Annuity Distribution to Inherited IRA
There is an FIA that has an income rider that compounds at 8%. The income account can be paid out upon death of the owner over a 5 year period… 20% of the income account value each year. I have a client who would like to have his daughter utilize the stretch provision upon his death. He is considering using the annuity to fund his IRA. My question is can the 20% that is paid out each year from the IRA account be transferred into an Inherited IRA so the stretch provision can be utilized?
Permalink Submitted by Alan Spross on Fri, 2010-03-26 23:45
Sorry, but no. To be rolled into an IRA account, a distributions must be rollover eligible. The types of accounts that can distribute such a distribution are limited to those in the attached definition of eligible rollover distributions:
http://www.retirementdictionary.com/definitions/eligiblerolloverdistribu…
Without such an account as a source of rollover distributions, the client would have to build an IRA from regular contributions made from earned income. If he has earned income he can make regular contributions and could use annuity distributions to subsidize his ability to make such contributions, but that would be a much slower process.
Permalink Submitted by steve harper on Fri, 2010-03-26 23:56
So would the daughter have to roll the entire IRA annuity balance all at once into the inherited IRA upon her father’s passing?
Permalink Submitted by Alan Spross on Sat, 2010-03-27 00:17
I thought that this was a non qualified annuity.
If it is an IRA annuity now then the death proceeds CAN be transferred to a beneficiary IRA for the daughter, BUT the insuror must offer direct trustee transfer of the payouts after his death to the custodian of the inherited IRA she sets up. This is vital, since a non spouse beneficiary cannot take a distribution and roll it over and therefore no checks should be made out directly to her as those would NOT be rollover eligible.
The daughter would have to request these transfers at the best time to maximize the annuity payout. If a lump sum is offered it might be discounted and she might be better off if they will transfer @ 20% per year. Client should investigate the options now and perhaps document what she should do when the time comes.
Permalink Submitted by steve harper on Mon, 2010-03-29 02:31
Sorry for the confusion. To make sure I am explaining correctly the 71 year old Father already has money in his IRA which is currently in a brokerage account. He is considering doing a direct transfer to an IRA and use the annuity with the income rider. The father’s reason for doing this is so his daughter can use the stretch provision. He came to me with the idea.
As I mentioned the annuity company will pay the income rider value as a Death Benefit. However I don’t know if they will do a direct transfer to an inherited IRA of 20% of the money each year when the funds become available to the daughter. Of course if the Accumulation account value is larger at the time the father passes then 100% of the money would be available to be directly transferred to an inherited IRA.
If the company will transfer each payment to an inherited IRA is there anything that would keep this from working to the daughter’s benefit from the IRS perspective?
Permalink Submitted by Alan Spross on Mon, 2010-03-29 04:07
The main challenge the IRS would be concerned with is satisfying the daughter’s RMD. The RMD rules as they apply to various DB plan and annuity contracts are very complex and generally best understood by the insurers that issue the various contracts. I do not know which year end value the insurer uses to figure the RMD, but the annual RMD must be paid directly to the daughter and cannot be transferred to another inherited IRA.
Therefore, these questions need to be addressed to the insurance company, ie how will her RMD be determined and will they transfer the excess of the RMD to another inherited IRA annually for the 5 years?
Those rules were issued in 2004 in the att’d IRS release:
http://www.irs.gov/pub/irs-irbs/irb04-26.pdf
Permalink Submitted by Joseph Arsenault on Tue, 2010-03-30 17:10
Actually the challenge is two fold (as Alan pointed out in previous posts), depending on how the contract reads this could be considered an annuitized payout which is not eligible for rollover (it would be considered the RMD). Also, being a non-spouse beneficiary, the custodian would have to agree to do a direct transfer to an inherited IRA every year when that 20% is paid, which this particular custodian will do only for lump sum payouts, not the 5 year payout. The 5-year option cannot be stretched.
Permalink Submitted by steve harper on Tue, 2010-03-30 17:33
I’ve been in contact with the custodian and found that unfortunately they will not direct transfer the payments to an inherited IRA over the 5 year period. I find it confusing why they will not make this option available for the client?? Thanks for all your help Alan and monsta!
Permalink Submitted by Mel Langer on Thu, 2010-04-01 06:03
I don’t know if I’m allowed to mention the name of Insurance Companies here, but this annuity sounds very much like the one just pitched to me by a financial consultant…and I use that term loosely! The only value, if any, it has is on death of the original owner. The beneficiary must take the death benefit over a “minimum” period of 5 years.
If this is qualified money, then the 5 year payout is considered the RMD. The beneficiary can also set up a longer payout, or continue with the annuity, and take out the RMD each year based on the beneficiaries life expectancy. Point being, you don’t have to transfer the money to an IRA….it’s already an IRA inside the annuity, which allows for the stretch provision.
Permalink Submitted by steve harper on Thu, 2010-04-01 20:47
The company I am referring to is Aviva. What company are you referring to mlanger1. The reason we were looking at the annuity is the income rider grows at 8% and then the value can be passed upon death of the owner over a 5 year period– which is exactly what the owner wants to have happen to this money– if it can be stretched. The accumulation value can be stretched. The income account value that compounds at 8% can not.
Permalink Submitted by Mel Langer on Sat, 2010-04-03 21:56
Yeah…it’s Aviva. It was explained to me a little differently. Upon death of the owner, the beneficiary can then take the GREATER of the Account Value or Income Value over a MINIMUM of 5 years. Remember, the Account Value is money invested in the EIA product.
If the beneficiary cannot get the Income Value account, compounding at 8%, then what is the benefit or purpose of this account, and for what is the current owner paying an INCOME RIDER?
These EIA’s are replete with “conditions” that generally don’t benefit the owner or beneficiary. That 8% is a “phantom account”. I’d love to know if anyone out there ever got money from one of these that actually compounded at 8%.
Lo and behold, I have the actual contract, will be reading it, as will a friend of mine, and will report on what I have found.