At first glance, the rules for IRA RMDs (Required Minimum Distributions) sound simple. However, they can quickly become complex. Running calculations for IRA annuities with additional benefits, such as death benefits and income protection guarantees, is not as straightforward as you may think.

An RMD is a distribution from an IRA or other retirement plan required by the Internal Revenue Code. Generally speaking, an IRA owner must start receiving distributions from their IRA in the year they turn 70 ½.

For purposes of this article, let’s focus primarily on Traditional IRAs[1]. There are additional guidelines and rules for other retirement plans which will not be discussed here.

The general rule when calculating the RMD is to take the prior year-end IRA account balance and divide it by the account owner’s applicable life expectancy factor. These tables are easily found at the IRS’ website (

The year-end balance used to calculate an RMD for a deferred IRA annuity, should be the Fair Market Value (FMV) of the annuity. It may not be simply the account value posted on the statement and this is an area where potential problems can arise.

Because today’s annuities have different features and riders associated with them, the true fair market value can be greater than the account value. Therefore, simply using the year-end values may result in under-estimating the total RMD and subjecting yourself to a 50% penalty on the additional portion that should have been taken.

Hypothetically let’s say Debra has an IRA deferred annuity (that has not been annuitized and is not a QLAC[2]) and has a current account value of $50,000 after incurring some market declines. This is the total lump sum amount she could take out in order to deplete the account in full.   However, the annuity is equipped with a rider that promises to distribute $25,000 a year for her entire life once she decides to start the withdrawals.  Clearly this policy contract has value above and beyond the stated account value of $50,000.

So how do you arrive at the Fair Market Value (FMV)? The bottom line is “don’t try this on your own.”

The best way to determine the FMV is to work with your financial advisor and enlist the help and assistance of the insurance company. After all, the insurance company is the party who will report the value to the IRS. They will be able to provide both the Fair Market Value at the prior year end and the Required Minimum Distribution that should be taken from your IRA annuity. Just be sure to tell them if your spouse is your sole beneficiary and is more than 10 years younger than you so the proper table is used. Keep in mind that most insurance companies now provide these figures in writing by January 31st of each year.

Your tax advisor should be consulted as to how the RMD rules apply to you. He or she can verify that the amount of income you are withdrawing complies with the tax law.

[1] The required minimum distribution rules do not apply to Roth IRAs during the owner’s lifetime.
[2] The information provided assumes that the IRA annuity has not been annuitized and is not a Qualifying Longevity Annuity Contract or QLAC.