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

Forum|Forum|6 years ago
June 7, 2019
3 replies
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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.

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Best answer by dmertz

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.

D

dmertzAnswer

Employee

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.

M

mitchden1Author

Employee

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.

T

TomD8

Employee

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

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

M

mitchden1Author

Employee

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

Employee

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.

M

mitchden1Author

Employee

I have been getting a 1099-R every year since I started taking the income rider distributions - beginning at age 59.5 As far as the contact value going to zero, I agree that the account will continue to grow, however, since the rider allows me to take 5%/year of the protected payment base, the contract value will decrease by this amount every year and will eventually be zero - unless they take into account the fair market value of the rider. In that case, the contract value will always include the fair market value of the income rider and never be zero. The 5% distribution from the rider is significantly higher than the growth of the contract - especially now that the rider has been distributing 5%/year for the last 10 years. 2020 will be the first year that I will be subject to the RMD.

I agree it’s not straightforward. I did talk to their representative, however, I don’t think he fully understood my questions.