Qualified Annuity Death Benefit
I’ve attended many of Ed’s presentation over the years and have always enjoyed them. I have a unique situation at hand that I can use some help with. I’ve looked online and the answers aren’t always clear cut. As a result, I’m posting here to see if I can find answers.
My father pass recently (8/2) and left a Qualified Annuity IRA ($302K Death Benefit) to my mom. The account value itself was just under $10K with a much larger, disproportionate death benefit. So, we always treated it like additional life insurance. The question is what to do with this for tax mitigation purposes since I had nothing withheld from the lump sum. The full $302K was paid out to my mom recently and deposited to her checking account about 10 days ago. The questions are. Do we have to keep this like this and just recognize Ordinary income tax on the whole amount? Or, can the monies paid as a lump sum be transferred into a spousal IRA subject to RMDs—which would be much better? I’m not even sure this is allowed. Given that my parent’s will have received about $100K in income for 2021 from all sources (SS for both, pension on my dad, auto RMDs paid from an IRA account, etc.) adding another $302K will increase taxes quite a bit. Any thoughts or suggestions here would be much appreciated. Many thanks in advance everyone!
Permalink Submitted by Alan - IRA critic on Wed, 2021-08-25 21:37
What would be both of their ages on the birthdays this year? And has your Mom done a 60 day IRA rollover of a distribution made in the last 12 months?
Permalink Submitted by Edward Alferoff on Wed, 2021-08-25 23:38
Thank you for your reply. My dad was 87 at the time of his passing (turned 87 in March) and my mom is 82 (also turned 82 in March). My mom has not done any 60 Day rollovers ever. She never had an IRA. I was thinking that if the death benefit of his qualified (IRA) annuity can be treated like an IRA that I would combine his current IRA and the Qualified Death benefit into one IRA subject to RMDs at her current age. I’m not sure this is making sense, but if it does do you know if it’s possible? I’d like to move on this as soon as possible. Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2021-08-26 01:33
With the ages as reported, the obvious solution for your Mom is to roll over the entire distribution into her own IRA account (known as spousal rollover). IRA annuities are treated more like IRAs than like non qualified annuities. The insurance company should not have automatically made any distribution unless someone requested it. Now that a distribution has been made, it is fortunate that Mom still has her one 60 day rollover available, because now she can simply roll the full proceeds into her own IRA (not a beneficiary IRA). For 2021, if your father had not completed his 2021 RMD, the remaining RMD amount should not be rolled over to Mom’s IRA, since an RMD is not eligible for rollover. Then starting in 2022, Mom will need to take annual RMDs using the Uniform Table for age 83. Due to being younger, her 2022 RMD will be less than what Dad’s 2021 RMD was.
It is also possible that if Dad had other IRAs, he might have satisfied the entire 2021 RMD from this or another IRA account. If so, then there is no RMD left and Mom can roll over the entire 302k to her own IRA.
While life insurance death benefits are not taxable, this is an IRA annuity, so the entire 302k will eventually be taxable as Mom takes her annual RMDs.
Permalink Submitted by Edward Alferoff on Thu, 2021-08-26 20:50
Hi Alan. This is super helpful. Thank you. So, to summarize. She would set up an IRA that we would deposit the $302K into. Does it have to be titled anything other than a Traditional IRA (e.g., Spousal IRA)? Also, can i take my father’s IRA and eventually roll it into this account after the last auto RMD distribution in December and have her use her Age 83 RMD on the total? Or, would you recommend just leaving both separate and letting his come out according to his RMD table and hers to hers as well. Not sure i’m making sense. Hope so.Lastly, once we move the $302K which is currently in a checking account, I’m assuming i have to let their accountant know the details of what i’ve done so that she can avoid paying tax in 2021 on the amounts deposited. And, the $302K was the death benefit as of 12/31/20. Does she have to pay RMDs on it this year in 2021 OR starting next year?
Permalink Submitted by Alan - IRA critic on Thu, 2021-08-26 22:07
The account should just be a basic traditional IRA. You indicated that the balance had been fully distributed to your mother, and that distribution would have included any remaining portion of his 2021 RMD. Therefore, the RMD has been completed, but no part of the RMD is eligible for rollover. That means you will have to determine how much of his RMD was left on his DOD and that amount cannot be included in the IRA rollover. So, for 2021 the RMD is the original RMD for the year. Your mother will not have any RMD until 2022, the 2021 RMD already having been completed.
That means that the 302k in the checking account is not ALL eligible for rollover unless father had completed his RMD, and if he was on automatic period distributions, that means that almost half of his original RMD was not completed. For example, if his original 2021 RMD was 30k, and only 18k was distributed prior to his death, then the remaining 12k is contained in the distribution. The 12k cannot be rolled over, and that leaves 290k eligible for rollover to her own IRA. If the 12/31/2021 balance is still 290,000 in this example, then her 2022 RMD will be based on 290,000 divided by her age 83 divisor.
Finally, to add to the complexity, there will be new RMD tables effective in 2022 that will lower RMDs somewhat (maybe around 6%) compared to the current tables. So she needs to be sure to use the correct tables when her 2022 RMD is calculated. She has until the end of 2022 to distribute that RMD.
Not sure you are following this, so feel free to ask if you have more questions.