Annuitizing an IRA and the Effect on RMDs

April 17, 2017

What does the implementation of a fiduciary standard mean for you and your clients?

With the implementation of a fiduciary standard for financial advisors looming somewhere in the future, it may be in your clients' best interest to offer information about annuities to fulfill their guaranteed lifetime income needs. This is especially true if their only asset to purchase that lifetime income is an IRA. We’ll explore a few of the issues that arise when a client elects to annuitize a portion of an IRA.

Clients in retirement may be interested in purchasing an annuity inside of an IRA for several reasons:

  • They need guaranteed lifetime income.
  • The IRA is their only source for lifetime income.
  • They want to simplify required minimum distributions (RMDs).
  • They want to maximize the investment performance of other IRA assets.
  • They want a level of stability for the IRA performance.

Regardless of the reason, the same concerns always arise. The most common question: How will the annuitization impact RMDs?
 

How Full Annuitization Impacts RMDs

Generally, once annuitized, the annuity is excluded from the value of that specific IRA for purposes of calculating RMDs. This is a straightforward scenario if the entire account value is annuitized; the annuity payments will be assumed to fulfill the RMD amount moving forward for the life of the IRA owner. But what if the client only annuitized a portion of an IRA or has other non-annuitized IRA assets?
 

How Partial Annuitization Impacts RMDs

If a client annuitizes only a portion of an IRA, the client must still satisfy the RMD for the non-annuitized portion. This is especially important in the first year of partial annuitization because the amount received from the annuitized IRA may not cover the amount of the RMD for that year. The use of the annuity payments to satisfy RMDs may sound contradictory from what was mentioned above, yet the first year is a special circumstance.
 

How the First Year of Annuitization Impacts RMDs

In the first year the IRA annuity is annuitized, the annuity payments can be used to fulfill the RMD for that year. Given the RMD is based on the prior year-end balance, the RMD regulations only require that the IRA owner take a distribution for the amount calculated, which the annuity payments can cover. Moving forward in year 2 and beyond, the segregation of annuity and non-annuity balances will apply.
 

What if Client Is Not Ready to Annuitize?

If your client is not ready to annuitize and would like to defer taking some of the RMDs, a qualified longevity annuity contract (QLAC) may be able to help. A QLAC can help clients defer RMDs, save on income taxes, and save for longevity costs. As always, each client’s situation is unique, and he or she should work with a tax professional to determine if a QLAC would help with these goals.

If you have questions about any of the above information, please feel free to contact the Retirement Strategies Group directly at (800) 722-2333, ext. 3939, or send an e-mail to RSG@PacificLife.com.

Picture of Caroline Elrod

Caroline Elrod is a Retirement Strategies Consultant with the Retirement Solutions Division at Pacific Life. She brings several years of industry experience to her role that includes tax planning with insurance products. Caroline enjoys educating financial professionals on creative and practical solutions to business, estate and retirement planning concerns.

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