RMD is key in retirement annuity decision

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Dear Dr. Don,
I have a regular IRA certificate that matures in September this year. Next year, I have to start withdrawing the required minimum as I will be 70.

My credit union currently has a 3.75 percent rate on a seven-year IRA certificate. My insurance company has a flexible retirement annuity currently paying 4 percent. I am not interested in putting my IRA in a stock fund. The insurance annuity is for seven years also. Please advise what my best option is.
— Leroy Longterm

Dear Leroy,
One area to research for both investments is the ability to take your required minimum distributions out of the investment without an early withdrawal penalty or surrender charges. Your banker and insurance company should both be able to point to language in the investment documents concerning the withdrawal of funds prior to the seven-year maturity.

Annuities are fairly complex investment vehicles. You indicate the annuity you’re considering is currently yielding 4 percent. Will the yield fluctuate over the investment term, and if so, how is that yield determined?

There’s a lot more upside potential than there’s room for interest rates to go lower, and if you’re able to participate in that upside, that is an argument for the annuity. At fixed rates, however, I wouldn’t let the 0.25 percent difference turn your head. I’d suggest you choose the certificate being offered by your credit union.

Before signing any annuity contract, I recommend the investor have the investment reviewed by a fee-only financial planner. Get a second opinion. Review the financial stability of the insurance company. The time to kick the tires is before you sign on the dotted line. Bankrate provides a directory of CFP professionals. You can also look for fee-only planners on the National Association of Personal Financial Advisors, or NAPFA, website.

Although it may seem as if I’m splitting hairs, required minimum distributions, or RMDs, out of an IRA start in the year you turn 70½, not 70. So whether you have a RMD next year depends on whether your birthday falls in the front half of the year or the back half.

It’s also possible to extend the first RMD out to April 1 of the year following the year where the individual turned 70½. That choice, however, means the individual will take two RMDs that year, the delayed RMD and the RMD for that year. The IRS publication “Retirement Plans FAQs regarding Required Minimum Distributions” has more on the topic.

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