[GNC] When income is not income

[Stan Brown (using GC 4.14)]

On 2025-07-03 13:39, R Losey wrote:
> On Thu, Jul 3, 2025 at 1:17 PM Stan Brown (using GC 4.14)
> <stan+gc at fastmail.fm <mailto:stan%2Bgc at fastmail.fm>> wrote:
> 
>     On 2025-07-02 15:42, David Cousens wrote:
>     > I personallywould regard the increase in Fair Market Value as an
>     > increase in the fund, but I think it would be better to get the
>     opinion
>     > of a practising accountant in your jurisdiction.
> 
>     Hi, David.
> 
>     Earlier, I couldn't articulate why I wanted to account for annual
>     changes in FMV, but it came to me this morning as I was reading your
>     reply from yesterday. The FMV as provided by New York Life is part of
>     what determines my RMD (how much I must withdraw from IRAs in the coming
>     year). So I think that needs to be in my books one way or another. One
>     possibility is simply to enter a description-only entry (debit=0,
>     credit=0) each year when I receive the statement. Another is to record
>     the increase or decrease in Equity:Unrealized Gains and Losses --
>     unrealized by me, of course; they may very well be realized by New York
>     Life.
> 
>     (Fairly recent legislation allows (1) aggregating the annuity FMV and my
>     brokerage FMV, (2) determining the overall RMD based on the IRS's life
>     expectancy table, and then (3) making total withdrawals from the two to
>     fulfill the RMD. In my case, the annuity payments are greater than the
>     annuity's "share" of the RMD, so that I can reduce withdrawals from the
>     brokerage below what would otherwise be the brokerage's "share". Since
>     the IRA in the brokerage grows tax deferred, postponing withdrawals is a
>     good thing.)
> 
> 
> Right. You absolutely need to keep up with dividends in things like
> IRAs.  However, part of the FMV is the price of the thing; that isn't as
> critical, in my opinion, as (at least here), the RMD is calculated from
> the price at the end of the year. I choose not to use the quote option,
> and just have the prices update as transactions occur.
> 
> But (and this is where I am uncertain about annuities), I'm not sure
> there is any point in doing this for an annuity... You actually don't
> own it any longer... they just have to pay you a monthly income,
> regardless of whether it gains or loses money. You could, if you wanted
> to, treat the money that was used to set up the annuity as an annuity
> setup expense, and then just have the monthly money coming in as annuity
> income. It's rather like a salary in that respect, except that you gave
> them a fixed amount of money, and they pay you regularly.

I'm not quite clear what your "doing this" refers to. If you mean
tracking the details of the change in FMV, I agree that it seems kind of
pointless because it won't affect the income I receive from New York
Life in the following year.

But if you mean paying attention to the FMV itself, without inquiring to
where it comes from, then that's important to computing the RMD on my
Vanguard IRA. Here's an example:

Assume that the IRS says, based on my age, I must withdraw 6% of my IRA
as an RMD. Assume the annuity FMV is $100,000 and the IRA holds $300,000.

Under old legislation the annuity must pay me at least 6% ($6,000), and
I must withdraw at least 6% ($18,000) from my IRA. But the annuity pays
me $10,500, on a schedule and not on my demand. So my total retirement
withdrawal is $10,500+$18,000 = $28,500.

But under the newer legislation (The Secure 2.0 Act of 2022), I
aggregate $100,000+$300,000 = $400,000, and my combined RMD is 6% of
that, $24,000. The annuity will pay $10,500, and I need withdraw only
$24,000-$10,500 = $13,500 from the IRA. Thus I defer income tax on the
$4,500 difference to a later year, which is a good thing.

> https://irahelp.com/slottreport/new-law-could-reduce-rmd-rules-annuitized-annuities-proper-valuation-needed
> 
> Excerpt:
> 
> "[Before Secure 2.0] ... For the other (non-annuitized) funds, RMDs are calculated under the usual rule (prior- year 12/31 account balance divided by the owner's life expectancy factor). But for the annuitized part, the annuity payments received during a year are considered the RMD for that year.
>     "This amount of total payments is typically much larger than the RMD that would be required if the annuitized part was determined under the usual RMD method. However, before SECURE 2.0, this overage couldn't be credited against the RMD for the other IRA funds. In other words, there were two separate RMDs - one for the annuitized portion and one for the remaining funds - that couldn't be aggregated.


Stan Brown
Tehachapi, CA, USA
https://BrownMath.com