How is the RMD calculated for an IRA annuity with a Lifetime Income Rider?

[mitchden1]

My IRA annuity has a Flexible Lifetime Income Rider whereby I get 5% of the protected payment base for life. The contract allowed me to start taking this at age 59.5 and I have been receiving a 1099-R each year. I turn 70.5 in 2020 and the insurance company told me the RMD will be based on the contract value on Dec. 31, 2019. I have NOT and don't plan to annuitize this.

The contract value fluctuates and it gets reduced by the the rider payments.

What happens when the contract value goes to zero and I'm still receiving the distribution from this rider? Since the contract value is zero, there wouldn't be any RMD's. I know that I can now use the rider distribution to cover the RMD's from this IRA and my other IRA's.

I assume that I will continue to get a 1099-R for my lifetime - even when the contract value is zero. If this is correct, can I use this ongoing distribution to cover the RMD's on my other IRA's?

Also, shouldn't the RMD take into account the fair market value of the lifetime income rider? If so, the contract may be zero, however, there will always be a RMD.

[dmertz · Accepted solution]

Under section 1.401(a)(9)-6 Q&A-12(b), the actuarial value of the rider must be taken into account when valuing the annuity for the purpose of calculating RMDs (except that in certain cases the actuarial value of the rider can be ignored if when added to the account balance the total is less than 120% of the account balance).  Only the annuity company can do this valuation, and they are required to provide you with this value near the beginning of the year following the year-end valuation date.  They must also provide this FMV on the Form 5498 that they file with the IRS.  It's this valuation that you use to calculate the RMD for the year.

https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-6

Given that the rider provides a lifetime benefit, even though the account balance may go to zero, the valuation will never be zero after taking into account the actuarial value of the rider.

[mitchden1]

Thank you so much for  your response. If the account balance (i.e. contract value) is zero, then the actuarial value of the rider will always be less than 120% of the account balance. At that time, if there isn't any required RMD for this annuity, can I use the ongoing yearly lifetime rider distributions to "cover" the RMD of my other IRA's (CD's)? If there's no RMD, will I continue to receive a 1099-R for this IRA rider distribution?  

I have not or plan to annuitize this. My distributions are from the lifetime income rider. I know the insurance company will do this calculation for me. I also know that it will probably be about 10 years from now when the contract value will be close to zero. I've been taking distributions for 10 years and the current contract value is about  50% of the protected payment base. Although I don't know what the market will do, the contract balance decreases every year. The total contract value is no longer large enough to grow anywhere near the yearly reder distributions.

Hope you can follow my questions. Thanks again for your help.

[Critter]

I think you are mistaken the annuity, even if not annuitized, will still have a year-end value which will be used for rmd calculations on that IRA.

[mitchden1]

The contract value may be zero, however, per TomD8, the actuarial value of the rider will be added to the contract value when the RMD is calculated. TomD8's response is clear. I hope he will respond to my other questions.

[dmertz]

mitch18, your math is flawed.  As the account cash balance approaches zero, the ratio of the actuarial value of the rider plus the cash value to the cash value approaches infinity, not zero, and infinity is greater than 120%.  Once the cash balance goes to zero, the FMV of the IRA will be based solely on the actuarial value of the rider and that's the amount on which the RMD will be based.

Another way to state this is that the FMV will always be cash balance plus actuarial value of the rider if the actuarial value of the rider is more the 20% of the cash balance.  A nonzero actuarial value will always be more than 20% of zero.

[mitchden1]

dmertz, thank you for correcting my math. I had interpreted it incorrectly.

Would you know if the RMD calculation will add the actuarial value of the rider to the account balance? If this is the case, the RMD will be based on more than than the account balance on Dec. 31, 2019.

It would seem reasonable that the RMD should be calculated by using the greater of the account balance or the actuarial value of the rider.

Thanks again for your help.

[dmertz]

The FMV would be the sum of the cash value and the sum of the *additional* actuarial value provided by the rider.  If the rider dictates the total value, I would expect that the FMV would be the total actuarial value (which would be greater than or equal to the cash balance) or, if the criteria in section 1.401(a)(9)-6 Q&A-12(c) to exclude the additional value are met, just the cash balance.

[mitchden1]

Thanks. The annuity doesn’t have a “cash” value. Are you talking about the contract value? The surrender value is currently equal to the contract value.

[Critter]

You put money into the annuity ... that is your cash/surrender/contract value ... that is what is considered in the RMD calculations.

[mitchden1]

I just spoke to a  knowledgeable person from the insurance company. He told me that once the contract value is zero, the contract gets annuitized and I continue to receive the same distribution that the income rider provides, however, that future distribution cannot be used for the RMD of my other IRA's.

He also told me that the they calculate the actuarial value of the income rider when doing the RMD calculation, however, they use the higher of the contract value or the actuarial value of the income rider  in the RMD calculation.

Does this make sense? Thanks again for your help.

[dmertz]

That makes sense.

[TomD8]

Typically the insurance company holding your IRA annuity will automatically calculate your RMD each year and send you a confirmation statement early each year telling you the amount.

In most cases the only decisions you'll have to make will be 1) the % of the RMD you want withheld for federal (and state, if applicable) taxes; and 2) whether you want to take your RMD as a lump sum or in quarterly or monthly payments.  

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.

This IRS reference gives more info:  https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans

[mitchden1]

Yes, the insurance company will tell me the RMD early in 2020. I will continue to receive the monthly rider distribution and the withholding of federal and state income taxes will continue. Since the rider distribution is more than my estimate of the RMD's of all my IRA's, I won't have to touch my other IRA's.

I'd like to understand what happens when the contract value is zero and I continue to receive the same distribution under the rider. Also, will the RMD be calculated with the fair market value of the lifetime income rider. This amount will always be 5% of the protected payment base - which is a fixed amount.

I sent an Email to the insurance company. Hopefully, they'll get back to me.

[Critter]

Ok ... you will NOT ever get a 1099-R just from the annuity since it is housed inside of the IRA. 

The RMD of the IRA is based on the year end value of the account and the annuity basis will never go to zero even if you take out more in distributions than you ever paid in due to the fact the earnings are always taken into consideration.  

Please talk to your annuity and IRA administrators and let them explain it to you as it is not a straightforward concept or calculation.