NQ Inherited after gains are distributed – recharacterization?

Submitted by Toby Hartley on Wed, 2018-08-01 16:20

So the client moves their portion of the DB into an NQ inherited policy. Question is, once RMD’s have reduced the policy down to the cost basis, can the client simply surrender, transfer or recharacterized to a NQ policy in their name with normal titling? I assume while its titled FBO the RMD’s must continue, even after gains are distributed.



Submitted by Alan - IRA critic on Wed, 2018-08-01 17:15

The remaining balance in an inherited NQ annuity cannot be transferred to an owned NQ annuity. The distribution option that applies must continue until the account is drained, even though the taxable gains may have been fully distributed.  Usually the beneficiary can drain the account any time they wish, as the distribution option is a minimum requirement only.

Submitted by Toby Hartley on Mon, 2018-08-06 14:26

Got it.  No re-characterization or direct transfer.   Obviously, nothing is wrong with distributing the balance once gains have been depleted due to RMD and then just reinvesting the funds as desired, right?  The point really is on this case: spread out the tax burden of the gains currently in the policy while understanding the client does not need or want more income.   So, we’re just letting them know that RMD’s are required, but once the gains are gone or greatly reduced, they can stop the RMD.  Not directly, but by taking the balance and reinvesting into another vehicle.  

Submitted by Alan - IRA critic on Mon, 2018-08-06 15:26

Correct. Sticking to the RMD only until the gains have been distributed will control taxable income, but if the expenses of the annuity are bad enough, it still may be worth accelerating distributions while gains are still coming out, particularly if the distributions can be used to subsidize maxing out taxpayer’s own retirement accounts such as a 401k.  Also, under a 2013 IRS PLR, doing a 1035 exchange (essentially a direct transfer) to another insurance company annuity is allowed.

Submitted by Toby Hartley on Mon, 2018-08-06 23:27

Thanks.  They are looking for an FIA, no expenses or rider fees etc…   Just 55% of the up in the S&P500 and 0% of the down.  Appreciate the confirmation.

Submitted by Alan - IRA critic on Tue, 2018-08-07 00:08

I would recheck that no expenses claim. These products have expenses that the insurance company may not describe as expenses, but all features come with a cost. Death benefits come with an added cost, and most companies purchase reinsurance for death benefits as they all got badly burned with deaths following the 2008 financial crisis. Perhaps capping the upside at 55% is the only expense for purchasing downside protection as financing the downside protection can vary by company.

Submitted by Toby Hartley on Tue, 2018-08-07 20:24

The cost is the lack of liquidity in the way of a 10 year term.  Withdrawals, more than 10% annually, are subject to an early withdrawal penalty.   The early charges are 8.3%, 7.4%, 6.5%….  After the term or in the case of a nursing home confinement, the account value is available without penalty.   Sure, you could say that the missed out 45% on the up years is a cost, i get that.  However, for those at the age or place where they are looking to preserve, 0% of the down years is well worth that cost.  

Submitted by William Tuttle on Tue, 2018-08-07 21:54

Alan is correct. I guarantee that a FIA has additional fees and expenses obsfucated in the payout rate:

  • The 55% cap almost certainly does not include dividends. Not reflecting the true return of the index.
  • There will be Mortality and Expense (M&E) fees.
  • There will be extremely expensive investment management fees.
  • The only good Fixed Annuity is a surrendered Fixed Annuity.

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