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On Fidelity.com, under “viewpoints.retirement,” one currently finds a post titled “Create Income That Can Last a Lifetime” (https://www.fidelity.com/viewpoints/retirement/income-that-can-last-lifetime). At the end of that post, there is a note on “RMDs and annuities,” which states, in part, the following:
The SECURE Act 2.0 that went into effect in January 2023 allows IRA income annuity owners the choice to aggregate their income annuity with their other IRAs for the purposes of determining their required minimum distributions. If you are 73 and older, cash flow generated from the income annuity can be used to potentially offset RMD obligations from other accounts, allowing assets within these other accounts to remain invested and grow tax-deferred.
I have a deferred annuity kicking in this December, and my first RMD year will be 2025. I am curious to know whether any HD writers/readers currently subject to RMDs and receiving annuity income can confirm that this “strategy” is, in fact, possible. Of course, I would also be delighted if any other HD writers/readers can shed useful light on the topic. Fidelity couches their statement in terms of “potentiality” and the ubiquitous advice to consult a tax specialist (an individual I do not employ).
This is my first HD post/comment, though I have followed the site almost from the beginning, and Jonathan since the WSJ days. I owe him much credit for educating me into my successful investment strategy over these many decades, and I can only add my wishes to those of the hundreds of others that his current dire circumstances will turn out better than any of us could be expected to hope.
Chris M.
The IRS released the long-awaited, much-anticipated new Final Regulations for Required Minimum Distributions on July 18, 2024. Here’s the link that explains the clarification of the Secure 2.0 Act. You’ll have to scroll down to the section titled, “Treatment Of Annuities Within Retirement Accounts And Other Rules Under The New Regulations”.
https://www.kitces.com/blog/secure-act-2-0-irs-regulations-rmd-required-minimum-distributions-10-year-rule-eligible-designated-beneficiary-see-through-conduit-trust/
Initially, the Secure 2.0 Act only allowed participants in an employer plan who hold an annuity to aggregate the annuity’s value with non-annuity assets to calculate their RMD. However, the July 18, 2024 Final Regulations extend the treatment to IRAs as well.
“Individuals who own annuities within IRAs can aggregate their annuity and non-annuity IRA assets together to calculate their RMD and count the entire amount of their annuity payments against that RMD total.”
Note: QLACs are handled different as noted in the comments below.
Thanks so much for this information, Cheryl! Glad the question had not receded too far down Forum river. I look forward to reading the (I assume) stultifying IRS regulation.
A really good link to the article on the Kitces blog. Thanks Cheryl.
My expectation is that in early 2025 that Chris should receive two IRS 2024 forms 5498 with one showing the 12/31/2024 fair market value of the annuity in that tIRA and the second 5498 showing the fair market value of the non-annuity assets in that tIRA. Those combined IRA values, plus any other tIRA account that he may own, are used by Chris (and the IRS) to determine if the RMD requirements were met for tax year 2025 and if not the amount of any penalty for failure to take his RMD.
Usually the end of year FMV is located in box 5 but for some assets the FMV is reported in box 15a. A link to the 2024 draft 5498 follows-
https://www.irs.gov/pub/irs-pdf/f5498.pdf
Best, Bill
Thanks, Bill. My first RMD will be in 2026, so will adjust your comment to that time frame. Is the annuity still considered within the tIRA? The funds did come out of my tIRA but the annuity is listed elsewhere among my various Fidelity retirement accounts. In any case, my Fidelity advisor told me a month or so ago that he assumed that the value of all of my accounts (e.g., 401k, 403b, SEP-IRA) along with the annuity (figured at what might be called its “face value”–sorry for that technical financial term) could be aggregated to calculate the RMD amount, and then count the distributions received from the annuity, which start this December, toward the RMD amount for the 2025 tax year (so, 12 months of annuity income, a decent chunk of the total RMD obligation).
PS: I don’t seem to remember how to get back into my previous credentials, hence the different posting name.
PPS: Looks like I “miswrote”; I’ll take the first RMD in Dec 2025 (rather than do 2 in 2026).
Your advisor’s assumption on which account(s) seems to be incorrect to me.
Per the IRS website –
Q5. Can an account owner just take a RMD from one account instead of separately from each account?
An IRA owner must calculate the RMD separately for each IRA they own but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract they own but can take the total amount from one or more of the 403(b) contracts.
However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
As far as actual annuity distributions from the IRA holding your annuity the calendar tax year distribution occurs as paid. So if you do not have a RMD requirement for 2024 a 2024 IRA annuity distribution in December 2024 does not count in the distribution amounts for your 2025 RMD.
Your statement “The funds did come out of my tIRA but the annuity is listed elsewhere among my various Fidelity retirement accounts.” makes me think it is considered a separate IRA account. It would scare me on the tax consequences of what could have happened if not.
If the annuity appeared in the taxable assets part of your broker statements I would be worried that the annuity purchase transaction was recorded as a distribution in the year that the annuity was purchased, likely 2024, and the total amount used to purchase the annuity would therefore be a taxable distribution fully taxable in the current year. I would suggest you look at your IRA account that the annuity was purchased from to verify that they are not reporting the annuity purchase as a 2024 distribution.
Thanks, Bill. The information you provide does appear to complicate things quite a bit, and seems to result in a situation where I will be required to take more of an RMD than I thought, if the annuity payments cannot be used to satisfy the 403b etc. The annuity does not appear in my taxable brokerage account, but it is also not labeled an IRA.
After a quick DuckDuckGo search, I believe this paragraph describes my situation:
*A qualified annuity is funded with pre-tax dollars, like those from retirement accounts like IRAs. Taxes on these annuities are deferred until withdrawal. The most common method of funding a qualified annuity is by transferring money from a 401(k), IRA or other tax-deferred or tax-free retirement account. There is no legal limit to the amount you can use to fund an annuity, although many companies may have their own limits. Contributing money to an annuity from a retirement plan does not offer additional tax deductions but retains the tax-deferral status already established for retirement assets.* (https://www.annuity.org/annuities/taxation/qualified-vs-nonqualified/)
I think the question being posed and the comment by Fidelity are all about a QLAC. I believe that a qualifying longevity annuity contract was first allowed in a IRA around 2014 and then the Secure Act of 2022 greatly expanded the use of this specialty type of annuity that are bought with IRA assets. My understanding, in a nutshell, is the year end value of the QLAC is excluded from the fair market value of all other assets inside your traditional IRA(s) and that net value (excluding the QLAC value) is used when you determine the amount your annual RMD.
The take big away is that a QLAC is an annuity but not all annuities are a QLAC. The companies selling annuities pushed to have a tool so that the law would allow people with IRAs to use their funds in a IRA to buy an annuity. Whether buying a QLAC is a good financial decision for a particular person is a different question.
Below is a link to a Kiplinger article on the topic with expanded detail.
https://www.kiplinger.com/retirement/qlac-secure-act-gives-this-annuity-a-boost
Thanks, William, for the information on the QLAC angle. My situation is actually a deferred fixed income annuity, over the amount allowed for QLACs, and well described by Rick as a “partial annuitization” of an IRA. I am, indeed, trying to escape the penalty forcing me into a larger RMD than if I had not annuitized a portion of the IRA.
Bill, thanks for the article on QLACs. That was good information. I was unfamiliar with this issue so I did a bit research yesterday. I think the issue Chris’s post was addressing is called “partial annuitization” of an IRA. I’ve read multiple articles, a few linked below, that discuss how Secure 2.0 intended to fix the penalty associated with partial annuitization. It deals with the tax treatment of qualified annuities that have been annuitized and the yearly annuity amount is greater than the RMD would have been on the amount annuitized. In the past, this would lead to the person out more than the original (pre-annuity) would have required.
As I read it (and I’m not 100% certain I’m right) post-Secure 2.0 you can aggregate the remaining amount in the IRA with the current value of the annuity as of 12/31 to determine the required RMD. The annuity payment counts towards that RMD, with any excess amount withdrawn form the other IRA assets. A number of articles from 2023 indicated that we are still awaiting guidance forth IRS on how, and who performs, the annuity yearly valuation. I read a Boglehead thread where the writer had asked for a quote from a a major insurance company and was told the the company would provide a year-end valuation to held the person calculate the RMD.
Good morning Rick,
Reading what Chris M wrote I was (and am still) uncertain if his annuity is a deferred annuity that is a QLAC. In his comment his annuity payment begins in 2023 and his first RMD year is 2025 which seems to me to be backwards of the tax benefit that a QLAC typically offers.
Assuming his annuity is a QLAC I have below posted a link to the IRS Q/A format of a current regulation regarding QLACs and RMDs that may be helpful but it is a hard read. From a practical compliance viewpoint I would expect that Chris (and the IRS) will receive the appropriate 5498 forms listing the FMV at the prior end of his traditional IRAs and 401(k)s by May 31 the following year end annually and he would then have the necessary information to calculate and take necessary RMD’s to avoid potential penalty for failure to take a timely RMD. My experience is the IRS will at some point send a taxpayer a notice based on the 5498s it receives assessing penalty if a taxpayer does not take the RMD timely.
https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-6
I hope this helps.
Thanks, William, for the additional input. I may be interested in a QLAC at some point, so the information is appreciated. My current annuity is a deferred fixed annuity, beyond the 200k limit of a QLAC. It was set up through Fidelity with a top-rated insurer. In my brokerage account, it is listed as a “deferred fixed income annuity,” and the first payment will be this coming December, 2024.
Clearly I have been working on too many 2023 1040’s lately and do not know that this year is 2024.
I enjoyed a 2023 podcast on Friends Talk Money that might interest you if you are thinking about a QLAC.
https://friendstalkmoney.org/podcast/annuities-for-retirement-income/
Best, Bill
Thanks – Cheers!
I’ve been looking into this and I’m still a bit confused. It seems Secure 2.0 added a provision to allow a retiree to get credit for an annuity payment which exceeds the RMD that would have been due had the IRA amount not been annuitized. However, several articles I have read indicate that the IRS has not clarified who is responsible for determining the annual value of the annuity to be used in the calculation of the “effective” Annuity RMD amount.
This article from Bloomberg law provided the info above.
https://www.bloomberglaw.com/external/document/X69I9OSO000000/retirement-benefits-professional-perspective-early-secure-2-0-im
Thanks, Rick, for this link and your other comments. Indeed, the situation I am concerned with is well summarized in the last several paragraphs of the article linked above. As I understand the issue, the non-annuitized funds in my IRA can be grouped with the value of my deferred fixed income annuity which was funded from that IRA for the purpose of calculating my RMD obligation, “and” (and this is my real question) then all the payments received from the annuity can be credited as part of my RMD. I am aware, as stated in the article, that the IRS has not yet clarified exactly how or by whom the annuity is to be valued, which perhaps puts anyone who uses such a calculation in danger of a penalty.
Here is a good article from Income Annuity. The way I understand it, whatever amount of IRA $$ you invest in an annuity are not counted towards calculating your RMD. If you have $300,000 in an IRA, and then invest $100,000 in an annuity, your future RMD calculation will be based on the remaining $200,000. The article references that this tax treatment counts when an annuity has been “annuitized”, and says there are different rules for deferred annuities. I would think once you start collecting that would meet the criteria, but you would have to check that.
Hope this helps.