Taking IRA monies
and setting up a a SPIA for 7 yrs…..wondering if the general concept of taking Qual monies pre 59 1/2 escape the IRS Penalty when put into a SPIA and client now has lost access to the lump sum as well as another example of annuitizing a portion and whether if that too escapes the penalties that the IRS can impose due to giving up access under the annuitization of the asset?
General questions,,,,,,,I hope there is a simple answer.Thanking you all in advance……. Michael
Permalink Submitted by Alan Spross on Mon, 2010-12-13 22:56
If someone separates from service in the year they reach 55 or later, then can take penalty free distributions directly from the plan. And at any age, they can roll qualified money over to an IRA and then set up a SEPP plan which must last the longer of 5 years or until 59.5. But a SEPP plan will yield less than 5 % of the account balance because it must be based on the life expectancy of the taxpayer. A 7 year SPIA would produce a distribution much too high for this because of the obvious 7 year distribution period being much shorter than the life expectancy.
That said, if the client establishes a custodial IRA and purchases a 7 year SPIA within the account for a portion of the balance that results in the exact SEPP distribution, this will work. Or better yet, if the SPIA was paid back into the IRA as a typical investment, client could just distribute the correct SEPP amount from the IRA. It is the amount actually distributed that is reported on the tax return and must comply with the requirements of a SEPP (aka 72t) plan.