Inherited IRA wants to buy an immediate annuity

While you would not contribute or transfer funds into an inherited IRA, if you already have one whose custodian will be willing to purchase an annuity with existing funds or by selling off assets, sure, you can do it.

Otherwise if you find an IRA custodian willing to purchase an annuity for you, and arrange for a Direct Transfer -- custodian to custodian -- that will work too.

But please, before you do, speak with a financial advisor who does not sell anuities to advise you on the wisdom of purchasing an annuity in your IRA.

I'm not a financial advisor but think it's not a good financial move.

There are two issues here:

The rules regarding an inherited IRA are specific and unforgiving. The original IRA had to have the beneficiary listed as such on the account. IRAs cannot pass, unbroken, via will. The new account is not "JoeTaxpayer, IRA" but "JoeTaxpayer's deceased Dad, IRA, JoeTaxpayer, beneficiary". If these rules are not properly followed, all assets must be withdrawn within 5 years.

Second, an inherited IRA (if not by a spouse, for whom my lecture above doesn't apply, spouses take it as their own, if they are listed on the account as bene) goes into RMD mode the year after inheritance. Since an immediate annuity offers a fixed annual distribution, but the RMD will rise as the divisor goes down, what will you do when the RMD is higher than the amount available?

Joe

This is what I am worried about.

I don't believe you should be. Look at the prospectus for the annuity.

We did exactly what you ask about for my mother.

First, we did a rollover, not even a direct transfer. No problem with that.

Second, the Pacific Life prospectus explicitly states that the RMD is an exception to the usual limits to the amount that can withdrawn annually.

I doubt that that is altruism on the part of Pac Life. I'm sure it is required by federal law. But I cannot quote chapter and verse.

I started to suspect this might be the case, but was unable to find any IRS doc to confirm. I'd still be real careful how the funds were transfered and titled. Joe

Well, he is attracted to an immediate annuity because he knows it runs till he dies, he wont run out of the money. When you have a sum of money and need to tap the principal (and dont know how much to take) it is scary. The immediate annuity in his case will give him 7.5% which is more than he could get from bonds and he can't stomach the stock market. Also, it keeps him from invading the principal (always too easy to do).

The IRA was inherited from deceased mother who inherited it from her husband. It is an inherited IRA.

Where are the distribution tables for an inherited IRA.?

Right now the annuity would pay 7.42% a year and thats that (typical of immediate annuities, they just pay so much a month till you die, some have caveats about inflation and a lump sum for your heirs, this one does not do any of that). Ive never heard of ones that follow the RMD rules specifically.

He hasnt done anything yet.

I'm wondering if the 7.42% would meet the minimum withdrawal rules.

David wrote: ...

No, if a RMD is required, the life expectancy tables start at 17.0 years at age 70 and go down from there. 7.42% --> 13.48 yr expectancy so after age 75 it wouldn't be sufficient.

Here follows a short portion of the table for single beneficiaries from Pub 590:

70 17.0 71 16.3 72 15.5 73 14.8 74 14.1 75 13.4 76 12.7 ...

You understand that an inherited IRA's RMD does not get recalculated by going to this chart each year, right? That if Age 70/ 17yr divisor is the first year, age 71 is 16 yrs, age 72, 15 yrs, etc. This rule is for beneficiaries and differs from the standard RMD you can't outlive (unless, of course you make it to 111).

To the OP/David, see pub 590.

Isn't RMD based on the _current_ value of the IRA? The payments are

7.42% of the _initial_ balance, which is a much higher percentage of the value of a life-only annuity for someone age 75.

Seth

If an immediate annuity is qualified and based on a payout scheme that is not intended to exceed your life expectancy the annual payout satisfies the RMD requirement even if it is less than would otherwise be required.

Regulation section 1.401 (a) (9)-6

RMDs are not technically "based on the _current_ value of the IRA", but I think I knew what you meant. They are based on the value as of the end of year prior to the tax year in question. IOW, a 2008 return filed in 2009 will be based on the value as of 12/31/2007.

This reg answers my concern about calculating RMDs. This is one for the FAQ. An important, but little known reg. Nicely done, kastnna. Joe

So I take it that an immediate annuity paying 7.42% on some 200k of inherited IRA , and it has zero value at death will satisfy the RMD?

IN otherwords, he CAN buy one with his inherited IRA and not have RMD problems?

That is my understanding. It doesn't matter what the numbers actually are so long as payments are not planned to exceed your projected life expectancy.

That seems to be the case. For the record, I'm not saying it is or isn't the prudent financial decision, just that it's possible.