SPIA Settlement Options Can Provide Guaranteed Income

IRS issued Final Regulations in April 2002 on required minimum distributions (RMD) from IRA accounts which are Defined Contribution accounts such as mutual funds, deferred annuities, and bank CDs.  You simply determine the account value from December 31st of the prior year and divide that amount by the annual attained age factor from the Uniform Lifetime Table (Treasury Regs. 1.401(a)(9)-5)

 

In June 2004, IRS issued Final Regulations on RMDs from IRAs which are considered to be Defined Benefit accounts.  Included under these Defined Benefit accounts are Single Premium Immediate Annuity (SPIA) IRAs that provide guaranteed settlement options.  For SPIA IRA settlement options starting ON or AFTER the required beginning date of the participant (age 70 ½), Treasury Regs. 1.401(a)(9)-6 provide that RMDs must be paid in periodic payments at least annually for the participant’s life.  As an alternative, the SPIA IRA settlement option payments can be paid over a period certain that is not longer than the participant’s life expectancy factor from the Uniform Lifetime Table for RMDs.

 

Let’s take a look at some simple case examples of how these defined benefit IRA and defined contribution IRA regulations would work when a client wishes to plan for retirement income:

 

Case Example #1:

 

 

 

 

Assume a participant owns an IRA deferred annuity contract and reached the required beginning date for RMD (age 70 1/2).  The IRA owner desires a guaranteed income stream funded by an SPIA rather than a deferred annuity or mutual fund.  What SPIA IRA settlement options are available?

 

  •    •An annuity settlement option payable for life only.
  •    •A period certain settlement option payment of NOT more than 27 years (the Uniform Lifetime Table factor for attained age 70 is 27.4).
  •    •An annuity settlement option payable for life and guaranteed for a period certain of NOT more than 27 years.

 


Case Example #2: 

 

 

 

 

 

 

Assume a 77-year-old participant owns an IRA mutual fund account and has been receiving RMDs based on the Uniform Lifetime Table.  The 77-year-old now wishes to transfer the funds to an IRA funded by a guaranteed SPIA.  What SPIA IRA settlement options are available?

 

  •    •An annuity settlement option payable for life only.
  •    •A period certain settlement option payment of NOT more than 21 years (the Uniform Lifetime Table factor for attained age 77 is 21.2).
  •    •An annuity settlement option payable for life and guaranteed for a period certain of NOT more than 21 years.

 


Case Example #3:

 

 

 

 

 

Assume a 65-year-old participant owns an IRA deferred annuity contract and wanted to transfer the account to an IRA funded by a guaranteed SPIA.  Current age 65 is PRIOR to the required beginning date of 70 ½.  What SPIA IRA settlement options are available?

 

  •    •An annuity settlement option payable for life only.
  •    •A period certain settlement option payment of NOT more than 32 years (the Uniform Lifetime Table factor for age 70 (27.4 years) PLUS the excess of age 70 over the age at the annuity starting date (age 65) = 5 years.  Thus, 27.4 + 5 = 32.4).
  •    •An annuity settlement option payable for life and guaranteed for a period certain of NOT more than 32 years.

 


Case Example #4:

 

 

 

 

 

 

Assume a participant owns an IRA deferred annuity contract and reached the required beginning date for RMD (age 70 ½).  However, rather than selecting an annuitized settlement option, the IRA participant wishes to take annual withdrawals from the IRA deferred annuity to satisfy RMD requirements. 

 

  •    •Determine the December 31st account value of the IRA deferred annuity contract each year and divide by the attained age Uniform Lifetime Table factor: Age 70 is 27.4, Age 71 is 26.5, Age 72 is 25.6, Age 73 is 24.7, etc.
  •    •Keep in mind that you can always take out more than the RMD from a defined contribution IRA account such as a deferred annuity IRA or mutual fund IRA.          

 

Often, the retirement needs of an IRA owner will need to be matched to their financial circumstances which can change over time.  BSMG offers SPIA IRAs with guaranteed income and deferred annuity IRAs with income riders from many competitive carriers.   Contact your BSMG Annuity Advisor to discuss case design solutions that can fulfill the retirement needs of your clients.

 

Russell E. Towers  JD, CLU, ChFC
Vice President – Business & Estate Planning    
Brokers’ Service Marketing Group
russ@bsmg.net