Systematic Rollover of IRA Annuity
We have a client who has an annuity with a favorable lock-in for annuitization. The income stream from annuitization will far exceed the value if we rolled to a new account, so we are going to annuitize.
Question: Can this client setup a brokerage IRA and have each monthly check from the annuity IRA fund the brokerage IRA? We are looking to defer the taxable event since the client does not need current income.
Thanks for the feedback!
Permalink Submitted by Alan Spross on Fri, 2012-04-27 19:19
The final determination to your question will have to come from the insurance company.
Today, there are several dozen variations of annuitization options. In the simplest case where life annuity begins prior to the usual required beginning date for RMDs, the start of the annuity is treated as the RBD, the payouts therefore become RMDs and RMDs are never eligible for rollover.
If the client is over 59.5 but not yet 70.5, there might be some annuitization periods that are too short to satisfy Sec 401(a)9 and become RMDs, and those could be T to T transferred to another IRA, but payments based on life expectancy are probably going to be considered RMDs even when they start prior to the usual required beginning date. The following is a copy of Q &A 10 of IRS Reg 1.401(a)(9)-6:
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Q–10. What rule applies if distributions commence to an employee on a date before the employee’s required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A–1 of this section?
A–10. (a) General rule. If distributions commence to an employee on a date before the employee’s required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A–1 of this section, the annuity starting date will be treated as the required beginning date for purposes of applying the rules of this section and §1.401(a)(9)–2. Thus, for example, the designated beneficiary distributions will be determined as of the annuity starting date. Similarly, if the employee dies after the annuity starting date but before the required beginning date determined under A–2 of §1.401(a)(9)–2, after the employee’s death, the remaining portion of the employee’s interest must continue to be distributed in accordance with this section over the remaining period over which distributions commenced. The rules in §1.401(a)(9)–3 and section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply.
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SImilar rules apply to the traditional DB pension payouts after retirement. These are never eligible for rollover because they are not considered ERDs (eligible rollover distributions). But ERDs as defined do not apply to IRA accounts. IRA distributions for an IRA owner not eligible for rollover are limited to RMDs, therefore once a payout is considered an RMD and is rolled over, it becomes an excess contribution that must be corrected. In the above posted IRS Reg. an IRA owner is considered the same as the “employee”.
I would be interested in whether the insurance company believes if the IRS will consider their form of annuity payout an RMD. If so, it is definitely not rollover eligible.
Permalink Submitted by Richard Krafcik on Mon, 2012-04-30 15:31
Thank you for your response. I spoke with the insurance company, and they informed me that the payout would be marked as a normal distribution. They would not be designating this as an RMD on any forms submitted to the IRS.
We are looking at taking either a life with 20 year or a 20 year period certain payout for a client that is currently 62 years old. The insurance company did not have a problem with issuing an annual check to the client that could be rolled into another IRA. Do you think the insurance company may be allowing something that the IRS would not allow?
We would like to roll the money since the client does not need current income, but we don’t want to generate tax issues for the client (of course!). Thanks.
Permalink Submitted by Jose Morales on Mon, 2012-04-30 15:50
All distributions after the age of 59 1/2 are simply coded as Normal Distributions. There is no special designation that a custodian would make to tell the IRS that a distribution is a Mandatory Distribution. The responsibility to follow all mandatory distribution and rollover rules lies solely on the individual, not the IRA custodian, although most good custodians will tell an individual when they are in danger of violating any IRS regulations if they become aware of a client’s intentions.