Aggregating Individual Retirement Annuities and Accounts for RMDs

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in California is representative of a common question on required minimum distributions.

“Is it possible to aggregate required minimum distributions (RMDS) from an annuitized IRA with RMDs from an IRA that isn’t annuitized to determine the total RMD amount that must be taken?”

Highlights of the discussion

Until recently, if a retirement account held an annuitized contract in addition to non-annuitized assets the RMD amount for the annuitized portion of the account could not be considered when determining the RMD amount that should be taken from the non-annuitized assets. In some cases, this resulted in the account owner having to take out more than they would have needed to had no part of the account been annuitized.

Section 204(a) of SECURE Act 2.0 addressed the ability of participants in an employer-sponsored plan to aggregate the present value of the annuitized portion of their account as of the prior year end with the actual prior-year end balance of the non-annuitized assets in the account for determining how much more must be taken from the non-annuitized assets to satisfy the RMD requirements.

Further, Section 204(c) of SECURE Act 2.0 directed the Secretary of the Treasury to make conforming amendments to the RMD regulations that apply to IRAs, 403(b) plans, and governmental 457(b) plans. As a result, under § 1.401(a)(9)–5(a)(5)(iv) of the final RMD regulations, effective January 1, 2025, the new optional aggregation rules apply to IRAs when a person either has multiple IRAs where one is annuitized or when a portion of an IRA is annuitized. Note: Any IRA or 403(b) plan that an individual holds as the owner, or which an individual holds as a beneficiary of the same decedent, can be treated as one plan for purposes of determining an RMD.

For example, let’s assume the following facts:

• An IRA owner who is age 78 and subject to RMDs has two IRAs, one is annuitized and the other is not.

• The annuitized IRA distributes a $12,000 annuity payment this year.

• The prior year end “present value” of the annuitized IRA is $250,000.

• The actual prior year-end value of the IRA that is not annuitized is $100,000.

• The life expectancy factor under the Uniform Lifetime Table for a 78-year-old person is 22 years.

Using these facts, you would calculate the RMD that must be taken from the IRA that is not annuitized as follows:

1. Determine the prior-year-end balance: $100,000 + $250,000 = $350,000 (used to calculate the total RMD)

2. Next, divide this balance by the applicable life expectancy factor (i.e., 22): $350,000 ÷ 22 = $15,909.10 (total RMD that must be taken for year).

3. Because the annuitized IRA has already satisfied $12,000 of the RMD, you subtract that amount from the total RMD just calculated to determine the remaining amount that must be taken: $15,909.10 - $12,000 = $3,909.10 (amount required to take from the non-annuitized IRA).

Under the prior rules, the amount that would have had to have been taken from the non-annuitized IRA would have been $11,363.64 ($250,000 ÷ 22) rather than $3,909.10.

Conclusion

The new annuity/account aggregation rules for RMDs may help an IRA owner reduce the total annual RMD amount due. Please note that this is an optional method for calculating RMDs, it is not required. To make use of this option, it seems the annuity provider would have to provide IRA owners with the present value of the annuitized portion of their IRA(s). To date, it is unclear whether the insurance industry will automatically provide individuals with the prior year-end present value for their annuities once they reach RMD status, or whether the IRA holder will need to request this value.