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.
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.
Benz: Right. And the IRS wants to get a piece of your assets.
Choate: Right. They've got a duty to make sure you get that money out of the plan at a reasonable time. So the annuity rules briefly say how long your annuity can last. It's your life or a joint life with your spouse or, with limits, a joint life with another beneficiary. And say that the payments, theoretically, cannot be increasing. So you can't say, "A dollar a month for me during my life and then $1,000 a month for my grandchild." The payments have to be level. But then, there's so many exceptions the IRS has built into this, it makes it very generous of what kind of annuity you can buy. Really any kind of income annuity that someone realistically would want for income needs, you can buy.
So, you can have a cost of living increase. You can have a fixed increase of at least 5% per year if you want. You can have a fixed term. Some clients are worried about, "If I have an annuity and I die on the way home from the insurance company office, they get all the money. I've lost all my money." So they want a minimum term. Well, you can have a guaranteed minimum term up to the participants' age 97, that's plenty. So, that's the good news. You can buy the kind of annuity you'd want.
Now, what's not known to many advisors would be what happens after that. You buy the annuity. Now, the payment under that annuity contract becomes your required minimum distribution for that contract. So that every payment I receive under that annuity is considered a minimum required distribution, which means I can't roll it over.
Benz: I see.
Choate: OK? So there's a trade-off.
Choate: The other thing is that the annuity contract and the rest of the IRA, if there's other assets, are considered two different plans. And the payments you're getting under that annuity contract cannot count towards your minimum distribution for the rest of the account. So that comes as an ugly surprise for some planning techniques. And that's one of the things I'll be covering in my seminar today at the Retirement Income Summit.
Benz: So it's a tricky landscape. You've got a chapter, a section in your book on how to deal with annuities in IRAs.
Choate: Exactly, chapter 10 of my book, "Life and Death Planning for Retirement Benefits," explains these annuity rules.
Benz: Excellent, Natalie, it sounds like a topic that people should delve into before putting one of these annuities into their IRAs.
Choate: Definitely. Yes.
Benz: OK. Thanks, Natalie. Thanks for being here.
Choate: OK. Thank you, Christine. My pleasure.
Benz: Thanks for watching. I'm Christine Benz.