Traditional IRA, annuity, rollover?
Taxpayer passed away at 61 years old in October 2020. He had an IRA that owned an annuity valued at $700,000. His 60 year old wife- spouse is the beneficiary of his traditional IRA and the beneficiary of the annuity.
The annuity company has told me conflicting options on what the spouse can do in option #2.
Option #1 will allow a lump sum rollover of $630,000 into her traditional IRA. Thus no tax on rollover. This option is clear and not questioned. This will probably be the best option if option # 2 payouts can’t be rolled over.
Option #2 Allows six payments of $137,000 over a five year period. The spouse will receive $192,000 more over this five year period totaling $822,000 rather than receiving the lump sum of $630,000.
I am told by representatives of the annuity company that these six payments can be indirectly rolled over into her IRA each year if I rollover within sixty days. Thus no tax again at rollover each year.
However, other representatives from the same annuity company say that these six payments can’t be rolled over because they are considered minimum required distributions.
Can these six payments be indirectly rolled over each year thus saving the tax?
Permalink Submitted by Alan - IRA critic on Sat, 2021-04-24 03:16
Why doesn’t the spouse simply elect to assume ownership of the inherited IRA? She is over 59.5. As the owner she is not subject to RMDs for the next 11 years.
Even as beneficiary, a sole spousal beneficiary does not have to start RMDs until decedent would have reached 72, only one year earlier than above. Either way, RMDs do not enter into this.
There is a problem however, and it’s the one rollover limitation for 12 months. If the plan distributed the annual second annual distribution even 1 day earlier than the prior year, it would not be rollover eligible. The distribution must either be on the same day or later in successive years to eliminate the issue of the one rollover limit for 12 months. The annuity company most likely is oblivious to these implications, at least judging from the response you quoted.
Even if the annuity IRA RMD provisions require a mandatory 5 year rule (now 10 year rule), that should not affect the option to assume ownership by the surviving spouse.
Obviously, the the monetary advantage of electing the 5 year payout (not to be confused with RMD provisions) is such that the lump sum decision should be avoided.
Permalink Submitted by George Burgess on Mon, 2021-05-03 16:52
Alan: Thank you for your response. It is greatly appreciated. Is there a difference to an inherited IRA and having her set up her own traditional IRA?I agree that Option #2 is the best option because she receives an additional $192,000 over these five years. How can I confirm that I can rollover these six payments with the exception on the last one that you mentioned? I agree that these are not minimum distributions but I have had three Reps tell me that she “cannot” make an indirect rollover and accomplish this tax deferred rollover.I was told by a couple of reps that it all depends on the receiving company on whether they would allow these six payments to be rolled over. Does this make sense to you?How do I get some guarantee that I can do this for the taxpayer? Or do I have to take a leap of faith?