IRA Annuitized Prior to 70-1/2
I’ve read previous forum discussions about annuitized IRAs. Once annuitized, the annuity payment becomes your RMD for that account. I just want to clarify that this is the case regardless of age.
New 65 year old client came in to do rollover for amount he withdrew from an IRA annuity. In filling out a fact finder, I discovered he had annuitized his IRA annuity 2 years ago and elected a single life, 15 year period certain payout. Since he was at an age not yet requiring minimum distributions, he has been taking his annuitized IRA distributions and rolling them over to another IRA once per year. His plan was to then take RMDs at 70 1/2 from the new IRA.
My understanding is that he doesn’t have that option. Can you provide me with the Code that addresses this situation and let me know if rolling over this distribution is permissible once per year.
Thanks.
Permalink Submitted by Alan Spross on Thu, 2011-12-08 19:13
You are correct.
If a life annuity (with options meeting the requirements of 401(a)9) begin prior to the usual RBD, the annuity starting date becomes the RBD. Since the annuitized distribution is therefore being made in an RMD year, it becomes an RMD is not rollover eligible. The rollovers become an excess regular IRA contribution and need to be withdrawn under the excess contribution rules. That means a 6% excise tax for each year the excess remains in the IRA.
Here is a copy of Q 10 from IRS Reg 1.401(a)9-6. These Regs apply to IRAs as well as employer plans, and the IRA owner is treated as the employee:
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Q–10. What rule applies if distributions commence to an employee on a date before the employee’s required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A–1 of this section?
A–10. (a) General rule. If distributions commence to an employee on a date before the employee’s required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A–1 of this section, the annuity starting date will be treated as the required beginning date for purposes of applying the rules of this section and §1.401(a)(9)–2. Thus, for example, the designated beneficiary distributions will be determined as of the annuity starting date. Similarly, if the employee dies after the annuity starting date but before the required beginning date determined under A–2 of §1.401(a)(9)–2, after the employee’s death, the remaining portion of the employee’s interest must continue to be distributed in accordance with this section over the remaining period over which distributions commenced. The rules in §1.401(a)(9)–3 and section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply.
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Permalink Submitted by Lynn Shepherd on Thu, 2011-12-08 20:39
Thank you so much for clarifying and providing the regulation for review. The client was so adamant that his Morgan Stanley rep was right, I doubted myself.