Annuity from IRA

According to Stan Brown <the_stan snipped-for-privacy@fastmail.fm:

No. From Pub 590B:

Annuity distributions from an insurance company.

Special rules apply if you receive distributions from your traditional IRA as an annuity purchased from an insurance company. See Regulations sections 1.401(a)(9)-6 and 54.4974-2. These regulations can be found in many libraries, and IRS offices, and online at IRS.gov.

Here is 1.401(a)(9)-6:

And here is 54.4974-2:

I think it says that the RMD for the annuity is the annuity payment, so long as the term of the annuity does not exceed your life expectancy in the Uniform Lifetime Table. But don't take my word for it.

By the way, the conventional wisdom is that unless you have a special tax angle, which is unlikely in an IRA, the fees mean an anuuity is usually worse than just selling assets as needed and taking distributions. Without going into personal stuff, can you tell us what the plan is here?

[big snip]

Sorry to be so slow in responding -- I've been going through some stuff in real life that's cut severely into my computer time. I haven't had time yet to chase down the references you gave to the regulations. The quote from 590-B is depressing and I'll certainly take it up with my agent.

A Single Payment Immediate Annuity (SPIA) is offered by many insurance companies; ImmediateAnnuities.com will give you free instant quotes from about a dozen. Unlike most annuity products, a SPIA is simple: You make one premium payment to the insurance company, and they pay you a fixed dollar amount every year for your life.(*) The payout should be more than you expect to earn in your investments -- for instance Thrivent's is a bit over 10% of the annuity premium. The percentage is higher the older you are when you buy. (That's the percentage if I receive money at the end of each year; it's less if I receive money at the start of each policy year, since over my lifetime I'll receive one payment less.)

How can the company do that and stay in business? That

10%+ includes not only return on my premium, but also my share of return on premiums from all the people who die early. So the 10%+/year for life is what the underwriters and actuaries think they'll be able to pay out to the whole group of people my age who buy approximately now, Some of them will die early without collecting much, and some of them will live longer and collect more of their share of the pot.

Jane Bryant Quinn gives a plain-language description of SPIAs and other types of annuity products in /How to Make your Money Last/. She recommends SPIAs for certain categories of people, though not from any particular company, and recommends against most other types of annuities for anyone.

Obviously you want to pick a really sound insurance company.

I don't know about fees; they weren't in the quote I got. Some money from the pot must be used to fund operations, but the 10%+ return is the net to me, not gross before any fees or expenses. And it's a fixed percentage of my initial premium, not a percentage of my declining balance.

Inflation is a concern here: there's no COLA as with Social Security. And there's no provision for any lump- sum withdrawal or for payment of a death benefit to anyone. Because of inflation, I think it would be imprudent to sink all or most of my funds into such an investment. But inflation protection is what stock funds are for. I'll be paying for this out of bond funds (and most bonds are also not indexed for inflation), not stock funds.

(*) You can also buy a SPIA that pays the fixed annual amount to you for life, or to you or your beneficiary for a fixed number of years, whichever period is longer. Naturally that fixed amount is less than you get if payments are to you alone.

According to Stan Brown <the_stan snipped-for-privacy@fastmail.fm:

Ah, a real annuity that pays out for life rather than an N year fixed period one. You're using it as insurance which makes sense.

I have a lot of relatives who have lived into their 90s so maybe I should take a look.

John has it right.

The issue with an immediate annuity, where the company pays you a set annual income for life, is that the level payments aren't compatible with the standard table used to compute what percentage of your IRA you must withdraw each year. Also, it doesn't have a clearly defined cash value, since it's a promise by the insurance company to pay you an amount for life. So the IRS -- or the Treasury Secretary, or Congress -- decided that the amount paid out each year by an immediate annuity would count as that year's RMD on that annuity alone. Thus, you would separately compute the RMD on any non-annuity IRAs(*) and withdraw that in any portion(s) from those non-annuity IRAs to add up to that RMD.

(*)Some forms of annuity IRAs can be lumped together with other IRAs for computing an RMD, but I didn't pursue that since an immediate annuity doesn't qualify.

I tried to read and understand the citations on page of Pub 590-B, but MEGO (my eyes glazed over). I then went for some usually reliable sources:

(1)

"Question: ... I recently transferred $100,000 from my $300,000 traditional IRA to buy an immediate annuity. Yesterday, I received my first payment from the insurance company. How do I calculate my RMD since I'll be RMD age soon? Do I combine the $100,000 I transferred to the annuity with my $200,000 IRA or is the annuity separate from the money remaining in my Traditional IRA?

"The IRS considers your IRA immediate annuity to have satisfied its future RMDs, but only for the money inside of that immediate annuity. In other words, you don't have to include the $100,000 you annuitized in your RMD calculations, but you still have to take RMDs on the remaining $200,000 in your Traditional IRA."

(2) And the same story, but briefer, from

"Say you have $300,000 in an IRA and use $100,000 to buy an immediate annuity. The $100,000 is turned into a stream of payments and is excluded from the RMD calculation. You still would have to figure the RMD for the remaining $200,000. But what if the annuity payments are more than the required distribution on the value of the annuity using the IRS method? Sorry, but any excess can't count as part of the RMD on the nonannuity part of your IRA."

That last sentence backs up John's original "No."