Can Adult Children be Co-Annuitants of SPIAs in a Roth IRA

Submitted by Bill Heggie on Tue, 2016-06-21 20:20

I am 67 and married (spouse is 63) and we have two daughters ages 28 and 32. I am considering investing equal amounts in two separate single premium immediate annuities (SPIA), each with a 5% cost of living escalator. My goal is to find a way to provide my daughters with a legacy of a tax-free “pension-like” income stream that would increase over time, and I am wondering if this could be done by purchasing the two SPIAs in my Roth IRA and naming one daughter as co-annuitant of one SPIA & the other daughter as co-annuitant of the other SPIA.

My questions are:
1. Inside a Roth IRA, is it possible to make one daughter the co-annuitant with me of one SPIA and the other daughter the co-annuitant with me of the other SPIA. Being a co-annuitant means that the annuity payment would be based on the life expectancy of the youngest co-annuitant, and since I am older, then the payment from each respective SPIA would be based on each daughter’s life expectancy.

2. Because the funds used to purchase the SPIAs are from my Roth IRA, I believe that my Roth IRA (and not me personally) would be the sole owner of each SPIA. By making my daughters co-annuitants of the respective SPIAs that are purchased as investments in my Roth IRA, would that action create an ownership interest wherein my daughters would also become owners of each respective SPIA, thereby creating a distribution from my Roth IRA and causing a loss of tax free status? Or, would making them co-annuitants be considered a gift to my daughters (and a distribution from the Roth IRA, causing a loss of tax free status) valued at the present value of expected future annuity payments? Please note that even though the purchase amount of each SPIA is initially equal, the annuity payments from one SPIA will not be the same as the annuity payments from the other SPIA due to differences in life expectancy of each daughter because of the difference in ages of each daughter. That means the present values of each SPIA will be different from each other on any given date.

3. Another question is how to structure the beneficiary designation for these Roth IRA assets. I believe each SPIA can have its own beneficiary designation, so shouldn’t each daughter be made the beneficiary of the respective SPIA of which she is co-annuitant prior to my death? This would mean that my Roth IRA would have separate beneficiaries for the different investments in it – one daughter as beneficiary for one SPIA, the other daughter as beneficiary for the other SPIA, and my spouse as beneficiary for the remaining investments in the Roth IRA that are held in a brokerage account.

4. The next question is would the annuity payments to be received by my daughters from each SPIA after my death be considered a part of an inherited Roth IRA and continue to be tax free payments since the money originally used to purchase the annuities was Roth IRA money. Under current law, would these annuity payments ever become taxable income to my daughters? How would these SPIAs be handled at my death to transfer the ownership to an inherited Roth IRA for each daughter?

Thanks,
BH



Submitted by Alan - IRA critic on Wed, 2016-06-22 04:36

  1. In an IRA, the annuitant is always the owner, but you could have a joint and survivor annuity with your Roth beneficiary This would likely require your Roth be partitioned into two Roths, one for each daughter. If you have Roth assets that you do not annuitize, they would also be in a separate Roth unless you end up with a rarely used custodial Roth account.Of course, the spouse is typically the primary beneficiary, but am sure you have considered the effects of not naming your spouse as beneficiary. It is not clear whether you need income from your Roth, but a Roth SPIA payment can be either distributed out of the Roth IRA to you which is the most common form, or a rarely used custodial Roth can be used under which the payments remain inside your Roth IRA. Of course, there are no RMDs for a Roth IRA until it is inherited by a non spouse.
  2. You are right, only you are allowed to own any investment inside an IRA. With the joint and survivor annuity mentioned above, your daughter would inherit and become subject to RMDs. RMDs should be satisfied if the payout is simply continued, but be sure the contract does not restrict this in any way. There is no problem with taxes since Roth IRA rules trump all the usual annuity tax rules and your Roth IRA is probably already fully qualified and tax free. There is also no taxable gift here as the Roth will be inherited.
  3. As indicated, barring a custodial Roth, there would be two Roth IRA joint and survivor annuities which operate similar to a traditional DB plan with the surviving spouse receiving a % of the payments for their life. This makes a beneficiary redundant, but perhaps you need to consider what happens if a daughter pre deceases you. It happens. Since the non annuitized Roth would be a separate account, you could name any beneficiary you wish on that one.
  4. No tax would be due since your beneficiaries will inherit an already qualified Roth IRA (5 years and you are already past 59.5).
  5. Note that annuities in Roth IRAs are relatively rare, so be sure whoever you deal with understands the difference between a non qualified annuity and a Roth IRA annuity. IRS Regs are pre occupied with RMDs and there are no RMDs here until after your death. Insurance products are being manufactured faster than the IRS publishes guidance, but with the Roth at least you avoid the RMD issues that result from IRA annuitization. Since articles and guidance on Roth annuities is rare, be prepared to get different information from different insurors or agents.


Submitted by Bill Heggie on Thu, 2016-07-07 17:10

Alan,Thank you for this thorough and well-considered answer. This is very helpful, and I’ll certainly follow your tips regarding clarifying with the carrier that this is a Roth annuity.Best regards, BH



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