Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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Although it does not specifically address this point, it appears that Reg. § 1.408-8 , A-9 (allowing the owner of multiple IRAs to take the aggregate RMDs for all IRAs he holds as “participant” from any one or more of such IRAs; see ¶ 1.3.04 ) applies only to IRAs that are still DC plans, not to any IRA (or portion of an IRA) that has been annuitized. Clyde Example: Clyde, age 70, has a $2 million IRA. He uses $500,000 of the balance to purchase a 10-year term-certain annuity that pays him $60,000 per year. Now his IRA holds $1.5 million of securities and a $60,000-per-year 10-year annuity contract. He could have purchased an annuity that would have lasted for up to 27.4 years; see ¶ 10.2.04 (D). If he had elected a longer annuity term payout, his annual annuity payment under the contract would have been much smaller. Can Clyde treat the “excess” payments (i.e., the part of the annuity payment in excess of the smallest annuity payment he could have elected) as satisfying the RMD requirement for the remaining IRA balance, under the aggregation rule of Reg. § 1.408-8 , A-9? The answer unfortunately for Clyde appears to be “no.” Once the participant has chosen an annuity contract with particular terms, those terms create the RMD under that annuity contract. Thus, the entire $60,000 per year payment to Clyde from his annuity contract is the RMD for the annuity, and there is no “excess distribution” to be applied to the DC portion of the IRA (even though he could have chosen a different annuity with smaller payments). Similarly, it appears that no part of the annuity payment can be rolled over, even though he could have purchased a longer- term annuity with smaller payments. Reg. § 1.402(c)-2 , A-7(c). Retirees may worry about running out of money in their later years. One solution is to hoard money (spend less) today because you might live beyond the average life expectancy. The problem with that solution is that it causes everyone to live below his possible standard of living even though not everyone will live long enough to have the problem. The insurance industry’s solution: For a lump sum payment that is relatively small while you are only in your 50s or 60s, buy an annuity now that doesn’t start paying out until you reach your mid 80s. Such a “longevity annuity” enables you to spend more during your “young old years” without worrying that you will run out of money if you live too long. But that type of annuity could not, prior to July 2014, be purchased inside a traditional IRA (or any defined contribution/individual account qualified plan, such as a 401(k) plan) because of the rule that payments under a plan-owned annuity contract must begin by the required beginning date (RBD) (generally approximately age 70½); see ¶ 10.2.07 . The IRS has ridden to the rescue. Under proposed regulations issued in 2012, as modified and finalized effective July 2, 2014, up to 25 percent of the participant’s account balance (but not more than $125,000) can be invested in a “qualified longevity annuity contract” (QLAC) without violating the minimum distribution rules. See Regs. § 1.401(a)(9)-5 , A-3, § 1.401(a)(9)-6 , A-17. Exception for “Qualified Longevity Annuities”

Definition of a QLAC

Reg. § 1.401(a)(9)-6 , A-17, defines the qualified longevity annuity contract. A QLAC:

 Must begin its payments no later than the first day of the month next following the 85 th anniversary of the participant’s birth. A-17(a)(2).