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By Christine Benz | 05-04-2010 04:43 PM

How Annuities Fit in an IRA

If you actually buy an annuity inside your IRA or Roth IRA, a whole new set of minimum distribution rules applies to that annuity, says noted retirement planner Natalie Choate.

Christine Benz: Hi. I'm Christine Benz. I'm here at the Investment News Retirement Income Summit, and I'm joined today by Natalie Choate. Natalie is the author of "Life and Death Planning for Retirement Benefits." She's also one of the foremost retirement planning experts in the country. So I'm really happy to have her here today. Natalie, thanks for being here.

Natalie Choate: My pleasure.

Benz: So, Natalie, a big buzz at this conference has been the role of annuities and retirement planning. A lot of the speakers have been talking about them being very important. But your field focuses on the intersection with retirement planning and tax planning. So let's talk about how annuities would fit within the framework of, say, an IRA.

Choate: Yes, the minimum distribution rules that financial advisors and retirees are so familiar with, that apply to normal IRAs--namely you take last year's account balance, you get a factor from the IRS table, you divide the factor into the balance, you've got your required distribution for the year.

Benz: Right.

Choate: And that's the system everybody uses. But, little known fact is that if you actually buy an annuity inside your IRA or Roth IRA, a whole new set of minimum distribution rules applies to that annuity.

Benz: So any type of annuity?

Choate: No, this would only be an immediate annuity, meaning one that's really going to pay you so many dollars per month.

Benz: The single premium, immediate annuity type.

Choate: Right. I am not talking about variable annuities that you're holding for investment. Eventually those may get "annuitized" and be subject to this rule, but for the moment I'm talking about the actual annuity that pays so many dollars per month. And you can immediately see the regular rules don't work for that kind of deal because there is no account balance, I'm just getting so many dollars per month.

Benz: Exactly. Right.

Choate: So the IRS came up with a new set of rules. And the goal, as always, with minimum distribution rules is to make sure that you're not extending the payout too long. So you can't buy 1,000-year annuity in your IRA because that would be extending the payments past your life and your beneficiary's life.

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