403b to IRA via annuitization

Submitted by Toby Hartley on Wed, 2013-10-23 16:22

Had a case where they want to annuitize from an old two-tier annuity to take advantage of the upper value. The plan was to annuitize into an IRA annuity. The client is over 59 1/2, the transfer company confirms they will send the funds via transfer and not 1099 the client, the receiving company confirms they will accept. My question: is there an issue with the rollover of 403b to IRA when the payments are scheduled for monthly? I know the 60day rule is once every 12 months. Does that apply here? The current carrier will not allow a conversion to IRA internally or we would have done that.

Thanks



Submitted by Alan - IRA critic on Wed, 2013-10-23 23:03

Any rollover from a 403b to an IRA must be reported on a 1099R and the IRA custodian will issue a 5498 reporting receipt of a rollover contribution. The direct transfer only functions to eliminate the need for mandatory 20% withholding. The receiving IRA custodian is probably an insurer who will annuitize the funds in an IRA annuity. Transfers of funds from a non IRA account to an IRA are NOT subject to the one rollover limit per 12 month period. Note that the annuitization period has RMD implications if not a lifetime annuity. Will this rollover result in penalties under the two tier contract?

Submitted by Toby Hartley on Wed, 2013-10-23 23:27

RMDs, Ouch. That may be the hiccup. The 2 tier question is no, in fact, they will get the bonus account by annuitizing over 5 yr minimum. The current carrier states the will do it via rollover and not withhold mandatory 20%.Here are the specifics. The client is 68. She has 39K going into the new policy at issue, 27K will be paid into it via annuitization of the 2-tier product at around $465 over 60 payments. Both are 403b rollover to the new IRA account.The new IRA will have a value of around 55K at 70 1/2 yet 15K still to come from old annuitized product. I know the annuitized account will no longer have a value, although the carrier can supply a FMV figure to the client based on the balance left to pay. Could they use the new IRA balance with the FMV of annuitized account to calculate RMD? 

Submitted by Alan - IRA critic on Thu, 2013-10-24 00:59

  • While IRS Regs do not directly address this type of arrangement, it appears that each of the direct rollovers to the IRA annuity would be instantly incorporated into a life annuity, and therefore the annual IRA RMD distributions would be increased accordingly. In such an IRA annuitization beginning at 68, the required beginning date is considered to be the date of the first annuity payout even though that will be prior to age 70.5. As long as the IRA annuity is a life annuity and does not have a period certain longer than the client’s life expectancy, the IRA portion of this should pass the IRS requirements.
  • Assuming that the client is no longer working for the 403b sponsor, a 403b RMD issue exists in Jan of the year the client reaches 70.5. The 403b RMD amount based on the prior year end 403b balance cannot be transferred to the IRA until the RMD is satisfied. Of course, that issue will disappear once the 403b is fully distributed. 403b 1099R forms will continue and there will be two of them, one for the direct rollover to the IRA annuity and another for the RMD distribution that is not eligible for rollover.
  • If there is any “old 403b money” from a 12/31/1986 balance, the first direct rollovers will come from that money probably resulting in NO remaining 403b balance subject to age 75 RMD inception.

Submitted by Toby Hartley on Fri, 2013-10-25 00:00

On point #2: I doubt that the current custodian will monitor RMD after the contract has been annuitized for the 5 year period certain as planned.  The distributions will be sent direct to the carrier.  However I do see the issue.  Plus, we dont want to double RMD either.  in other words, take an RMD in of 2015, it will need to be based on the IRA which will include the single premium rollover as well as two years of rollovers from the annuitized.  Then also, somehow, receive RMD from the 403b that has been annutiized based on its balance but being careful not to include then payments after 12/31/14.#3, no, this is all post ’86

Submitted by Alan - IRA critic on Sat, 2013-10-26 00:58

I missed a major point in my prior post. The IRS Regs are not clear regarding an annuitization which of course erases any prior year end value. But the annuity RMD Regs suggest that such payments become RMDs. Since the 403b was annuitized for 5 years and that period breaches the year employee reaches 70.5, there is a chance that the IRS would take the position that whatever the annual payment is will be the 403b RMD. As such the direct rollover to an IRA would become an excess IRA contribution since an RMD cannot be rolled over, and it would have to be removed from the IRA. Whether the IRS will catch this or not is anyone’s guess, but it is not a good idea to annuitize when payments will reach into RMD years and intend to rollover those distributions. 

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