Often, a financial professional will encounter a client with two IRA accounts that may have been created at different times with different funding products. Some might of opened one for precious metal investments for example through Lear Capital (you can learn more about them at finance.yahoo) Or a financial professional may recommend two separate IRA accounts with different financial purposes for different designated beneficiaries. In either event, the Treasury regulations treat certain IRA accounts differently when it comes to distributing Required Minimum Distributions (RMDs) from these accounts when the client reaches age 70½ .
Of course, these multiple IRA accounts can be funded with different financial products. These financial products usually fall into the following categories: Mutual fund IRAs, deferred annuity IRAs (i.e. fixed, indexed, variable), and single premium immediate annuity IRAs (SPIA IRAs). What are the RMD requirements and options for different product combinations when a client owns two IRA accounts from these product categories?
First, the type of IRA account must be categorized by whether it’s considered to be a “defined contribution” type of account or a “defined benefit” type of account. Mutual fund IRAs and deferred annuity IRAs are considered to be “defined contribution” type of accounts, where RMDs are governed by Treas. Regs. 1.401(a)(9)-5 which were issued in 2002. Immediate annuity IRAs are considered to be “defined benefit” type of accounts where RMDs are governed by Treas. Regs. 1.401(a)(9)-6 which were issued as distinctly separate regulations in 2004. Given the fact that two separate sets of Treasury regulations exist for RMDs, how can we determine RMD requirements when a client owns two IRAs from different product categories?
Possible Combinations of Mutual Fund IRAs, Deferred Annuity IRAs, and SPIA IRAs:
1) SPIA IRA #1 and SPIA IRA #2
• These SPIA IRAs are “defined benefit” accounts governed by the 2004 Treasury regulations. As such, each SPIA IRA must satisfy RMD requirements on its own.
• No aggregation of accounts is permitted. An actual RMD distribution will come from each SPIA IRA account.
• Permitted SPIA IRA settlement options which satisfy RMD rules include: Life only, Life and Guaranteed for no longer than the one-time age related RMD factor from the Uniform Lifetime Table, and Period Certain Only for no longer than the one-time age related factor from the Uniform Lifetime Table.
2) Mutual Fund IRA #1 and Mutual Fund IRA #2
• These mutual fund IRAs are “defined contribution” accounts governed by the 2002 Treasury regulations. As such, the client must use the 12/31 account values from the prior year to determine RMDs based on the age related factor from the Uniform Lifetime Table each year.
• Aggregation of the accounts is mandatory. However, the actual RMD may come from each account or may be taken from only one of the aggregated accounts if desired.
3) Deferred Annuity IRA #1 and Deferred Annuity IRA #2
• These deferred annuity IRAs (i.e. fixed, indexed, variable) are “defined contribution” accounts governed by the 2002 Treasury regulations. As such, the client must use the 12/31 account values from the prior year to determine RMDs based on the age related factor from the Uniform Lifetime Table each year.
• Aggregation of the accounts is mandatory. However, the actual RMD may come from each account or may be taken from only one of the aggregated accounts if desired.
4) Mutual Fund IRA #1 and Deferred Annuity IRA #2
• The mutual fund IRA and the deferred annuity IRA are “defined contribution” accounts governed by the 2002 Treasury regulations. As such, the client must use the 12/31 account values from the prior year to determine RMDs based on the age related factor from the Uniform Lifetime Table each year.
• Aggregation of the accounts is mandatory. However, the actual RMD may come from each account or may be taken from only one of the aggregated accounts if desired.
5) SPIA IRA #1 and Mutual Fund IRA #2
• The SPIA IRA is a “defined benefit” account governed by the 2004 Treasury regulations. The mutual fund IRA is a “defined contribution” account governed by the 2002 Treasury regulations. As such, each IRA must satisfy RMD requirements on its own.
• No aggregation of accounts is permitted. An actual RMD distribution will come from both the SPIA IRA and the mutual fund IRA.
• SPIA IRA settlement options include Life Only, Life and Guaranteed for no longer than the one-time age related RMD factor from the Uniform Lifetime Table, and Period Certain Only for no longer than the one-time age related factor from the Uniform Lifetime Table.
• The Mutual Fund IRA must use the 12/31 account value from the prior year to determine RMDs based on the age related factor from the Uniform Lifetime Table each year.
6) SPIA IRA #1 and Deferred Annuity IRA #2
• The SPIA IRA is a “defined benefit” account governed by the 2004 Treasury regulations. The deferred annuity IRA (i.e. fixed, indexed, variable) is a “defined contribution” account governed by the 2002 Treasury regulations. As such, each IRA must satisfy RMD requirements on its own.
• No aggregation of accounts is permitted. An actual RMD distribution will come from both the SPIA IRA and the deferred annuity IRA.
• SPIA IRA settlement options include Life Only, Life and Guaranteed for no longer than the one-time age related RMD factor from the Uniform Lifetime Table, and Period Certain Only for no longer than the one-time age related factor from the Uniform Lifetime Table.
• The Deferred Annuity IRA must use the 12/31 account value from the prior year to determine RMDs based on the age related factor from the Uniform Lifetime Table each year.
Multiple accounts can arise for many different planning situations. Here is a short list of reasons why multiple IRA accounts can be useful planning tools for IRA owners:
1) Marital-credit shelter type of estate planning may dictate one type of IRA for the benefit of a spouse alone and the other IRA for the benefit of the children alone or a trust for the benefit of the children alone.
2) Second marriage situations may require one type of IRA for the benefit of the second spouse and the other IRA for the benefit of the children from the first marriage.
3) One type of IRA may be more oriented to growth with underlying equity investments while the other IRA account may be more oriented to fixed type of accounts (i.e. bond mutual funds, U.S. government securities mutual funds or fixed annuities).
4) Special needs planning for certain disadvantaged children may require a special needs trust for that child to be the beneficiary of one IRA while the other IRA account may name the other adult children as designated beneficiaries.
5) One type of IRA account may have an individual named as designated beneficiary while the other IRA account may name a trust as the designated beneficiary. The trust can provide for the long term management of “inherited” post-death IRA distributions after the death of the IRA owner.
6) A classic approach is to have one IRA account invested for growth with the other IRA account providing a guaranteed income stream from a SPIA IRA.
Note: One important rule to keep in mind when planning for multiple IRA accounts is the “one rollover per year” rule that IRS announced in 2014. The IRS has interpreted IRC Section 408(d)(3)(B) to mean that an IRA owner can do only one 60 day IRA to IRA rollover per year. However, the IRS also reaffirmed that an unlimited number of “direct transfers” can be made when transferring funds directly from one IRA account to another IRA account.
