Podcast Episode - Suze School: Annuities in Retirement Accounts - I Don't Think So!

IRA, Retirement

August 27, 2023

Listen to Podcast Episode:

As a follow-up to a question on last Sunday’s special Ask KT & Suze Anything, Suze does a deep dive explaining how to handle an annuity inside an IRA rollover and how that impacts your RMD.

Podcast Transcript:


Intro / Outro: OK, Suze, are you ready for today's podcast? Oh,


Intro / Outro: you bet I am cause I'm unstoppable


Intro / Outro: Music In.


Suze: August 27th, 2023. Welcome everybody to the Women and Money podcast as well as everybody. And I do mean everybody smart enough to listen today is Suze School. And for those of you who listened to last Sunday's podcast, which was a doozy. All right, you know that I said I would address this one question


Suze: that came in that KT happened to choose to ask me on Ask KT and Suze Anything. And I said, KT that is one of the more complicated questions that you could possibly ask, but it needs to be answered, but it needs to be answered in great detail. So that is what we are doing right now.


Suze: Last week Joie wrote in with the question that said I have an annuity in my ira rollover that I am now ready to annuitize. Now everybody listen to me, take out your Suze notebooks. You're gonna need it for this one. When you hear me say a word such as annuity or annuitize and you don't know what those words mean, just Google them


Suze: and then write down the definition because that way you'll get used to looking up things that you don't know what they mean.


Suze: So I have an annuity in my IRA rollover that I am now getting ready to annuitize. I'm turning 73 next year, just like you, Suze. So my question is, will those annuitized payments count towards my RMDs? And remember RMDs stand for required minimum distributions, I will get $500 a month from this annuity.


Suze: I put $100,000 in my IRA in this annuity and I have another $100,000 in that IRA invested in stocks.


Suze: Now, that was her question. Now, as you may all know RMDs or required minimum distributions go like this. Once you reach the age of 73 you've got to start taking money out of pre taxed retirement accounts ROTH IRAs, this doesn't apply to them. So, out of pre taxed retirement accounts and required minimum distributions that you take out.


Suze: The amount is according to a specific formula based on your life expectancy.


Suze: So as I said, I was going to address this today. So here we go, write this down. Joey said she had $100,000 in investments in an IRA. Put that on one line.


Suze: She has $100,000 in an annuity, which is a contract with an insurance company giving her $6000 a year in income for the rest of her life


Suze: now because it's giving her that obviously she has to pay taxes on it. But that is besides the point.


Suze: So Joie and everybody, if you're in this situation where you happen to have an annuity that you are going to annuitize, which means you are going to convert it from just simply earning interest to paying you a monthly income for the rest of your life. If you're in this situation


Suze: and it's still going to be there when you are 73 years of age or older. When you have to start taking required minimum distributions, then you need to hear what I'm about to tell you.


Suze: So Joie, the very first thing you need to do is you first need to go to the IRS uniform Lifetime table, just Google that and it will come up IRS uniform Lifetime table and it's there that you will find out what your life expectancy is at the age of 73.


Suze: Your life expectancy is how much longer


Suze: the IRS on this table expects you to live. Ok, whether they're right or they're wrong, doesn't matter. That's what they dictate. Now, since I happen to be the same age as you as you. So politely called out in your email.


Suze: When I looked it up for me, it was at 73. My life expectancy was 26.5 years. That is how long we are expected to live.


Suze: So Joey write down 26.5 years and all of you should maybe pretend that you're Joie for this Suze school.


Suze: Now, your next step normally and notice that I said normally and I'll explain why I said that in a bit would be this. You need to look at what the end of this year's in 2023 What the end of this year's balances are going to be


Suze: on all the money and investments in the IRA that is not in the annuity.


Suze: So you said currently you had $100,000 in investments in an IRA. Let's just assume that at the end of this year, it's still exactly at $100,000. Why do I want you to look at this year's ending balance? It's because we aren't required to take our M DS till next year or 2024.


Suze: So the IRS says you have to figure out what your RMDs are going to be based on the ending balance for 2023.


Suze: Now, what you would do is you would divide that $100,000 that will be there, let's say at the end of this year by 26.5, which is what your life expectancy is in this example, at the age of 73. And you would get approximately $3774 and maybe a little bit of change

Suze: and that would be your RMD on that $100,000. However, the $100,000 in the annuity that was giving you $6000 a year because you annuitized it.
Suze: How do you figure out the RMDs that?
Suze: And the way the IRS used to do it
Suze: is they just figured out that, that $6000 was your RMD. Just that simple. So in this case, you would have paid $3774 on $100,000. That was in stocks, the ending balance of this year and $6000 because that's what the annuity paid you.
Suze: So in total, you would have paid $9774 in RMDs that if you think about it,

Suze: if you had all $200,000 in your IRA, not in an annuity.
Suze: So I wouldn't suggest having annuities with it, an IRA if you're going to annuit it. But anyway,
Suze: if you had $200,000 in your IRA, not in an annuity,
Suze: then if you looked at that, you would simply divide the $200,000 by 26.5. Again, your life expectancy and your RMDs would be 7547 or $48 right around there.
Suze: That happens to be 2000 $226 less.
Suze: Then if you had $100,000 in an annuity
Suze: giving you $6000 a year of income and $100,000 that had been invested in stocks or bonds or in a money market fund or anything like that.
Suze: So that's not very fair if you think about it, that made absolutely no sense. So, the Secure Act 2.0
Suze: was supposedly supposed to change this? And the new rules simply went like this where you add together the ending yearly balance of the money that was invested in your ira. And you add that to the ending valuation of the annuity,
Suze: which just let's say in this case, if you added the two of them together, it would be $200,000. Let's just say that's true.
Suze: And if you divided $200,000 by your life expectancy, which we already just did your life expectancy of 26.5 years, all you would have to withdraw is $7547. Correct. We just did that.
Suze: But now Secure 2.0 write this down says that you can subtract your annuity payments in this case, which are $6000 from the $7547 that we figured out you owe in RM DS. If all of it was worth $200,000
Suze: once you subtract the $6000 from the $7547 that would make it so that all that you had to take out of your retirement account, besides your annuity payments would be an additional $1547.
Suze: And that is all you would have to pay in RMDs. So why is it that I keep saying normally? And I keep saying supposedly
Suze: and that is because it is so very, very sad that in the same way, the rules for inherited Ira S that we talked about are so absolutely confusing
Suze: and that they still haven't clarified them. They haven't clarified this rule of RMDs and annuities as well. For no one knows exactly what the right way to do an end of the year evaluation on your annuity would happen to be
Suze: like, it's easy to look at the money that you have invested in stocks or whatever it may be. And you'll see at the end of the year, this is what it was worth. Your ending balance is right there on your statement.
Suze: But for an annuity, especially one that has been annuitized where money is coming out, even though they are supposed to tell you what your ending balance in that annuity is after you've taken out your annuity payments, half the insurance companies don't do it. They're not exactly sure how to figure it out.
Suze: And there is so much confusion about this one thing. It's not even funny.
Suze: So until Secure Act 2.0 issues guidelines on how to properly evaluate the ending balance of an annuitized annuity. No one knows for sure. And the only thing we can do is hope that they rule on this sooner than later.
Suze: Now, you know why I waited to answer this question in Suze School? So what does this mean for most of you? How many times have I said to you

Suze: within a retirement account? It makes absolutely no sense in most cases to have an annuity, especially if you are going to annuitize it,

Suze: I have said to you, it makes absolutely no sense to have a variable annuity within your retirement account.


Suze: And so many of you think, oh, that's where I want to own the annuity. No, you don't. You are far better off if you are going to own an annuity, sometimes they make sense and sometimes they do not. I've done many podcasts on this topic, but if you are going to own an annuity that you are going to annuitize to give you guaranteed monthly income,


Suze: I don't necessarily have a problem with that at these high interest rates.


Suze: However, do not do it within a retirement account. Unless they really have made the laws clear, you would be far better off to do it outside of a retirement account with other money that you may happen to have. Just that simple everybody so I could go on and on. But I'm sure


Suze: that your head is a spin'? Ok, I promise you I won't give you another Suze School like I did last week or this week. Even though these are things that are so important for you to know, you need to know it. It would be so great if you kept a little log of what each one of these Suze Schools is about when it pertains to your situation or it may pertain


Suze: and if you're listening to this and you're younger and you think this doesn't apply to you, it most certainly does. Didn't you learn last week


Suze: when your parents or your grandparents or whoever it was, didn't actually know the correct way to designate beneficiaries or how it really worked. How many of you were actually cut out of being able to easily inherit retirement money or you were cut out altogether of getting it at all.


Suze: But if you had known what I taught you last week, maybe you could go to your parents or grandparents and say, can we just check this out? So I can make sure that everything happens to be in order. And if they happen to say to you what you want me to die, so you can get my money


Suze: and because sometimes they'll say that or they'll think that you just want to know because you want to get their money, just say grow up, right? You have to be a financial adult. I want to know and if you want to know why I know, listen to that podcast that Suze Orman just did on what could go wrong when you don't know how to designate beneficiaries correctly.


Suze: So take down the date that was August 20th, tell them to listen to the August 20th podcast and then make a date to talk to them and go over everything.


Suze: Also, you may have parents or grandparents that are buying immediate annuities within their retirement accounts. You might want to have them listen to this podcast so they can understand the ramifications of what they are doing


Suze: in regards to required minimum distributions. So, until next Thursday with another Ask KT and Suze, Anything. And I'm so happy for KT that Spain won. But there's only one thing that I really want you to say every single day and it is as follows today, wherever I go, I will create a more joyful,


Suze: peaceful and loving world


Suze: and I promise you if you do that, you will be unstoppable.


Intro / Outro: Music Out.

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