Unreported Traditional IRA via Insurance Policy
Late 80’s, spouse bought insurance policy designated as Traditional IRA .
(1) I suspect some of these monies were not reported on some of our 1040 throughout the years
(2) In addition, not being aware of this existing IRA, we may have over-contributed to IRA at other company.
With spouse now being deceased, this IRA will be rolled over to my name, so what might I expect with such existing errors or how should corrections be made?
Note: Notice from insurance company did not arrived until May timeframe each year.
Permalink Submitted by Alan Spross on Tue, 2012-11-13 17:30
This is probably an annuity because a life insurance policy cannot be purchased in an IRA.
If you inherited an IRA annuity, there would have been no taxes unless your spouse took distributions, however RMDs must have begun when your spouse reached 70.5. Those RMDs could have been taken from another IRA if your spouse had another IRA account. If those RMDs were overlooked, there is the possibility of a large penalty. What you should do now is to determine the 2012 RMD if spouse passed in 2012 and take out that RMD before year end. It will be taxable, but your joint tax rates in the year of death will be lower on the same amount of income than when you file single in later years. Also, the IRS Regs indicate that the year of death RMD must be taken by the beneficiary, but there is no clear regulation what happens with all those omitted RMDs from prior years when the IRA owner passes. You might avoid any penalties for that, but will take larger RMDs of your own as a result of the annuity being larger.
Also, insurors require an IRA or other annuity to be annuitized around age 85. If you annuitize the IRA annuity, the amount you receive each year will automatically be your RMD from here on.
I do not follow your comment on over contribution. Contributions to a traditional IRA must stop at age 70.5 when RMDs must start. Were contributions made after that date? The IRA custodian must secure the date of birth and should not accept contributions because they know when the IRA owner is 70.5.
Have you been using a professional tax preparer?
Permalink Submitted by Gaynell Vinson on Wed, 2012-11-14 02:13
Yes, insurance is an annuity. I plan to “roll over” all IRAs into my own name as a surviving spouse and treat assets as if they were my own based on fact the age of spouse (69), deceased 10/19/12 and I am (68) so as I understand by not inheriting the IRA I do not have to begin RMD this year. RMD had not begun for either of us so that was not a factor. I was not planning to begin RMD until 70 1/2. However, thanks for mentioning:
“[i]It will be taxable, but your joint tax rates in the year of death will be lower on the same amount of income than when you file single in later years.[/i] An important consideration I must discuss with accountant.
Also, insurors require an IRA or other annuity to be annuitized around age 85. If you annuitize the IRA annuity, the amount you receive each year will automatically be your RMD from here on. Agent has been non-existent but I did receive message from another agent within the company late today. Obviously I have much to learn about annuitizing. Possibly this year may be a good time to begin RMD using these monies?
As to my comment about “over contributing”, each year one is allowed to invest/contribute up to an IRS designated amount toward their IRA. For example, with my being unaware this policy was IRA, I suspect we fully funded to the limit of $3,000 and failed to take into consideration an additional amount of $1,000 was also flowing into the IRA via this annuity.
This was my main concern & what penalty to anticipate?
You asked if I have been using a professional tax payer. Yes, but the accountant’s input is only as good as the information I provide to them so if I failed to make them aware, they do not know to report it. And as with the insurance agent being non-existent, I also will be working with an accountant new to me this year! This has definitely not been a good year!
I do hope I have not confused you anymore than I am.
Permalink Submitted by Alan Spross on Wed, 2012-11-14 20:54
Sorry to hear of your loss.
With respect to your IRA contributions over the years, it may take some research to determine how much was contributed. Due to the age 50 catchup contributions starting in 2002, here is the total amount that could be contributed for each year:
1) 1981-2001 2,000
2) 2002-2004 3,500
3) 2005 4,500
4) 2006-2007 5,000
5) 2008-2012 6,000
Each year the IRA custodian issues Form 5498 showing the amount you contributed and this also goes to the IRS. If you saved these, it will be easy to determine if you have excess contributions or not. Technically, there is no statute of limitations on excess contributions and the penalty is 6% for every year the excess remains in the IRA, but the IRS might be lenient on the acccounts of a deceased spouse. You may also be able to determine your contributions by checking your prior tax returns, which would show either an IRA deduction or a non deductible contribution on Form 8606. If any excess contributions were made by your spouse, I would not try to correct any that were older than 2009 unless the IRS has already contacted you.
I assume you do not have a Roth IRA annuity, but if you did the contribution limits each year are the same as above starting in 1998, the first year a Roth was offered.
Rolling the IRA annuity into your name as owner is a good idea. There are no RMDs until the year you reach 70.5. If you kept the account as a beneficiary and not as owner, your RMDs would have to start in the year your spouse would have reached 70.5. So you probably have some time in which to do this rollover. The insurance company will have to provide you with the 12/31 balance each year on which to calculate RMDs because the RMD value of some annuities could be higher than the market value. Your annual RMDs will continue to be based on the value provided until you annuitize. You do not have to annuitize for several years, and if you no longer want the annuity, the account can be transferred to another IRA custodian and the investments changed into what is suitable for you.