Life and Death Planning for Retirement Benefits

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Chapter 10: RMD Rules for “Annuitized” Plans 439
Although it does not specifically address this point, it appears that Reg. 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 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 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. 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. A-7(c).
10.3.02 Exception for “Qualified Longevity Annuities”
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
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. A-3, A-17.
10.3.03 Definition of a QLAC
Reg. 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 85th
anniversary of the participant’s birth. A-17(a)(2).