Inherited Roth Deferred Annuity
I own a deferred annuity held in a Roth IRA that will start monthly payments in 2035 and last for 12 year. If I should predecease this event, what are the withdrawal rules/requirements for the 2 primary beneficiaries – my spouse and son. FYI, my spouse and I are the same age and, obviously(?), my son is younger by more than 10 years.
Thanks in advance for your help and insight.
Permalink Submitted by Alan - IRA critic on Tue, 2021-01-26 14:48
Your spouse could do the spousal rollover into her own Roth IRA, which eliminates any RMDs for the duration of her life. Your son would be subject to the 10 year rule for his share, therefore no annual RMDs. Upon your death, if both are still living they would first create separate inherited Roth IRA accounts, but your spouse could rollover hers to her own Roth.
The more complex question will have to be provided by the insurer. That is, how will they value this product upon your death. The answer may depend on whether the 12 year payout is locked in, or is an option for you to apply at your discretion. And of course, what options will they have in relation to either continuing the annuity as an inherited Roth IRA or in receiving the cooperation of the insurer in the event they wish to transfer the death benefit to a non annuity IRA custodian. Oftentimes these decisions are not favorable for beneficiaries. You might start by checking the contract to determine if these questions are addressed there in sufficient detail.
Permalink Submitted by Patrick Enriquez on Fri, 2021-01-29 01:03
Thank you for the response Alan and apologies, I oversimplified things in the original post. I called it a “deferred annuity” b/c it does have some of the components of that investment but in reality it’s a structured settlement that I purchased from the owner on the secondary market. So the payments are starting in 2035, regardless of whether I’m here or not. I can see that my spouse would rollover into her own Roth IRA but what about the non-spouse, my son. How does the 10 year rule apply if the payout lasts 12 years? What if I died tomorrow, payments don’t even start until 4 years AFTER the 10 year rule expires.
Permalink Submitted by Alan - IRA critic on Fri, 2021-01-29 03:39
Are you sure that the contract does not have any special provisions with respect to a non spouse beneficiary? If not, and the contract would continue payments in the same manner as if you were alive, it is not clear how the Secure Act would affect your son. There is an annuity exception to the Secure Act, however it is conditioned on the payouts being made over your life expectancy or joint LE with a beneficiary. This structured settlement does not meet those conditions and therefore does not qualify for the exemption. That said, the IRS has not yet issued the Regs for the Secure Act, and this affects situations like this where the application of the Secure Act is in question. One challenge is that this situation is rare enough, and issued IRS Regs may not address it. Worst case of course, is that the 10 year rule runs out before the settlement which might force your son to sell the settlement for what he can get in year 10.
Permalink Submitted by Patrick Enriquez on Tue, 2021-02-09 14:58
I’m fairly confident that my wife will not have any issues as beneficiary to this account. I’ve consulted with a financial advisor, tax consultant, the IRS and the IRA custodian and they are all in agreement as to how she should handle her inheritance. The non-spouse is another matter all together, none of these players has a definitive answer. The more I research, the more convoluted this becomes. Just to follow the income stream…The insurance issuer, AIG, has agreed, by court order, to divert payments from an existing structured settlement to an assignee company for a period of 12 years starting in June of 2036. The Assignee has contracted a Servicer to deliver those payments to a specific account being held FBO by my IRA custodian. The contract is irrevocable and guaranteed, regardless of my status – dead or alive. At the time of my death the IRA custodian will set up an inherited/beneficiary IRA for my heirs and payments will be redirected to those accounts. For the spouse, it’s simple and done. For the non-spouse it remains a mystery. FYI this “annuity” that I purchased is NOT an annuity but a structured settlement payment rights, a derivative of a structured settlement.