Annuitization of Roth IRA
I am confused about IRS Sec. 1.402(c)-2, Q-7 regarding the “Special rule for annuities” as it pertains to Roth IRAs. The Roth IRA in question was annuitized in April 2011 over a period of 10 years in quarterly payments. Payments were sent directly from AllianzLife to a Schwab Roth IRA, supposedly as T-T transfers but instead were flagged as excess contributions after the 3rd payment was sent and had to be withdrawn. A request was then made through Schwab to initiate a formal T-T transfer process (i.e., letter of acceptance and transfer paperwork) to meet the transferor’s requirements. Allianz now contends, with no mention of the Roth IRA status or transfer process, that annuitization payments are considered the RMD and must be distributed to the owner by the transferee trustee by the end of each tax year.
My question is: Since distributions from Roth IRAs do not require RMDs, are they bound by Sec. 1.402(c)-2, “Special rule for annuities” and, also, do any of the payments referred to above, in fact, have to be withdrawn by year’s end in order to avoid penalties?
Permalink Submitted by Alan Spross on Thu, 2012-02-02 23:03
Roth IRAs are not subject to RMDs (provisions of 401(a)(9), and you would expect that both custodians would recognize that a Roth IRA was both the distributing account and the receiving account.
More likely, what we have here is a rejection of rollover due to the 10 year term of the payments. Payments over a period of 10 years or more are considered “substantially equal periodic payments” under the definition of an ERD (eligible rollover distribution). HOWEVER, IRAs are not subject to the ERD restrictions because an ERD only refers to a distribution from a qualified plan, not from an IRA. Therefore, the 10 year annuitized period here is immaterial and should not prevent the transfer of such payments to another IRA account. The transfers must be done directly, otherwise they exceed the one rollover limitation per 12 month period.
There should be no reason that these transfers cannot continue because:
1) They are not RMDs under 401(a)(9) because distributions were made from a Roth IRA under 408(A)
2) They are not ineligible for rollover as SEPPs because they were not made from a qualified plan
NOTE: The fact that a rollover of a 72t plan distribution invalidates a SEPP plan is limited to Sec 72t (10% penalty waiver). It does not invalidate or limit such a rollover whatsoever.
While Sec 402(c) does mention annuity contracts, the entire section only deals with distributions from qualified plans including rollovers to IRAs and other plans, but not to distributions FROM IRAs. The insurance companies mentioned in various sections here, including Q 7 refer to annuities purchased from insurors from qualified plan funds, eg when a DB plan buys an annuity for employees in lieu of paying out DB pensions.
Did Schwab initiate the problem first by flagging the transfers as excess contributions (ie not rollover eligible)? And Allianz agreed not realizing this was a Roth IRA?
Permalink Submitted by James McAllister on Fri, 2012-02-03 01:28
Schwab actually accepted payment #1 as a rollover, but by the time payment #3 was forwarded (by direct check from Allianz to Schwab), a red flag went up and #2 and #3 were considered to be excess contributions since they were not beyond the 12 month window for rollovers. These were immediately transferred (journaled, is the term they use) to a taxable Schwab account, although no tax was due. I don’t know if they contacted Allianz or not, but I tried to rectify the situation by having payment #4 sent by direct deposit to my non-IRA checking account until I could research the subject matter of the above post. Schwab advised that what I was attempting to do was acceptable, resulting in the formal letter of acceptance and transfer paperwork from them to Allianz. Allianz’s reaction to this was as I have noted above – with no mention whatsoever of the Roth IRA status of the annuity, I was asked to return a hastily constructed form accepting one of two options: 1. that I understand my annuity payments are considered RMD and must be distributed by the end of the tax year, etc., or 2. I do NOT want to transfer my annuitiztion payments. I considered their letter to be misleading and unresponsive to the situation at hand and have not responded to them as yet, certainly without their restrictive “form”.
Permalink Submitted by Alan Spross on Fri, 2012-02-03 02:13
If the original transfers were done by direct trustee transfer they do not count as rollovers, but Schwab’s actions infer that the payments were made by indirect rollover, ie from the Allianz Roth annuity to you and then from you to Schwab, but that does not square up with your first post.
Nonetheless, if these were not direct transfers, then Schwab is correct to treat all but the first one as excess contributions to their Roth. You need to try to get the transfers done from now on by direct transfer only, since you cannot do any more rollovers until 12 months pass. Further, their choices make no sense because a Roth IRA does not have RMDs. Are you real sure that this is a Roth IRA annuity?
If so, Allianz needs to understand that annuity payments do NOT make them RMDs. Try to get this referred to a tax specialist there as they are treating this like a traditional IRA annuity.
Permalink Submitted by James McAllister on Fri, 2012-02-03 03:10
I am not privy to the backroom drama between Schwab and Allianz although it appears they do not communicate well without a referee. I do know that the transfer of funds from all 3 annuitization payments was by check directly from Allianz to the Schwab Roth IRA. I was never in the loop other than having requested the transfer of payments and never saw any of the payments noted. There is no question that the annuity is a Roth IRA, having been funded with Roth IRA funds in 2004 and identified as such in Allianz records. I appreciate your thoughtful insights and thank you for the time spent addressing this problem.