Annuity misclassified as an IRA
5 years ago I purchased what I thought was an unqualified annuity and funded it with $100,000 from my checking account. Last year I received a letter stating that I needed to take a RMD because I am turning 73. It turns out I was sold an IRA after reviewing the paperwork. This money came from unqualified funds and will get taxed again if I surrender the account. How can I get this fixed? Any help would be great.
Permalink Submitted by Alan - IRA critic on Mon, 2022-05-02 22:56
Very huge mess here! If the insurance company was responsible for this error, you should pressure them for reimbursement of the costs to correct this excess IRA contribution, which will be considerable. You will owe a 6% excise tax each year (6k), and will have to withdraw the excess before year end to avoid another 6% for 2022. The IRS may also bill you late interest for late payment of the excise taxes. Since the corrective distribution will be well after the due date, any gains on the investment can stay in the IRA.
You should have received a 5498 form (as did the IRS) for the annuity purchase year showing a rollover contribution, and another statement each January showing the IRA account balance. If you never received these forms, it may enhance your case, but if you did and ignored them, you will not get any relief from the insurance company and you would be wasting your money to proceed against them.
When you request the distribution, tell the insurance company that you have an excess contribution that needs to be returned after the due date per Sec 408(d)(5). The 1099R you receive will then leave box 2a blank, and that will prevent you from owing taxes on the distribution since this excess contribution must be treated as an excess regular contribution for which you never claimed a deduction. There is NO earnings calculation, so any earnings get to remain in the IRA.
Note that your 100k excess amount will be less if you were eligible to make an IRA contribution including a spousal contribution starting in the year following this annuity purchase that you did not make, nor did you make a Roth contribution. This is all handled on Form 5329 which you will need to complete for each year starting with the year of the annuity purchase. You may need to retain a tax professional to complete these forms.
Your IRA balance for purposes of determining your annual RMD starting at 72 is not reduced by the excess amount held in your IRA. Neither does the corrective distribution of 100k (or whatever the excess balance may be when you take the distribution) count toward your RMD for that year. It must be in addition to your RMD, although will not be taxable if handled correctly. However, prior or current year RMDs DO reduce your excess balance for purposes of the determining the excise tax for the current year. For example, if your excess balance is 100k at the end of 2021, your 2022 RMD distributed from any of your IRAs of 20k would reduce your excess amount to 80k, which is the amount you would need to distribute to eliminate the excess balance this year. This is all done on Form 5329.
Unfortunately, when you request the corrective distribution