IRA Variable Annuity RMD due in Year of the Annuitization?

SouthShore · ‎July 21, 2021

Per IRS requirements, each Dec 31 my Annuity Insurance Company provides an "Entire Interest (EI)" amount for this (Variable) annuity contract consisting of the Account Value and the Present Value of all accrued benefits, eg, Death Benefit (Life Insurance) and Lifetime Income Benefit (annuitization). The Entire Interest amount is used to compute the RMD amount due for that year and, in my case, is always substantially greater than the Account Value.

I have been in "RMD mode" for several years taking lump sum withdrawals from the Account Value to pay the RMDs and taxes. My RMDs are due and paid in the calendar year following the Dec 31 evaluation. For example, the RMD paid in 2021 (and consequently affecting 2021 income tax filings), is based on the 12/31/2020 Entire Interest Value.

I intend to annuitize this contract within the next couple of years and want to do some near term planning. I can annuitize the contract once in any year going forward and anytime within the calendar month of July based of the contract "Anniversary Date".

The question becomes: I will always have an RMD due for the un-annuitized IRA contract, but suppose I annuitize in in July of, for example, 2022. Will there will be an RMD due in 2022 based on the 12/31/2021 EI value even though the IRA Annuity will cease to exist in July 2022. (And thus, no RMD is due in 2023 and beyond.)

Must I take the 2022 RMD from it sometime before (in Jan through June) I annuitize the contract in July? If I don't pull the RMD from the annuity in first half of 2022, and annuitize in July, will I have to make up the amount from my other conventional IRAs? There's some flexibility here ...

I know this seems a bit complicated, and I intend to validate my plan with a local CPA, but in the meantime I would appreciate any commentary from anyone that has already done this or might have insight into any way to optimize this type of situation!

Thanks much!

/ss

PS - My personal recommendation is to avoid IRA Variable Annuities if at all possible. High fees, unwanted life insurance and needless complexities leading to too much brain damage like this example make them just not worth it, except for the crooks that sell them getting fat commissions and trips to Hawaii! 😮

Look to immediate or deferred Income Annuities as much better options if desiring that type of income vehicle. Cheers!

Critter-3 · ‎July 21, 2021

This question should be posed to the financial advisor or the annuity manager ... they should have the answers for your situation.

fanfare · ‎July 23, 2021

It's not complicated but easy to mess up.

Always take your required RMD before you make any irreversible changes, like conversion to Roth or annuitization.

BUT, if you have another IRA account with enough funds, you can use any IRA account to satisfy your RMD.

TomD8 · ‎July 23, 2021

Q: Will there will be an RMD due in 2022 based on the 12/31/2021 EI value even though the IRA Annuity will cease to exist in July 2022.?

A. Yes. Your RMD in the first year of annuitization is based on your prior year account balance, so you’ll need to make sure that the total payments you receive during the first year of the annuitized contract are equal to or greater than the calculated RMD. If they are less, then you would need to make up the shortfall from non-annuity holdings in your IRA.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.

SouthShore · ‎July 24, 2021

First, thanks!

This bears "checking out"!

(Note: My next "Annuitization Opportunity" will be in mid next year (7/2022) and each year thereafter.)

If I am understanding correctly, I have multiple options:

1. Withdraw up to the RMD (taxed as Ordinary Income) amount prior to annuitization, then annuitize. It is then no longer an IRA, no future RMDs due for this.

2. Annuitize, and the amounts (monthly or quarterly) paid out until year end by the annuity, will count toward the RMD due for that year! Make up the total RMD difference from other IRAs.

By doing #2 (no withdrawals) instead of #1, the annuity "income base" will not be reduced at all, resulting in slightly higher annuity payments for life.

Also, it appears that since the annuity payments will be taxed as Ordinary Income, just as any RMDs are, it all evens out for the IRS(?). (For illustrative purposes, this assumes that no "non-deducted" IRA contributions were ever made into the IRA annuity.)

Of course, I'll check this all out with both my CPA and CFP. This posting was just to gather some initial planning info for the front end of the process.

Thanks much!

IRA Variable Annuity RMD due in Year of the Annuitization?

Retirement tax questions

Retirement tax questions

Retirement tax questions

Retirement tax questions