IRA Annuity Death Benefit
Hello,
I met a gentleman who had an older variable IRA annuity with a death benefit that exceeded his account value significantly. Because the annuity reduced the death benefit, dollar for dollar, by any amounts withdrawn, he withdrew all but $2,000 of the account value and retained a death benefit of $50,000.
Can he now roll the IRA annuity into a Roth and pay tax on the account value of $2,000, leave it there until death, and get the $50,000 death benefit inside of his Roth for his heirs?
Notice this has nothing to do with surrender penalties, which I understand the IRS has already ruled on.
Thanks.
Permalink Submitted by Brian Pugaczewski on Mon, 2010-08-16 19:54
DJ,
On the conversion, he will have to pay income tax relating to ‘fair market value’ between the account value and the death benefit (approx 48k), so be aware of the potential tax implications. The income tax will not be solely based upon the $2,000 account value.
As for the death benefit, if the converted annuity has been inside the Roth shell for the 5 year holding period, the death benefit will indeed be 100% tax free under Roth rules.
-Brian
Permalink Submitted by Alan Spross on Mon, 2010-08-16 19:58
Starting in 2005, the IRS targeted several variations of IRA annuity conversions which would depress the taxable amount of the conversion while transferring various fringe benefits of considerable value to the Roth IRA Annuity.
The short answer is that the Insurance Co will have to provide the taxable amount when converting this annuity with the 60k death benefit, and it will be considerably more than 2,000. The various valuation methods that apply to different annuity situations are complex, but the IRS has shut down most all strategies that provide for an artificially depressed taxable conversion. Here is a link to TD 9418 which outlines IRS requirements for valuation of these conversions:
http://www.irs.gov/irb/2008-38_IRB/ar07.html