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