Bene IRA Annuity – Annuitization and RMD’s
My client passed away and left his IRA annuity to his 82 yr old mother. The mother set it up as a Bene IRA. The Penalty Free Amount is $36,000, but the RMD is $50,000. The Insurance Co. will not waive the penalty, even though it’s a Required Distribution.
If the mother were to annuitize the policy, would the policy still be subject to RMD’s? My understanding is that when a policy is annuitized, the policy now technically has no value, so the payout amount becomes the RMD. Am I correct? I’m trying to find a way to satisfy the IRS requirements without causing her to pay a huge penatly to the insurance company. The annual payout would be $19,000.
Permalink Submitted by Lee Martinson on Wed, 2011-10-05 22:30
I think you are right but it would be nice if someone could cite the code on this.
Many insurance companies waive the surrender penalty if owner/annuitant dies. Sounds like this one is harsh, what company is it?
Permalink Submitted by Alan Spross on Wed, 2011-10-05 23:29
That would work if the insurance company allowed her to annuitize. But it would not work for the first year in which there WAS a prior 12/31 balance unless the annuitization took place in the same calendar year that the client passed. That would wipe out the year end balance that would trigger the 50.000 RMD.
However, the numbers quoted appear incorrect. If the mother turned 83 in the year following the son’s death, her single life expectancy would be 8.6 years from Table I and an RMD of 50,000 indicates an account balance of around 430,000. Annuitizing this amount for her life should yield a much higher annual payment than 19,000 even if the company did not factor in any earnings at all. If there is a joint annuitant added here that is younger and that is what is causing the 19,000 figure, then this would not pass IRS muster.
While the annuity and DB plan IRS requirements are very complex, they boil down to not allowing joint annuitizations where the IRS gets their money much slower than under the usual RMD regs. They provide a break for spousal joint annuitants (eg mother is married to younger man), but there is a limit there as well as to how much younger the spouse can be. This is all buried in the following Regs for anyone that wants a nice research project. I wonder if the insurance companies have fully digested these Regs:
http://www.irs.gov/pub/irs-irbs/irb04-26.pdf