3614. What are some of the potential benefits and consequences of holding a fixed income annuity within an IRA?Alexis LongCaroline McKay312015-07-28T20:33:00Z2016-06-22T17:38:00Z2016-07-09T19:21:00Z24722697Summit Business Media2263163143614. What are some of the potential benefits and consequences of holding a fixed income annuity within an IRA? The primary benefit of holding fixed income annuities within an IRA is the simplification of the required minimum distribution process. Fixed income annuities held inside a taxpayer’s IRA usually comply with the RMD rules automatically because their payments are determined in the same way that the RMD itself is calculated—using a formula based on the life expectancy of the individual and the amount invested.While a cash RMD is required each year after the taxpayer turns 70½ regardless of general market conditions, it is important to remember that IRA assets may be invested in a variety of holdings, including securities and funds that will fluctuate with the equity markets. Unfortunately, the RMD requirements may, depending on market performance, cause taxpayers to miss out on market upswings by requiring that the taxpayer liquidate securities held within the IRA in order to satisfy his or her RMDs. Using a fixed income annuity can help eliminate this risk because the payments are fixed in advance. In other words, there is no investment decision required each year because the taxpayer has already determined the value of the payout (whether it is made monthly, quarterly or annually). While the RMD for any non-annuitized portion of the IRA will still have to be calculated, the value of the annuity is excluded from this calculation, thereby reducing the risk that the taxpayer will be forced to make an unfavorable investment decision simply to comply with the RMD rules.Further, the fixed income annuity actually allows the taxpayer to set an income level in advance—RMDs will fluctuate with the IRA value in any given year, but the annuity payments will remain constant regardless of the performance of the remaining underlying IRA assets. Taxpayers also have the option of adding a cost of living increase to the annuity payouts to ensure sufficient income during retirement.As with any planning strategy, however, there are potential objections. Most commonly, advisors may feel that it makes little sense for some taxpayers (especially younger individuals) to hold an annuity within the IRA because both types of investments are tax-deferred, so the annuity could be held separately from IRA assets with similar consequences. As a result, some might feel that the strategy is simply redundant.Additionally, amounts held in an annuity are more difficult to access than other IRA funds without incurring significant penalty charges—if the taxpayer has a financial emergency after age 70½, he or she could access non-annuitized IRA funds without penalty. Taxpayers should, therefore, only consider purchasing the annuity with IRA funds if they have sufficient assets held outside of the annuity to cover any unforeseen expenses. Further, while holding an annuity within an IRA can allow the taxpayer to avoid selling IRA assets during unfavorable market swings, it can also mean that the taxpayer has no reason to liquidate those holdings when their value is high, potentially avoiding a loss if the value eventually falls.