Would converting my entire 403(b) into immediate annuities satisfy required minimum distributions?
I have not yet retired. I am considering purchasing an immediate annuity using all the funds in my 403(b) plan upon retirement. Would the annuity distributions satisfy required minimum distributions? How will placing the entire amount in an annuity be taxed? How will the monthly payments be taxed?
You ask interesting questions. In order to correctly answer your question, you would need to know what the required minimum distributions (RMD) are going to be regardless of how they are distributed. In a typical investment account, the value is based on your age and the account value at the end of the previous calendar year. Each year the tables decrease the life expectancy. If your account value increased in the previous year, you might have a greater amount to withdraw for example.
You need to know the income value of your distribution from your immediate annuity to know whether it would satisfy the requirement. One suggestion is to consider a different type of annuity such as an indexed annuity that might provide you with more flexibility. In the event you should predecease the total amount put into your immediate annuity, the insurance company gets the balance. In other types of annuities, such as indexed annuities and variable annuities, then if you should predecease before using all of the deposit amount, your heirs would receive the remainder. In both cases, one of the big advantages of annuities is that you can create your own pension plan that you will never outlive.
There is no tax when you move one retirement account into another retirement account. All retirement accounts are taxed as ordinary income when they are withdrawn regardless of how they are invested unless they are in a Roth account.
Yes, that would satisfy your RMD requirements. I am assuming all 403b money is pretax and there is no Roth component. All distributions will be subject to marginal taxes. There are several big considerations.
1. You lose the ability to ever tap into the account for more funds is you need money above the distribution.
2. Over time, inflation will eat into this fixed payment for purchasing power.
3. Typically your heirs will receive nothing unless you pick a lower payment that has continuation of benefits.
If this is the bulk of your retirement dollars, think twice before putting it all in one contract where you lock yourself into a situation you can't modify.
Your annuity distributions should more than satisfy RMDs. As long as the annuities were set up as Traditional IRAs there would be no tax for this rollover. The resulting payments would be fully taxable. Plus, if you retired before age 59.5 you would pay an additional 10% excise tax on the distributions received before that age.
Whether 100% allocation to single premium immediate annuities (SPIAs) is a good idea is another question. It probably is not, even if they are laddered for increasing income. Funds that you won't need for 10-15 years need some market exposure in order to keep up with inflation. You might take a look at Indexed Annuities with income riders if you are averse to market risk.
Annuities generally do satisfy required minimum distribution rules because the IRS is assured of getting it's tax dollars regularly from the annuity company based on an actuarial life expectancy table. It is likely 100% of each annuity payment to you will be taxable as income because the money in the 403(b) which you will use to buy the annuity likely hasn't been taxed yet. You'll want to talk with your tax adviser to be certain. Before you buy the annuity, however, make sure you understand both the Pros and the many Cons of purchasing an annuity.
THE PROS OF AN ANNUITY
With an annuity, you have assurances that you will get a set amount of money each month until you die (assuming the insurance company doesn't die first). The fact the insurance company is taking on the investment risk is a big plus, and an annuity might be a good choice for a portion of your retirement funds to provide you with your basic living expenses. Realize though, that Social Security and pensions provide the same benefit, so an annuity may not be necessary to provide for your basic living needs. If you are highly risk averse, annuitizing a small portion of your portfolio to supplement Social Security for basic living expenses (like food and medicine) could be a good idea.
AND NOW FOR THE CONS
Annuities have very low rates of return built into them, and over long time periods generally will pay out less retirement income compared to a balanced portfolio of stocks and bonds.
Annuities also have very high costs built into them, further reducing the payout relative to the potential payout of a well-managed portfolio of stocks and bonds. Internal fees within annuities commonly range between 3% and 6% of your balance annually.
When you purchase an annuity, you give your money over to an insurance company, meaning they own your money. You won't be able to get the money back and you'll be stuck with the set annual income. This can pose a problem if you have an emergency such as your house needing a new roof or a major medical expense.
Once you buy and start an annuity, there is no going back. Unlike your stock and bond portfolio, you can't change annuity companies or pull your money out of the annuity.
There is no ending balance with an annuity, so there won't be any money left for your children and grandchildren to inherit. A period certain annuity would provide some inheritance if you died young, but it would lessen the amount of income the annuity pays you.
Most annuities aren't adjusted for inflation, so what seems like plenty of money at the beginning of your retirement will likely leave you in financial hardship toward your later retirement years. There are inflation adjusted annuities but you'll see a significant reduction in the monthly income they pay you (think a 30% or more reduction).
Insurance companies can and do go out of business, and if the insurance company you chose goes out of business, your annuity income will likely be greatly reduced or be eliminated altogether.
Annuity sales practices can be very predatory, and a bad annuity advisor (sales rep) can easily lead you to believe something which isn't true. Annuity sales practices have often been identified by regulators as problematic and anti-consumer. And these annuity sales practices are one of the main reasons the Department of Labor attempted to implement their fiduciary rule.
I GENERALLY DON'T RECOMMEND ANNUITIES FOR TYPICAL CLIENTS
As you are making this decision, you will likely talk with a 'financial advisor' who sells annuities to explore and subsequently purchase the annuity. Realize these advisors are really commissioned product sales reps and you will likely be getting advice with a high level of conflict of interest. You potentially will get a very well-rehearsed sales pitch disguised as advice, and you may not be presented with the downsides of the investment nor the alternatives.
If you are exploring an annuity, make sure to get a second opinion from a fee-only and fiduciary financial advisor before you make this decision. Fiduciary advisors have a legal obligation to serve their client's best interests (most advisors don't) and the fee-only part means they don't earn extra money from kickbacks or commissions if you follow their advice. Purposeful Finance, a non-profit organization, also offers a free annuity analysis because of the prevalence of bad annuity sales practices.
There are a number of things to consider here. First, you do not mention what other savings, retirement or non-retirement, you have and how those may be invested. If everything you have is in this 403(b), then I would never recommend putting more than 50% of all your savings into any one or more annuities. Even when an annuity may be an appropriate choice, it should be only part of the total picture.
Annuities are complex products which need to be clearly understood. While they get a bad rap due to aggressive sales practices and high commissions paid to representatives, they still may be of value to some individuals concerned about lifetime income. You need to be working with a fiduciary fee-only financial advisor who is bound to work in your best interest and does not accept commissions. Some insurance companies, who issue annuities, have designed products for fiduciaries to recommend that do not pay commissions, thereby avoiding any conflict of interest for the advisor. Because you are talking about an immediate annuity, I am thinking this would be one that pays for a specified number of years, rather than lifetime. This would not solve your lifetime income problem and may be a poor choice. The fiduciary advisor can explain more fully.
If you do find an appropriate annuity, for all or part of the 403(b), you will want to make sure it is within an IRA so the funds transfer from the 403(b) to the IRA with no taxable event. In that scenario, then the distributions, which would be determined by the annuity contract, would count towards your required minimum distributions and be taxable as income for the year in which they are paid. What you need to compare is what your RMDs would be each year, and they change each year as you get older, with what the annuity would be paying. The annuity schedule may or may not be sufficient to cover the RMDs. In that case, you would need to have other retirement income from which to take the additional RMDs. Of course, that other retirement money would have its own RMD as well. Youi do not mention how old you are, but remember that RMDs do not begin until age 70.5 years and must be taken each year. You cannot take any "in advance." However, an immediate annuity would start paying immediately.
Again, for your questions: the annuity distributions may or may not satisfy your RMDs, there would be no taxation at the time of transfer provided the 403(b) funds were transfered directly to an IRA annuity, and the monthly payments would be taxed as regular income. I hope you do consult with a fiduciary advisor before doing anything and let them advise you on your total situation.