Annuity purchased in 401K

[LXEX55]

My understanding is that if an annuity is purchased within a 401k or IRA, the month payout is taxed as regular income. Also, if a person purchases an annuity within their 401k, whatever money is remaining in the account(s) is subject to the required minimum withdrawal rule, no matter how much you spent to purchase the annuity. Am I correct on these two assumptions?

 

[pb4uski]

Yes, I believe so assuming that the 401k or tIRA is all pre-tax contributions that have never been taxed and the annuity is an immediate annuity. YMMV.

If the annuity is a QLAC deferred annuity the there is a 25% limitation.

 

[kaneohe]

You implied , but did not say a key word...........immediate. If you buy an immediate annuity with IRA money (I assume the same is true w/ 401K), the remainder is still subject to RMD rules. https://www.immediateannuities.com/required-minimum-distribution/

 

[donheff]

I know that you can purchase an annuity from an IRA distributions from which will qualify as RMDs for the funds used to purchase the annuity. In that case what you said is true - the income will be fully taxable and you will have to take RMDs for any funds remaining in the account.

What I don't know is whether it is easy to accidentally purchase a non-qualifying annuity with IRA funds triggering a taxable event for the whole purchase amount. That would be something to watch out for.

 

[street]

^ yes, if it is an annuity that is a retirement type (IRA or 401K) it is a candidate for RMD when that age occurs.

Taxes I'm not sure on for sure but it is what I have been told taxed as regular income. I hope some can confirm on tax status.

 

[kaneohe]

Yes, I believe so assuming that the 401k or tIRA is all pre-tax contributions that have never been taxed and the annuity is an immediate annuity. YMMV.

If the annuity is a QLAC deferred annuity the there is a 25% limitation.

Interesting........never had heard of them before.
https://www.fool.com/retirement/general/2015/12/28/what-is-a-qlac-and-why-might-you-want-one.aspx

 

[pb4uski]

You implied , but did not say a key word...........immediate. If you buy an immediate annuity with IRA money (I assume the same is true w/ 401K), the remainder is still subject to RMD rules. https://www.immediateannuities.com/required-minimum-distribution/

Not sure if you are referring to the OP or my response but I did specify immediate annuity... I'm guessing that you are referring to the OP.

 

[Richard4444]

So, just for example in round numbers: If I have $500,000 in my IRA, and at 70 1/2 I purchase an SPIA for $50,000 which pays out $3500 for that year, yet my RMD is $20,000 .... am I covered because I spent more than $20,000 for the purchase of the SPIA, or am I short because I am only receiving $3500 ?

Thanks, Rich

 

[kaneohe]

So, just for example in round numbers: If I have $500,000 in my IRA, and at 70 1/2 I purchase an SPIA for $50,000 which pays out $3500 for that year, yet my RMD is $20,000 .... am I covered because I spent more than $20,000 for the purchase of the SPIA, or am I short because I am only receiving $3500 ?

Thanks, Rich

this relates to donheff's concern........depends if your annuity is qualified or not.......if you withdrew as a normal distribution the 50K from your TIRA, that might make it taxable and your annuity would then be a non-qualified distribution purchased w/ post-tax funds . However you would have satisfied your RMD for that yr.

The alternative is to somehow purchase that annuity with pre-tax funds.
In that case , you have 450K left within the IRA and RMDs would be based on that amount in future yrs. There may be a complex initial transition period for that first yr.

You might want to run this by Alan S. in the fairmark.com retirement forum.

 

[kaneohe]

Not sure if you are referring to the OP or my response but I did specify immediate annuity... I'm guessing that you are referring to the OP.

You are correct........check the timestamps..........I did not see your post bc we were both racing to the finish line and you beat me by a micro-second
1:42PM

 

[donheff]

So, just for example in round numbers: If I have $500,000 in my IRA, and at 70 1/2 I purchase an SPIA for $50,000 which pays out $3500 for that year, yet my RMD is $20,000 .... am I covered because I spent more than $20,000 for the purchase of the SPIA, or am I short because I am only receiving $3500 ?

Thanks, Rich

As I understand these things, your $3500 counts as this year's RMD against the $50K you converted to an annuity. The annuity's continuing payments over the years will also count against that $50K portion of the IRA. This year you will also need to take an RMD against the remaining $450K and so on in future years for the end of year balance.

 

[LXEX55]

Yes, I am talking about a fixed, immediate annuity.

 

[Sunset]

My understanding is that if an annuity is purchased within a 401k or IRA, the month payout is taxed as regular income. Also, if a person purchases an annuity within their 401k, whatever money is remaining in the account(s) is subject to the required minimum withdrawal rule, no matter how much you spent to purchase the annuity. Am I correct on these two assumptions?

Since all money coming out of a (pretax) 401K or IRA is taxed as regular income, there is no benefit to this tax treatment.

As a way to lower RMD to avoid taxes, it seems pretty minor in effect.

 

[pb4uski]

My understanding is that in the scenario that was described where one had a $500,000 IRA and used $50,000 to purchase an immediate annuity that the RMD is based upon the remaining $450,000 and the relevant rmd factor based on your age. So your income for the year would be the RMD based on $450,000 plus the $3,500 annuity benefit.

 

[Richard4444]

My understanding is that in the scenario that was described where one had a $500,000 IRA and used $50,000 to purchase an immediate annuity that the RMD is based upon the remaining $450,000 and the relevant rmd factor based on your age. So your income for the year would be the RMD based on $450,000 plus the $3,500 annuity benefit.

Thank you !

Rich

 

[pb4uski]

Thank you !

Rich

You're welcome. Also see https://www.kiplinger.com/article/r...-rmd-tips-when-your-ira-holds-an-annuity.html

 

[zinger1457]

My understanding is you need to be careful when calculating the RMD during the first year you purchased the annuity and started receiving annuity payments. Say you have $500K in your 401K at the start of the year and your RMD for that year is calculated to be $21K, if six months into that year you purchase an annuity using $100K from funds in the 401K you need to make sure the annuity payments received for that year combined with 401K withdrawals adds up to at least $21K. In future years you would only need to consider the balance in your 401K for RMD.

 

[LXEX55]

What I am not clear on, is that after age 70.5 are you allowed to figure in the monthly annuity payments against your RMD? In other words, if I received a total of $5000 in annuity payments when I am say 73, does that $5000 help me meet my RMD amount?

 

[kaneohe]

What I am not clear on, is that after age 70.5 are you allowed to figure in the monthly annuity payments against your RMD? In other words, if I received a total of $5000 in annuity payments when I am say 73, does that $5000 help me meet my RMD amount?

Once you get past the transitional first yr , the 401K and annuity should be independent. If you have a qualified annuity, the annuity schedule should be the equivalent of RMD for the annuity. The 401K RMD should be based on the usual prior yr end value of the 401K itself.

 

[pb4uski]

What I am not clear on, is that after age 70.5 are you allowed to figure in the monthly annuity payments against your RMD? In other words, if I received a total of $5000 in annuity payments when I am say 73, does that $5000 help me meet my RMD amount?

See posts #14, #17 and #19.

 

[LXEX55]

My understanding is you need to be careful when calculating the RMD during the first year you purchased the annuity and started receiving annuity payments. Say you have $500K in your 401K at the start of the year and your RMD for that year is calculated to be $21K, if six months into that year you purchase an annuity using $100K from funds in the 401K you need to make sure the annuity payments received for that year combined with 401K withdrawals adds up to at least $21K. In future years you would only need to consider the balance in your 401K for RMD.

Yes, but what if I purchase the annuity at age 64 BEFORE RMDs? That is what I don't understand. Do I just pay regular tax on them?

 

[kaneohe]

Yes, but what if I purchase the annuity at age 64 BEFORE RMDs? That is what I don't understand. Do I just pay regular tax on them?

Any distributions from a qualified immediate annuity are taxed at ordinary income tax rates. If you goof up and your annuity is not qualified, part of your distribution will not be taxed............because you paid the tax after withdrawing from the 401K.

 

[zinger1457]

Yes, but what if I purchase the annuity at age 64 BEFORE RMDs? That is what I don't understand. Do I just pay regular tax on them?

Yes, as explained above. The insurer you purchased the annuity from will provide you with a 1099-R at the end of the year, box 1 will show the total distribution for that year, box 2a the taxable amount, should be the same if the annuity was purchased with qualified 401K funds. The annuity provider should also have you fill out a W-4P form to determine the tax withholdings from your annuity payment..