5yr deferral on nonqualified annuity

Submitted by Douglas Bauerband on Mon, 2012-12-10 19:26

Am i correct in stating that when a client elects a 5yr deferral (as a beneificiary) on a non qualified annuity…they do not have to take any withdrawals or rmd like withdrawals…they just have to make sure that the account is 100% empty prior to the 5th anniv. of the original contract owners death?

Reason: annuity company is stating that since the client elected a 5yr deferral, they must elect a payout of rmd like distibutions over the 5 year time frame and cannot leave the money in the account for the whole 5yrs.

Thank you,

Douglas

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Permalink Submitted by Alan Spross on Mon, 2012-12-10 21:08

The following is the IRS Tax code applicable, Sec 72(s)(i)(B):

[quote]s) Required distributions where holder dies before entire interest is distributed
(1) In general
A contract shall not be treated as an annuity contract for purposes of this title unless it provides that—
(A) if any holder of such contract dies on or after the annuity starting date and before the entire interest in such contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used as of the date of his death, and
(B) if any holder of such contract dies before the annuity starting date, the entire interest in such contract will be distributed within 5 years after the death of such holder. [/quote]

While the IRS and many insurance companies do not dictate when the 5 year rule distributions must occur, a company such as the one you are dealing with has apparently adopted a more restrictive approach, although it will level the taxable income each year. You may want to ask someone more senior at the insurance company to review the earlier indication.