurance company will pay him a monthly guaranteed amount for 5 years the it is done.

Since it is being paid out over just 5 years the RMD on this settled annuity is higher that it would be if it were in an accoiunt and the factor was being used to calculate the RMD.

So the question is --- does the annuity stand on its own now and have no bearing on the RMD calculation on the 3 other IRA accounts ?

I am not sure and actually doubt if the insurance company will calculate a fair market value of the annuity each December 31st.

THank you,

[ETA Consulting LLC]

It has no real account value,

What I am saying is that the IR-Account distribution can be reduced by just $6,000 ($50,000 - $44,000) and still meet RMD rules.

I, respectfully, disagree; because you are now talking apples and oranges. When you go into the annuitization phase, the account has no value, but you will receive a stream of payments not extending beyond the life (or life with period certain) of the taxpayer. This, alone, satisfies the RMD requirement for this annuity while precluding it from being combined with other accounts for purposes of satisfying the RMD. Of course there is some value there (even though there is no account value), because there are a stream of payments being made over the taxpayers life.

In this case, the remaining three IRAs may be combined. In rfahey's case, the annuity isn't being annuitized, but merely paid out in 5 installments. This was Mike Preston's argument that they could, therefore, be combined.

I cannot fathom a situation where an annuity can enter the annuitization phase while continuing to have it's distributions be used to offset RMDs from other accounts.

Good Luck!

[Gary Lesser]

rafahey, could you indicate whether the contract issued by the insurance company is a stand alone IRA (IR-Annuity) or merely an investment (perhaps one of many that could be) held in an account?

I suspect the "fixed annuity" is merely an investment in an IR-Account.

Is the fixed annuity held by a trustee or custodian?

[Gary Lesser]

_{Even though the fixed annuity does have value in an "account" or "sub account" before annuitization), the rules to be followed in calculating RMD amounts are different because it is (for purpses of our discussion) an IR-Annuity (rather than held say in an IR-Account with a trust/custodial account).}

_{So I ask, if no one did anything, how much would be required (the minimum) to be distributed this year from the fixed annuity contract (by its own terms), that is, without the owner having to look at any table or chart? IOW, what would the insurance company automatically send a check for (to comply with rmd rules)? I believe the answer to that Q will answer the Q in this thread.}

_{Once the amount is known we should have an answer. If there is no amountr required, then it wasn't an IR-Annuity.}

[rfahey]

The fixed interest rate annuity is an IRA and a stand alone contract.

It is entirely separate from the other 3 IRA's.

It is an annuity contract issued by National Life of Vermont many years ago. It has a current cash value and a fixed rate of 3% interest.

Once we settle it on a 5 year payout it will no longer have a "cash value" that can be withdrawn in lieu og the 5 years of guaranteed payments.

[Gary Lesser]

_{Then it would have had provisions regarding RMD amounts. How much would be required (the minimum) to be distributed under the fixed annuity contract (by its own terms), that is, without the owner having to look at any table or chart and assuming no payments had been requested.}

[ETA Consulting LLC]

Once we settle it on a 5 year payout it will no longer have a "cash value" that can be withdrawn in lieu og the 5 years of guaranteed payments.

This is the information I used to say that you would remove this IRA from the analysis with the other three IRAs.

Good Luck!

[Gary Lesser]

Assume no payments were requested (it's still accumulating). How much would have been required to be distributed under the contract?

Since the individual is age 90, the 5-year (20%) payout schedule would appear to be more than the RMD amount and satisfy any contract rules regarding RMDs. However, this does not help answer the Q.

[rfahey]

If no settlement/payment option had been selected the RMD on this annuity would be calculated like any other "account" using the normal factor table and the Dec 31 balance.

[ETA Consulting LLC]

If no settlement/payment option had been selected the RMD on this annuity would be calculated like any other "account" using the normal factor table and the Dec 31 balance.

My contention is yes. The calculation is always done separately for each IRA, you are allowed to satisfy the RMD with a distribution from one IRA. This is what you have, apparently, been doing for the past years. What makes this year different is that this particular annuity is being "settled" for a period of 5 years; where the balance goes to zero and the taxpayer will receive 5 annual payments.

I cannot foresee how these 5 payments would reduce RMD distributions for the other 3 IRAs. I am trying to understand the contrary position, but just don't see it.

Good Luck!

[Gary Lesser]

rfahey, you state "the RMD on this annuity would be calculated like any other `account.'" IT IS NOT an "account," the POINT I WAS TRYING TO MAKE (but not really any longer). In most respects the RMD rules are identical for IR-annuities and IR-accounts , but in calculating the actual annual dollar amount the rules differ (are "similar"). Each contract provides for an rmd amount based on its own internal factors and assumptions (determined under different rules - see below).

Perhaps the IR-Annuity is not subject to the RMD rules [blasphemy]!

To be an IR-Annuity under Code Sectioin 408, the contract issued by the insurance company provides for the distribution of a minimum amount to comply with the RMD rules that apply to annity contracts that is an individual retiremen arrangement. If it were an IR-Annuity under CODE SECTION 408(b) it would have been in pay staus (annuitized). The fact that it isn't and the individual is age 90 is perplexing. However, there may be a reason (see later).

Pub 590 states:

"Distributions from individual retirement account. If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year. See Figuring the Owner's Required Minimum Distribution, later.

"Distributions from individual retirement annuities. If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries, IRS offices, and online at IRS.gov." (But see below.)

Now, that section, Treasury Regulations Section 1.401(a)(9)-6, Required Minimum Distributions for Defined Benefit Plans and Annuity Contracts is not (always) the same as the rules regarding IRA "accounts" found in 1.408-2(b)(6) that apply to "Individual Retirement Accounts" where getting your rmd may be optional. That section refers to section 1.401(a)(9)-5 were the annuity has not yet been annuitized. In that case the regular Pub 590 "individual account" rules apply and Mike is spot on.

The holding of an IR-Annuity (that is a 408(b) IRA) is rarely held in a brokerage account and is generally done by accident.

Is it possible that the contract was issued prior to ERISA in 1974? In those days (and for a short period thereafter), insurance companies sold an after-tax product called an "Individual Retirement Annuity," some even were called "qualified." HOWEVER, they were not the same as Individual Retirement Annuities under Code Section 408(b). A friend mentioned another possible reason, the annuity contract is a single premium deferred annuity generally treated like a CD account for RMD purposes. I suspect yours does say "IRA" all over it.

Because this annuity has not been placed in pay status and the individual is age 90, I believe this is a either a PRE-ERISA annuity contract (or one that was sold shortly after) - and no RMD rules appply to it. If so, it may be unwise to offset required distributions amounts from the IRAs under Code Sectio 408(a).

I do not think I can be of further assistance. Hope this helps.