Annuity within an IRA question

[FloridaJim57]

My understanding is that if one purchases an immediate annuity within an IRA the monthly payout is taxed as regular income. But does the monthly money you get from the annuity count towards the mandatory IRA withdrawal amount? Any clarification welcome.

 

[zinger1457]

Not really sure what the correct answer is but it doesn't seem likely, once you purchase a SPIA there's no longer a year-end balance assigned to those funds to calculate your RMD.

 

[MarieIG]

It is my understanding that a SPIA, either single life, or for joint and survivor for a spouse, can be purchased with "qualified funds". Since the payout ends with death, it is my further understanding that (this tranche) would satisfy the RMDs, although the amount remaining in the traditional IRA would still be subject to RMD requirements. Yes, income tax would be owed unless the annuity was funded by a Roth.

Please note, this will need to be confirmed as this is my understanding from Googling about.

 

[TheWizard]

The answer is YES, the annuity payout covers your RMD for those funds.

Remaining unannuitized tax-deferred money is still subject to normal RMD...

 

[latexman]

How about an annuity within a Roth IRA? If allowed, that would be tax-free income. Is that allowed? If so, what pitfalls am I not seeing?

 

[TheWizard]

How about an annuity within a Roth IRA? If allowed, that would be tax-free income. Is that allowed? If so, what pitfalls am I not seeing?

A payout annuity in a Roth IRA would provide tax-free income, correct.
Only pitfall might be paying too much income tax to get sufficient money into the Roth.

Contrary to Ed Slott's mantra, your goal shouldn't be to pay way more income tax in your latter working years so that you can pay very little income tax in retirement...

 

[zinger1457]

Not sure but I took the OP as asking if the annuity payment would count towards their total RMD requirement and to me the answer is no. Typically the annuity payment would be a lot more than the RMD for the amount the annuity was funded with. If I start out with $200K in my IRA at 72 the RMD is ~$7300. If instead at 72 I funded an annuity with $100K and left $100K in the IRA I would probably generate over $8K in income from the annuity alone. Could I then use the ~$8K annuity payment to cover the $200K RMD total of $7.3K? I don't think so, would still have to take an additional $3650 from the $100K IRA to meet that RMD requirement.

 

[RunningBum]

How about an annuity within a Roth IRA? If allowed, that would be tax-free income. Is that allowed? If so, what pitfalls am I not seeing?

Not really a pitfall, but you may not want such a conservative investment in a Roth, and you may want to leave your Roth alone to grow tax free rather than making withdrawals through annuity payments. But it can make sense in some situations. It did for me.

 

[VanWinkle]

Not sure but I took the OP as asking if the annuity payment would count towards their total RMD requirement and to me the answer is no. Typically the annuity payment would be a lot more than the RMD for the amount the annuity was funded with. If I start out with $200K in my IRA at 72 the RMD is ~$7300. If instead at 72 I funded an annuity with $100K and left $100K in the IRA I would probably generate over $8K in income from the annuity alone. Could I then use the ~$8K annuity payment to cover the $200K RMD total of $7.3K? I don't think so, would still have to take an additional $3650 from the $100K IRA to meet that RMD requirement.

If all the funds are within qualified IRA accounts under your name, you can take the RMD from any IRA account to satisfy the entire amount. The RMD is based on the total of all IRAs, but can be taken from one account. This can't be done with simple IRAs and 401Ks.

And all annuity contracts do supply an end of the year statement for RMDs

VW

 

[zinger1457]

And all annuity contracts do supply an end of the year statement for RMDs

VW

Interesting, didn't realize they did that with annuities.

 

[zinger1457]

This is from the Kitces Report on RMD requirements (page 18).
https://www.kitces.com/wp-content/u...o-Lifetime-Required-Minimum-Distributions.pdf

However, it’s important to recognize that when a
retirement account is annuitized, the account balance
and the subsequent payments are entirely segregated
from any remaining retirement accounts and their
associated RMD obligations. Which means annuitized
payments from a retirement account cannot be used to
satisfy RMDs from the other non-annuitized accounts.

 

[VanWinkle]

This is from the Kitces Report on RMD requirements (page 18).
https://www.kitces.com/wp-content/u...o-Lifetime-Required-Minimum-Distributions.pdf

I stand corrected.. Annuiaized accounts are different than annuity balances before annuatization.

 

[oldtimer]

This is from the Kitces Report on RMD requirements (page 18).
https://www.kitces.com/wp-content/u...o-Lifetime-Required-Minimum-Distributions.pdf

Ed Slott agrees.

Once the IRA annuity is actually annuitized, then the annuity payout satisfies the RMD for the annuity IRA only, and the other IRA must separately satisfy it's standard RMD. In this situation, the RMD aggregation rules no longer apply.

https://www.irahelp.com/forum-post/71014-rmd-calculation-ira-annuity-and-non-annuity-ira

 

[steelyman]

Speaking of Mr. Slott, I received a notice that he has a new podcast “The Great Retirement Debate”.

 

[TheWizard]

The year-end statements I receive for my annuities are simply 1099-R forms. The forms have nothing to do with RMDs and everything to do with what your Ordinary Income for the year is.

Similarly for withdrawals I make from my unannuitized tax-deferred accounts: the 1099-R simply states the amount withdrawn from the account for the year. There is nothing special on the form stating whether that amount satisfies your RMD for the year...

 

[zinger1457]

Your IRA custodian will issue form 5498 to both you and the IRS and this form will show if RMD's are required and the amount due but probably a good idea to also figure out those numbers yourself before getting the form. If you have multiple IRA accounts you need to make sure the total distributions from your IRA accounts are at least equal to the combined RMD totals. The penalty, 50% of the amount under the RMD, is severe.