Anyone have RMD knowledge?

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Aug 15, 2008 11:20 am

I'm interested in answers to the following question.  I would like to also hear guesses to the answer.  When responding, please let me know if you are sure of the answer or if you are guessing. 


Facts: My client is a non-spousal beneficiary for an IRA.  He is going to set up a beneficiary IRA for himself.
 
Question: Can my client purchase a straight life SPIA?  Why or Why not?
 
(I think that I know the answer and the rationale, but am not positive.)
Aug 15, 2008 1:01 pm

http://www.irs.gov/pub/irs-pdf/p590.pdf


See page 37.
 
I would say YES, because the SPIA would be based on the beneficiary's life expectancy, not on anyone else's life.
Aug 15, 2008 1:35 pm

Just a guess, Yes IF the SPIA met the RMD requirement.  As the IRS charts are designed with getting the taxes sooner than later, this may an issue.

Aug 15, 2008 1:45 pm
anonymous:

I'm interested in answers to the following question.  I would like to also hear guesses to the answer.  When responding, please let me know if you are sure of the answer or if you are guessing. 

Facts: My client is a non-spousal beneficiary for an IRA.  He is going to set up a beneficiary IRA for himself.
 
Question: Can my client purchase a straight life SPIA?  Why or Why not?
 
(I think that I know the answer and the rationale, but am not positive.)



Your client can buy anything that he wants and can afford.

Aug 15, 2008 2:19 pm

He can as long as it kicks off enough to satisfy the RMD.  Better make sure the IRS and the insurance company are using the same tables, declining years method.

 
If the original account owner was 70.5+, make sure he takes their RMD first (which will be higher than his own "stretched" RMD).
Aug 15, 2008 8:23 pm

http://www.irs.gov/pub/irs-pdf/p590.pdf


See page 37.
 
I would say YES, because the SPIA would be based on the beneficiary's life expectancy, not on anyone else's life.
 
Skippy, thanks.  Unfortunately, it doesn't address this specific subject.  It tells us to good pieces of information that relate to the question.  1) How RMD's are calculated and 2)an annuity can be purchased.  It does not tell us if an annuity can be purchased for a beneficiary IRA.
 
Just a guess, Yes IF the SPIA met the RMD requirement.  As the IRS charts are designed with getting the taxes sooner than later, this may an issue.
 
That is the giant "if".  Does the SPIA meet the RMD requirement.  It does for non-beneficary IRAs.
 
Your client can buy anything that he wants and can afford.
 
If only it was that easy.  The tax code has to allow it and the carrier must be willing to issue the product.   As a general rule, insurance companies don't like beneficiary IRA's.  Why is this?  If someone has a life expectancy of 20 years, it is guaranteed that the account will be fully liquidated within 20 years.  Does anyone have any specific knowledge of VA's that will or will not allow the account to be titled as a beneficiary IRA?
 
He can as long as it kicks off enough to satisfy the RMD.  Better make sure the IRS and the insurance company are using the same tables, declining years method.

Your post doesn't really make sense.  Annuities for the original owner are allowed simply because the IRS says that they are allowed.  With the IRS tables, the amount of the distribution is based upon the total from the end of the previous year.  With annuities, the amount is simply based upon age and sex at issue.


 

If the original account owner was 70.5+, make sure he takes their RMD first (which will be higher than his own "stretched" RMD).
 
That's an excellent point.
 
My answer:
 
I believe that a SPIA can't be used.  A SPIA does not meet the requirements for the required minimum distribution and I can't find anywhere that shows that there is an exception.   It can't meet the RMD because the SPIA will pay out for as long as the person is alive, but the payments for a beneficiary IRA must be 100% completed by their life expectancy.  
 
I'd really like to be wrong about this one.
 

Aug 15, 2008 8:42 pm

I've always been told that any annuitized IRA would meet the RMD requirements.  I tried looking for a reference but couldn't find it.

 
My thoughts are that if there isn't a definable asset to value each and every year (because it's only an income stream) that the income would indeed fulfill the RMD requirements.
 
This is what I've been told, but I'll need to find a reference to it to back it up.
Aug 15, 2008 9:22 pm

Skippy, you are correct for an IRA.  In fact, your link backs you up on that.    However, a beneficiary IRA and an IRA are not the same thing.   The RMDs are not calculated in the same manner.  With an IRA, the life expectancy gets recalculated every year.  With a beneficiary IRA, the life expectancy never changes.  Therefore, if the original life expectancy is 16 years, the account must be completely depleted in 16 years.  This can't happen in a life payment SPIA. 

Aug 16, 2008 1:33 am
anonymous:

Skippy, you are correct for an IRA.  In fact, your link backs you up on that.    However, a beneficiary IRA and an IRA are not the same thing.   The RMDs are not calculated in the same manner.  With an IRA, the life expectancy gets recalculated every year.  With a beneficiary IRA, the life expectancy never changes.  Therefore, if the original life expectancy is 16 years, the account must be completely depleted in 16 years.  This can't happen in a life payment SPIA. 

That would defeat the purpose of a Stretch IRA, wouldn't it?
 
How else could an IRA be stretched on through multiple generations?
 
(Again, I haven't looked up anything, but just another reference to think about.)
Aug 16, 2008 6:21 am

Skippy, there is no such animal as a "stretch IRA".  It is a concept.   It does not defeat the concept of a stretch IRA.  An IRA can't be stretched indefinitely 

 
Let's say that your dad has an IRA and then he dies with you as the beneficiary.   By rolling this money over to a beneficiary IRA for you, you can then use your life expectancy instead of his for the RMD's thus stretching the payments.  If your life expectancy is 40 years, you will have to take 1/40th of the value as an RMD the first year.  In year 10, you'll have to take 1/30th of the value.  In year 20, 1/20th of the value.  Let's say that you die at this point and your son is the beneficiary.  He will not be able to use his life expectancy. (on the other hand if your beneficiary is 80 years old, he would still continue to use your life expectancy)  In year 21, he'll have to take 1/19th of the value.  In year 30, 1/10th of the value and finally in year 40 1/1th of the value depleting the account.
 
In short, an IRA can be stretched over the life expectancy of the non-spouse beneficiary, but no further.
Aug 16, 2008 10:09 am

Anonymous,

 
You're right.  As you can tell, I hadn't studied this aspect very deeply.
 
From the LEAP System's Library on "Stretch IRA's":

If the IRA owner has named someone other than his or her spouse as beneficiary of the IRA, the beneficiary may have a few options upon the death of the owner (see Inheriting an IRA or Employer-Sponsored Retirement Plan). One of these options will generally be to take annual distributions over a fixed period of time based on the beneficiary's life expectancy at the time of the IRA owner's death (in some cases the period of time can be based on the remaining life expectancy of the IRA owner, if this results in a longer period of time). Young beneficiaries with long life expectancies can spread distributions over a substantial period of time, keeping the maximum amount allowable in the tax-deferred IRA.
If you die with funds in an IRA, the required minimum distribution rules allow your beneficiary to take distributions from the inherited IRA over a period of time based on the beneficiary's life expectancy.
 

Some IRA illustrations may stretch the underlying assumptions used
 
There's no question that it is possible to "stretch" IRA funds over a considerable period of time, sometimes over generations. This long period of time combined with the tax-deferred compounded growth of an IRA can lend itself to some incredibly powerful sales presentations. However, the thought of turning a $200,000 IRA into a $2,000,000 inheritance for your grandchildren can be so appealing that you might not take the time to understand the underlying assumptions that are being used. These assumptions may be completely valid, but may not always apply to your situation. In a few cases, though, the assumptions themselves may be a stretch. Some things to consider:
 
First, almost all stretch illustrations assume that you will not make withdrawals from the IRA until age 70½, and that after 70½ you will only withdraw the minimum required amount each year. This isn't really misleading because these IRAs are intended for individuals who don't need to tap their IRAs for retirement, and want to keep the maximum amount in the tax-deferred IRA environment. If you will need to withdraw more than the minimum amounts from your IRA or need to start withdrawals before age 70½, just understand that the more you withdraw from the IRA and the earlier you withdraw it, the greater the impact on the overall growth.
 
Second, to demonstrate the ability of IRA funds to pass from generation to generation, illustrations often assume that the original beneficiaries die before they reach their full life expectancy. This doesn't really impact the total period of time over which funds are distributed (since successor beneficiaries "step into the shoes" of the original beneficiaries), but it does tend to show the funds ultimately in the hands of the successor beneficiaries, which may or may not happen. Successor beneficiaries only get the IRA funds if the original beneficiaries die before they reach their full life expectancy.
 
Thanks!  I learned something about beneficiary distributions!  (Besides, stretch IRA's are simply "dollar for dollar, fully taxable Life Insurance policies!")
Aug 17, 2008 5:52 pm

I like your last line.  What's the point of posting and reading here if we can't learn something. 


I really hope that someone can find some sort of documentation showing that I'm either right or wrong with the SPIAs.
Aug 19, 2008 6:37 am
It turns out that a SPIA does satisfy the RMD requirements for non-spouse beneficiary.  My guess was wrong.