RMD SPIA Non-spouse beneficiary?
Can a non-spouse beneficiary of an IRA transfer the money into a beneficiary IRA and purchase a life SPIA?
I’m having a very difficult time getting a definitive answer on this one. My confusion obviously comes in because the SPIA can cause the payments to extend past the person’s life expectancy. I know that SPIAs are fine for the original account owner, but I’m simply guessing that they aren’t for a non-spouse beneficiary.
Permalink Submitted by Al Fry on Mon, 2008-08-18 19:26
It should be ok, however the certain period cannot extend beyond life expectancy.
Permalink Submitted by Mister Anonymous on Mon, 2008-08-18 20:37
Thanks for the response.
By you saying, “it should be ok”, does that mean that you are giving an educated guess at the answer or are you sure about this?
This could be a great opportunity to stretch the payments out longer and have the payments be more like RMD’s that get recalculated.
Ex. The non-spouse beneficiary is 63 and has a life expectancy of 22.7 years. In 14 years, for RMD calculations, they have a life expectancy of 8.7 years. However, their true life expectancy is longer than this. At that point, they could transfer the IRA into a SPIA and get a payout for the rest of their life that is based upon their true life expectancy. This will allow them to spread the payouts and the tax over their lifetime and not an artificially lowered life expectancy.
I’m surprised that they can do this because the IRS seems like the loser in this game. If they die soon, the IRS loses out on lots of tax money. If they live to life expectancy, the IRS still loses out.* The IRS only makes out better on this if the person lives a good deal past their life expectancy.
*If the person dies at life expectancy and the investment account averaged 5% a year, a 63 year old would have pulled out about $900,000, but only $800,000 in a SPIA.
Permalink Submitted by Al Fry on Mon, 2008-08-18 20:54
You are forgetting one thing. The certain period will be limited to 22 years, if they die in year 15, their bene will get only 7 more years payments. That is why IRS limits the certain period. Next you must find a carrier to take it. Most will.
Permalink Submitted by Al Fry on Mon, 2008-08-18 20:58
Another point is that typical annuitization will give them a higher (than RMD) payment in early years, a lower one (than RMD) in later years, so the IRS gets its taxes sooner. And if the person lives a longer time, the IRS will continue to get taxes on the payment.
Permalink Submitted by Mister Anonymous on Tue, 2008-08-19 00:59
alfry, I appreciate the conversation. This is a good learning experience for me.
I wasn’t forgetting the period certain limitation. In fact, I was really thinking more along the lines of life only.
It is also true that with the SPIA, the IRS will get some of the money sooner, but they are also gambling that they will get very little of the money.
I think that my thought process centered around the fact that a SPIA makes an acceptable substitute for RMDs when we are are talking about the original owner. The IRS probably looks at this as “6 of one; half dozen of the other”. However, when we are talking about non-spouse beneficiaries, the RMDs, after the first year, are higher. Therefore, the equivalency that existed before now tilts in favor of not wanting SPIAs from an IRS perspective. This is why I didn’t know if SPIAs were allowed for non-spousal beneficiaries. It appears as if my thought process was wrong.