Annuitization as satisfying stretch payout rules

Submitted by Robert Vashko on Wed, 2023-03-22 18:10

Does the Code or regs explicitly set out that annuitization by a stretch-eligible IRA beneficiary can meet the requirements of 401(a)(9)(B)(9)(iii)?

Or is it one of those things where an annuity with a period not to exceed the bene’s life expectancy just simply meets the definition under (B)(iii)?

Not sure if I saw anything in the regs [1.401(a)(9)-6] that flat-out says that “annuitization is acceptable as a distribution option for a bene.” Did I miss something?



Submitted by Alan - IRA critic on Wed, 2023-03-22 23:30

  • I have looked before and have not found any explicit reference in 1.401(a)(9)-6 to annuitization initiated by a beneficiary. There are some restrictions to joint annuities started by the plan owner to limit the reduction of distributions to the living owner by deferring to a younger joint annuitant.  I expect that many insurers would not allow it, perhaps out of concern for the RMD Regs. If there were Regs, it’s pretty clear that a 5 or 10 year rule beneficiary could not extend that period by annuitization. 
  • While 401a(9)-6 is long and complex, the overriding intent seems to limit annuity structures that would suppress distributions to the owner compared to normal RMDs. That said, recent emphasis in Congress is pushing annuitization options, and of course Roth accounts, so some changes to the Regs might be expected at some point.

Submitted by Robert Vashko on Thu, 2023-03-23 00:25

Thanks, Alan.  My question was rooted more in, say, an EDB who could still stretch.  If an annuitization was throttled to life expectancy or less, and paid out no less than once per year, then it seems that even though “annuitizataion” is not explicitly listed, a properly structured annuitization still “checks all the boxes” set out in 401(a)(9)(B)(iii) and the regs?  As you said, it doesn’t suppress distributions or spread them out past L.E.

Submitted by Alan - IRA critic on Thu, 2023-03-23 16:29

Seems like this would comply if any insurer would be willing to offer the option. GIven the almost total lack of IRS oversight on inherited plan RMD compliance, it’s not clear if the IRS would have any issue with this or not.

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