Quote:
Originally Posted by Caymus
I am considering the pros/cons of a qualified fixed immediate annuity when (or if  ) I reach RMD age. This article from 2017 indicates that it covers the RMD for that portion of the IRA. As I age, I will want more $ in guaranteed income and less in equities. |
Ok, let's do this!
Single IRA, no other qualified accounts, lets just use round numbers, and decent size ones for effects:
$1,000,000 IRA . .
Spend $600,000 on a fixed immediate annuity, which is excluded from the RMD. .
And then you calculate and distribute the RMD on the remaining $400,000, correct?
The $400,000 can last your lifetime if you don't have any large medical bills, and you aren't frivolous spending your savings during retirement. . but lets say you use the non annuity all up by the time of your death, medical, etc.
Scenario A: you have a $600,000 +/- value remaining in the IRA. . uncertain as to the exact amount based upon annuity details, but its just for discussion. The $600,000 goes to your W, if she is alive, and it continues for your W, tax free.
Scenario B: $600,000 in the IRA and your W has pre-deceased you. . the $600,000 goes to your beneficiaries, say three children, just as an example. They then can't use the annuity as a shelter, and must take the distributions over X amount of time and are paying an increased tax bracket on that income.
Scenario C:
You don't put the $600,000 in the annuity, and money comes out via RMD. Assuming that you don't need the money to live on, as you wouldn't have had the same amount with the annuity, then you pay your taxes and put the money back into investments for zero inheritance tax when distributed to your three children, but depending upon the circumstances, you might pay up to some ungawdly amount for medical insurance, through means testing. not sure of the amount, all depends on a host of items
Scenario D:
You put all the money into the qualified annuity and now only take out the RMD amount to stay below the large increase in medical costs resulting from means testing.. . So you pay the least amount of taxes and the least amount for health insurance, and you keep the most wealth in the IRA (wealth maximization)
the downside is that the 1M gets distributed to your children and they pay taxes and potentially increased health insurance on their distribution at the increased incremental tax rate. . so they don't get tax minimization strategy
So scenario D is you live efficiently, but your beneficiaries may get a huge hit, and even more so if they are retired and on means tested health insurance.. . So the balance point is who and when and how much is the tax hit. The optimizer says to take out more earlier and reinvest it, and then there may be little / no income tax when its used as well as when passed to children with no state estate or inheritance tax and very high limit on federal estate tax. tax minimization strategy (example assumption). You can put it into a ROTH to avoid taxes, but you don't have to if you invest tax efficiently and don't use much of it unless needed for medical expenses.
I am not a tax professional, i am a finance professional who tries to look at the future investments, cash flows and tax impacts of money decisions, and tries to maximize wealth and cash flows through future decision making processes, regardless of what has happened in the past, that would be an accountant's job, dealing with the past.
comments / disagreements welcome