Grandchild IRA beneficiary rule question – 5 yr rules etc.
Minor grandchildren are beneficiaries on an IRA. Original owner passed away in 2004. No withdrawals have been taken – 2009 represents the end of the 5 year period.
To complicate things further this IRA is in a variable annuity. The VA company wants it all out by the end of 2009.
Is this 5 year rule due to IRS rule or simply the annuity company rules? and if it is due to annuity company rules – could the money be transferred to a “stretch” friendly annuity company to allow the grandchildren to withdraw based on their life expectancy or is it too late since none was taken out for the past 4 years?
Lastly, as the grandchildren are still minors – would income coming out be subject to kiddie tax? (but not 10% penalty tax – as this was inherited)
Permalink Submitted by Alan Spross on Wed, 2008-07-16 22:25
Did owner pass prior to their RBD?
If so, this situation may well have been affected by PLR 2008 11028. See att’d:
http://www.financial-planning.com/asset/article/613061/saving-stretch.html
My impression is that the annuity IRA MUST contain the requirements of the 2002 IRS RMD ruling under which life expectancy is the default. Accordingly, under the PLR, the GCs should still be able to retroactively establish their stretch, albeit at the expense of 3 years worth of excess accumulation penalties. That said, they are probably young enough for these penalties to be of little consequence compared to the benefits of saving the stretch for decades.
A direct transfer may be the best solution if the insurer is not cooperative. In answer to your question, the 5 year period may be a misapplication of the IRS 5 year rule without knowledge of the PLR above. They really should not have the option of “their own” 5 year rule since the 2002 RMD Regs have been released. IRA rules trump their usual NQ annuity rules.
Permalink Submitted by Al Fry on Fri, 2008-07-18 01:27
IRA Annuities do not “have their own rule” as regards to the 5-year deferred payout, N-Q annuities do, however. If the annuity wasd held in a Custodial IRA, then the custodian rules would apply. If the annuity was a stand-alone IRA, then the regular IRA rules aplly with most any company’s IRA annuity. Many use the National Financial Services IRA template documentation.