Photo credit: <a href = "http://www.freedigitalphotos.net/images/view_photog.php?photogid=2365">Grant Cochrane</a>

A lot of advisors like to tote the merits of income and indexed annuities for things they are not. They are not designed to beat the stock market; they were designed to compete with CDs. Income annuities were not designed to hide us from taxes; they were designed to protect us as we withdraw income.

See: Are RMDs the WMDs of a retirement plan?

Income annuities work great within IRA and IRA Rollover accounts. The main reason is because they are created with a minimum floor that the insurance company uses as a figure that allows the owner to withdraw income in the future. These fit well within plans that have RMDs, or Required Minimum Distributions, at age 70-and-a-half. The IRS forces a minimum withdrawal from these plans to recover some of the tax benefit enjoyed for so many years because the distribution is usually about 4 percent or less, while the income floors are anywhere from 6 percent to 10 percent, depending on the contractual guarantees.

These can be used to the client’s advantage if the RMDs are being met and the client can handle the somewhat minimal tax impact since they still have an account that’s growing for the future. The RMD for a 70-and-a-half year-old is 27.4 percent or 3.65 percent of the account. If the income annuity has a 7 percent compounded floor their account is still growing at a minimum of 3.35 percent.

The difference from the RMD and the income floor allows the account to grow and can be accessed should inflation impact their spending needs. This is a plus if more income is needed due to inflation. However, it can be a double-edged sword when the tax burden of an increased account would also increase their next year’s RMD.

The other way the RMD can help a client and their family in a positive way is to leverage their RMD. For example, a 70-and-a-half-year-old female with a $450,000 IRA has an RMD factor of 27.4 percent, which translates into a withdrawal of approximately $16,423. She has the ability to take $6,423 and set aside for taxes each year, and put the remainder in an IRA Maximizer Plan, which will guarantee her heirs receive an additional $354,943, for a total value of approximately $804,943.

We may not like the forced spending of tax-beneficial assets but they can be used to our benefit.

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