Qualified Single Premium Income Annuity Annuitized
I have a SPIA within a New York Life IRA which I annuitized and receive a level monthly distribution for my lifetime. I pay taxes on the distributions I receive from this SPIA. As I understand, once a SPIA has been annuitized with a lifetime level distribution, the SPIA would:
a) Excluded from aggregating with my other pretax accounts (IRA, 401K) in determination of my required minimum distributions. FYI I have not yet age 72, requiring withdrawing RMD from my pretax accounts.
b) Not be subjected to the aggregating and pro rata rule with any other traditional IRA(s) values; if converting an after-tax non-deductible IRA to a Roth IRA. My annunization action is irrevocable and the contract has no cash value (i.e. my lump sum premium payment cannot be surrender accessing my money).
I would appreciate if my understandings are correct. Thank You.
Permalink Submitted by Alan - IRA critic on Sun, 2021-05-30 22:38
When you annuitized the IRA the distributions you receive are RMDs even though you are not yet 72. Therefore, they are not eligible for rollover. When you reach 72, RMDs from your other accounts will begin and you are correct that these RMDs cannot be aggregated with the IRA annuity RMDs.
Your other question has not been clarified by an IRS guidance. If your IRA has basis, there is no consensus how you apply the basis since the annuitized IRA has no account balance and therefore Form 8606 will not generate a result. Apparently, annuitizing an IRA is fairly rare and annuitizing with basis is even more rare, and this situation has not risen to the level that the IRS has felt the need to develop regulations. Taxpayers have developed various means of applying the basis, and if they make any sense at all, the IRS has not contested the results. One of those methods when the annuitized account is small in relation to the others is to complete the 8606 as if the annuity does not exist, and treat the annuity as 100% taxable. But that will not work if the annuitized amount was the bulk of the IRA. Another method is to include the annuity premium on line 6 of the 8606 along with the other balance, and reduce the annuity value each year by the amount already distributed from the annuity. Just keep detailed notes in case the IRS inquires and be consistent from the start – do not change the approach as the years pass. Perhaps some day the IRS will come up with a workable method of applying basis to IRA annuities.
Permalink Submitted by Donald Diotallevi on Mon, 2021-05-31 01:59
Thanks Alan for your quick response! As clarification the SPIA does not have a basis. Funds from my Fidelity 401k was rollover to NYL IRA to purchase the SPIA. My NYL IRA only contains the SPIA. I also have a separate, after-tax non-deductible IRA, that has a basis. If I converted the after-tax non-deductible IRA to a Roth IRA, just wanted to confirm my understanding that since the SPIA was irrevocable annuitized, the pro rata rule would not apply as the SPIA has no cash value and have been paying taxes as ordinary income on the SPIA distributions.
Permalink Submitted by Alan - IRA critic on Mon, 2021-05-31 03:52
Per Sec 408(d)(2) copied below, all IRA accounts are treated as a single contract, and all distributions are treated as a single distribution for purposes of Sec 72, which specifies how IRA basis is applied to any distribution. Therefore, it is immaterial which account comes first and the pro rata rule therefore applies to all distributions, except that the IRS has not provided a formula for applying this rule. The taxpayer is therefore forced to improvise.
“(2)Special rules for applying section 72For purposes of applying section 72 to any amount described in paragraph (1)—(A)all individual retirement plans shall be treated as 1 contract,(B)all distributions during any taxable year shall be treated as 1 distribution, and(C)the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.”