Annuity IRA and 8606

Submitted by Courtney Adam on Wed, 2014-10-01 17:34

client has annuity IRA with 1099R coded 7 normal & marked IRA which makes my software bring it over to 8606. He has another traditional IRA with basis so this is creating an inaccurate taxable amount.

How should the IRA annuity be coded? If I simply delete the code 7 will it create an IRS matching problem?



Submitted by Alan - IRA critic on Wed, 2014-10-01 23:47

There isn’t any specific IRS instruction for handling basis if the annuity has been annuitized because it now lacks a year end value. If it has not been annuitized, then reporting should be routine with the total of both IRAs shown on line 6 of Form 8606. The distribution code is immaterial as code 7 just means client is over 59.5.

Submitted by Courtney Adam on Thu, 2014-10-02 16:07

Thanks for the reply.  I guess I should have said delete the box marked IRA thereby preventing it’s inclusion on the 8606 but is this ok?  And yes, the annuity has been annuitized and has no year end value which leads me to believe it should not be included on the 8606 with the other IRA, nor should it’s distribution.  However, the only way I can figure to get it off the 8606 is to remove the IRA checked box which I’m reluctant to do.  His annuity exceeds the rmd of all his IRAs btw, however, I’m pretty certain he still has to take his rmd from the tradtional IRA even so.

Submitted by Alan - IRA critic on Thu, 2014-10-02 18:44

  • There are several logical methods that could be used, but they all have pitfalls at the end. The annuity IRA 1099R should show the full distribution in 2a and the “taxable amount not determined” box checked. But if you report this as a non IRA annuity, the IRS will be looking for that amount in 2a to be taxable, ie no basis will be applied. There could be other unintended consequences, so I would discourage reporting as a non IRA.
  • If you were to follow the 8606 Inst literally, you would just enter the total value of the non annuity IRA on line 6 and the payment from the annuity on line 7. The annuity has no nominal value, and the annual 5498 statement will not show a value. That would produce a higher assignment of basis % on the 8606 than would be normal because there is no fair market value for the annuity available to be added to the other IRA. 
  • If you wanted the total IRA value to be reflect the estimated value of the annuity, you could alternately determine your life expectancy from the single life table and multiply the annuity payout by the number of life expectancy years remaining. You would include that result on line 6 and attach an explanatory statement how the annuity value was estimated for purposes of completing line 6 of the 8606. Doing that would result in basis recovery that is reasonable. Since the IRS has not seen fit to address this problem, I doubt very much that you would ever hear from them.

Submitted by David Mertz on Thu, 2014-10-02 20:00

  • If you report it as a non-IRA, the tax software I’m familiar with will put the taxable amount on Form 1040 line 16b rather than line 15b where it belongs; your tax software apparently does the same.  I’ve heard of cases where the IRS has issued notices because the amount is missing from line 15b where the IRS expects to see it even though it appears on line 16b.
  • I would probably use the method Alan described in his third bullet since it is simple and rational.

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