IRA Aggregation Rules
Does the Fair Market Value of an existing IRA Income Annuity come into play at all when converting a Non-Deductable IRA?
If you mean that the annuity has been annuitized and therefore has no year end value, the IRS has not provided any guidance on how to apply IRA basis to distributions or conversions from either the IRA annuity or other non annuitized IRA accounts. Therefore, taxpayers have been improvizing when completing the 8606 to report the conversion. One example is to show the annuity premium less the total prior year distributions from the annuity as the annuity value on line 6 of the 8606. If the non annuitized account is much larger than the annuity premium was, another tactic is to treat the annuity payments as pre tax and apply the basis only to distributions from the non annuity account. I have heard of some insurance companies providing a present value of the annuity cash flow to include on line 6. Again, there is no clear IRS guidance for some reason, possibly because such guidance might be overly complex, but there is also little evidence that the IRS has issues with the various improvised approaches.
Back in 2017, we sold a $ 252,000.00 Joint Life Income Annuity that pays a couple $ 1,250.00 per month. Each January they receive a letter from the issuing company. On January 5, 2021, they received their annual letter which noted the following:The FMV as of December 31, 2020 was $ 270,555.35 and that it will be reported to the IRS. It goes on to say:”It is our understanding that this information may only be relevent to you in the event that you have made nondeductable contributions to any of your individual retirement plans, and you have taken a distribution from any of your individual plans during the calender year.” It concludes:”Please note, your annuity is an income paying product that has no cash value….. Any clarification as to the meaning of the second paragraph would be greatly appreciated.
Yes, this imputed value or present value calculation is meant to be included on line 6 of Form 8606 and therefore will provide the ability to apply the IRA basis. I don’t know that every company uses the same method of calculating this value, but it provides an easy way to address the issue with Form 8606. The last sentence of this annual letter just clarifies that this figure is not to be used for any purpose other than determining how much IRA basis on Form 8606 can be applied to any distributions made in the year ending on the date of the FMV statement. It is not clear whether the IRS has ever accepted such use of the annuity value. That would pose an interesting question to this insurance company. Perhaps the value will drop if interest rates rise materially.
Permalink Submitted by William Tuttle on Fri, 2021-06-04 15:28
There is no such thing as a “non-dedictible” IRA. There is only non-deductible basis and pre-tax balances in all traditional, SEP and SIMPLE IRA accounts.