How Can Annuities Help Adjust Your RMDs?

A well developed annuity strategy designed to address RMDs could be a winning strategy for you!
A well developed annuity strategy designed to address RMDs could be a winning strategy for you!. Photo By: tumpikuja / E+ / Getty Images

Why take RMDs?

Required Minimum Distributions(aka: RMDs) are typical examples of the government tapping you on the shoulder to “remind” you that you need to start paying taxes. Specifically, on that IRA money you have been deferring taxes on. Whether you need the money from your Traditional IRA or not, you have to start taking distributions when you hit the ripe old/young age of 70 ½. The amount of money you take out annually is based on your life expectancy, and that amount increases as you get older because your life expectancy is shorter.

  In true government form, if you choose not to take your RMDs, there is a predatory penalty for this defiance.

Some things in life are inevitable!

So there are 3 things that we know will happen…….death, taxes, and RMDs. I guess you could group taxes and RMDs together, but you get my point. They all are going to happen, so it’s probably prudent to have a plan to address each of them. Let’s take a look at your Required Minimum Distributions (RMDs), and how a strategy utilizing a couple of annuity types can help with this mandatory eventuallity.

Income from a Single Premium Immediate Annuity (SPIA) in an IRA covers some/all RMDs.

SPIAs are used for lifetime income that starts immediately, and can be traced back to first being used in the Roman times as a pension reward for Roman soldiers and their families. SPIAs are the most simplistic, pro-customer annuity on the planet in my opinion, and provide the highest contractual payout as immediate income when compared to every other annuity type.

SPIAs have no annual fees, no moving parts, and are commodity products that should be scrutinized for the best contractual guarantees to fit your specific situation.

If you purchase a SPIA within your Traditional IRA, that income stream derived from the SPIA fully covers your Required Minimum Distribution (RMDs) for that dollar amount in the annuity.

For example, if you have a $750,000 IRA, and place $400,000 into a SPIA …..that income stream from the SPIA covers the RMDs for the $400,000 in the annuity. You will still have to take RMDs from the other $350,000 in non-annuity assets. If you put all $750,000 in the SPIA, then the income stream would cover the entire RMD obligation.

Qualified Longevity Annuity Contracts (QLACs) offer income and lessen RMD base calculations.

QLACs were first introduced in July of 2014 after approval from the Department of Labor and the IRS. QLACs allow you to place into the policy the lesser of 25% of your total Traditional IRA assets, or $125,000. QLACs address future income needs, so you can defer beyond standard RMD dates to age 71 or as far out as age 85 without penalty. It’s your decision how long you want to defer. In addition, even though it’s your IRA, you can add a spouse to receive a joint lifetime income stream with you from the QLAC. Still, the best part of a QLAC in my opinion is that you can lower the taxes on your RMDs.

What do I mean by, "You can lower the taxes on your RMDs?"

For example: if you have a total amount of $500,000 in your Traditional IRA, QLAC rules would allow you to place $125,000 in a QLAC policy.

When you go to calculate your RMDs, the $125,000 QLAC amount is not included. So your RMDs will be based on $375,000 instead of $500,000. By the way, lower taxes are a good thing in my book…..especially when it’s legal.

Develop an Annuity Strategy when considering RMDs from your IRA.

So the next time you take a look at your IRA, and you have to take RMDs, it might be time to consider an annuity strategy to provide a guaranteed income stream while addressing your Required Minimum Distributions.  It’s a contractual solution that might be the right fit for your specific situation.