Not all annuities will be used to calculate your required minimum distribution.
Annuities are not necessarily the most straightforward products.
They have plenty of specific rules governing them.
These complexities can make the already not-always-easy task of calculating required minimum distributions much more difficult, according to a recent Kiplinger article titled “RMD Tips: When Your IRA Holds an Annuity.”
Is it impossible?
But you will need some guidance.
Do you have an annuity in your traditional IRA?
Here are a few tips to help you.
Remember when you must take your RMD.
Everyone needs to take their RMD the year they turn 70½.
Forget this and you will pay more simply as a penalty.
Know how to calculate your RMD.
How do you do this?
The simple formula is to divide the IRA balance from December 31 of the previous year by a factor determined by your age on the appropriate government table.
There are three main types of annuities.
What are they?
Deferred Variable Annuities.
How does each affect your RMD?
As the name suggest, this results in an immediate payment stream.
It will duplicate the RMD distribution because this stream will cover the RMD portion of the IRA money invested in it.
The annuity is paid based on the life expectancy of the buyer.
These annuities are future-focused.
Although purchased now, the payouts will not begin until later.
A typical age for payouts to begin is 85.
Your IRA will not count qualified longevity annuity contracts (QLACs) in the RMD calculations.
Only your non-annuity holdings will be included in the calculation.
Is there a limit on qualified longevity annuity contracts?
You can only purchase them with IRA money up to the lesser of these to values—either $125,000 or 25 percent of your retirement account assets.
Deferred Variable Annuity
These are the most complicated.
The RMD value for the annuity is determined by the whether it had been “annuitized.”
What does it mean for it to be annuitized?
The annuity had been converted into a stream of payments—typically over the life expectancy of the owner.
In this case, the stream of payments will cover the RMD for the IRA represented by the annuity.
You will still have to calculate the RMD for any of the non-annuity holdings in your IRA.
What if the annuity is merely an asset in your IRA?
The value of the annuity will be used with non-annuity holdings to calculate your RMS.
What if you are withdrawing cash from the annuity?
The value of the annuity on December 31 of the previous year will count for the RMD calculation.
What if your insurer gives you an RMD estimate based on the value of the annuity?
You will still need to calculate the RMD for all non-annuity holdings in your IRA because this number is specific to the annuity.
What if you annuitize the contract after you are subject to RMDs?
Keep an eye on the calculation for the RMD for the first year of your annuity payouts.
This RMD will be based on the account balance of the previous year.
You do need to be sure the total payments you receive this first year are equal to or greater than the calculated RMD.
Otherwise, you will need to make up the difference from your other IRA holdings to satisfy the RMD.
In later years, the RMD will exclude any funds in the annuitized contract.
If you are not sure what type of an annuity you have or should get, work with an experienced financial advisor to determine what is best for your situation.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Kiplinger (March 2017) “RMD Tips: When Your IRA Holds an Annuity”