Inherited annuity to "inherited ira"


A

aallflaat

I am writing both out of personal concern and to provide some
important
information to those who might inherit an annuity.

Sadly my mother passed away last year, intestate. There was
an variable annuity which she had not yet drawn upon. It had no
beneficiary.
I am anticipate inheriting as sadly my mother left no other relatives.
Of course, I am concerned about the tax hit. At first the annuity
company
said the only option was to simply collect the funds. Now they say
they can
set up an inheritted IRA Account. This is much better as one only
is
taxed on the required minimum distribution each year rather than the
entire contents of the annuity. In my case, I will simply increase my
tax
deferred savings through my employer by an amount equal to the RMD so
it
does not change my tax bill at all.

Publication 590 says that a direct transfer from a deceased employee's
"qualified" "annuity plan" or "tax-sheltered annuity" or "governmental
deferred compensation"
is treated as an inherited IRA if one is the "beneficiary of the
plan."
Unfortunately, this does not completely cover the issues by the
relevant sections of the Internal Revenue Code.

Section 408(d)(3)(C)(ii) of the Internal Revenue Code
which concerns "inherited IRAs" and annuities.
It says that the account will be treated as "inherited" if
"the individual for whose benefit the account or annuity is
maintained acquired such account by reason of the death of another
individual."

Thus, the fact that my mother chose not to designate a beneficiary
should
not affect the ability of those inheriting the annuity from doing so.

It refers to section 408(a) of the IRC Code which simply states that
it be
organized for the exclusive "benefit of an individual or his
beneficiaries..."
It does not require that the retirement annuity be set up by an
employer.
It is not clear from talking to the annuity company where the money
came from,
e. g. did the employer deposit it or did my mother choose to make an
investment.
I have reason to believe the latter.

However, it gets more complicated! 408(a)(6) provides:
"Under regulations prescribed by the Secretary, rules similar to the
rules of section 401(a)(9) and the incidental death benefit
requirements
of section 401(a) shall apply to the distribution of the entire
interest
of an indivdual for whose benefit the trust if maintained."

401(a)(9)(A) A trust shall not constitute a qualified trust under this
subsection unless the plan provides that the enitre interest of each
employee--will be distributed to such employee not later than the
required beginning date...over the life of such employee or over the
lives of such employee and a designated beneficiary.

The required beginning date means April First of the calendar year
following
the later of the calendar year in which the employee attains age 70
1/2 or
the calendar year in which the employee retires.

My heart sunk when I saw this since I knew my mother had the required
date
on her ninetieth birthday and she unfortunately passed away on her
eightieth
birthday. (She complained that she would want to not beginning these
distributions as early as her ninetieth anniversary.)

However, I read the next paragraph entitled "Exception" Subclause
(II) of clause (i)
shall not apply for purposes of section 408(a)(6) or (b)(3). So it
looks
like I may be able to roll over, but there is the clause I which
refers to age 70 1/2.
(408(b)(3) refers to an individual retirement annuity.)

I checked these statutes in the United States Code Annotated and there
have
been no court cases regarding the inheriting of retirement accounts
or their roll-over into an inherited IRA.

I also see a thread on inherited annuities in September 2007 in this
group and it seems
to indicate that one can roll over and it does not say anything about
the "required
distribution" starting at age 70 1/2. What gives?

I had the insurance company look at it.

Thanks for any confirmation that anyone might provide on this subject.
Hopefully, I can get the information free but I am open to paying a
financial or legal professional if they can provide value.

And I hope this information is helpful to other people who may be
faced with
a similar tragic circumstance. Insist upon moving the annuity to an
inherited IRA and also
get a copy of the original contract for the annuity.
 
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J

joetaxpayer

My heart sunk when I saw this since I knew my mother had the required
date
on her ninetieth birthday and she unfortunately passed away on her
eightieth
birthday. (She complained that she would want to not beginning these
distributions as early as her ninetieth anniversary.)
Where did the money come from? Was it from an IRA and is this account an
annuity within an IRA? Or, was it a rollover from a pension?

If it was a purchased annuity, with post tax funds, I am unaware of any
provision that lets you shift it into an IRA. IRAs are sourced with
annual cash deposits or rollovers from other retirement accounts.

I don't understand the above sentence. What was required on her 90th
birthday?

Joe
www.blog.joetaxpayer.com
 
M

Mark Bole

I am writing both out of personal concern and to provide some
important
information to those who might inherit an annuity.
You have no question.
Sadly my mother passed away last year, intestate. There was
an variable annuity which she had not yet drawn upon. It had no
beneficiary.
Each account application form should require an entry for beneficiary.
[...] In my case, I will simply increase my
tax
deferred savings through my employer by an amount equal to the RMD so
it
does not change my tax bill at all.
Unless adding the RMD amount causes you to exceed your allowed contribution.
Thus, the fact that my mother chose not to designate a beneficiary
should
not affect the ability of those inheriting the annuity from doing so.
You are trying to designate a beneficiary?
It refers to section 408(a) of the IRC Code which simply states [...]
"IRC Code" and "simple" is an oxymoron...by some measures.
And I hope this information is helpful to other people who may be
faced with
a similar tragic circumstance. Insist upon moving the annuity to an
inherited IRA and also
get a copy of the original contract for the annuity.

Most of your post, I could not make it through.

-Mark Bole
 
D

D. Stussy

Mark Bole said:
You have no question.
I agree, but perhaps a concensus of correctness is being sought.
Each account application form should require an entry for beneficiary.
That doesn't mean that one was stated, or that the estate wasn't selected as
the named beneficiary (which is a stupid choice if one does have an heir).
[...] In my case, I will simply increase my
tax
deferred savings through my employer by an amount equal to the RMD so
it
does not change my tax bill at all.
Unless adding the RMD amount causes you to exceed your allowed
contribution.

I don't see that as happening since RMDs can't be rolled over. Only non-RMD
amounts could be, but note that aggregating an inherited amount with
non-inherited amounts loses the inherited character.
You are trying to designate a beneficiary?
I don't see that. The law has already selected a beneficiary for you.
Most of your post, I could not make it through.
I can't figure what's going on either - for certain.
 
J

joetaxpayer

D. Stussy said:
I can't figure what's going on either - for certain.
I read this (way too long) post to ask:
"Can I roll my deceased mom's annuity into an IRA?"

OP did not (that I could find) indicate the source of the funds. I also
suspect that if the answer were 'yes' as funds were in an IRA or from a
lump sum pension, that he still can't roll to an IRA as he was not a
named beneficiary on the annuity, although I am not certain of this last
point, only that it pertains to inherited IRAs.
Joe
 
A

aallflaat

Thanks to everyone who answered my post. Sorry that the
original post was so difficult to follow even though I did reread
it carefully and revised before posting.

There are two issues mentioned in the answers.
I do not know where the money came from.
However, the insurance company told me that the annuity was qualified.

Section 408(d)(3)(C)(ii) of the Internal Revenue Code
which concerns "inherited IRAs" and annuities.
It says that the account will be treated as "inherited" if
"the individual for whose benefit the account or annuity is
maintained acquired such account by reason of the death of another
individual."

My mother did not designate a specific beneficiary on the account, so
by
the intestate laws of her state
(my mother was unmarried after her first divorce and
there were no other children), I end up inheriting it.

And I know, but thanks for the reminder, that one must keep the
inherited
IRA separate from other accounts.
 
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J

joetaxpayer

My mother did not designate a specific beneficiary on the account, so
by the intestate laws of her state
(my mother was unmarried after her first divorce and
there were no other children), I end up inheriting it.
I believe the same rule as for an inherited IRA applies, you needed to
be named on the account to inherit it with the option of a 'stretch'
payout. Inheriting through a will or the laws regarding intestate
estates means a 5 year maximum payout is required. If the amount is
large enough, it's worth consulting, and paying for, a professional
opinion. I hope your clarification will invite others to offer their
advice, as I am not 100%, given the annuity twist.

Joe
www.blog.joetaxpayer.com
 
A

Arthur Kamlet

And I know, but thanks for the reminder, that one must keep the
inherited IRA separate from other accounts.

Yup.

Which also means if there is any basis to these IRAs, you have multiple
Forms 8606! And you use two different tables/entries to calculate your
MRD.
 
J

joetaxpayer

Arthur said:
Yup.

Which also means if there is any basis to these IRAs, you have multiple
Forms 8606! And you use two different tables/entries to calculate your
MRD.
I've followed this thread, but not seen confirmation of the correct
response. Is my assumption that Annuities have the same beneficiary
requirements as IRAs (i.e. that the bene must be spelled out on the
account paperwork) correct, or does that rule not apply?

Joe
 
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A

Arthur Kamlet

I've followed this thread, but not seen confirmation of the correct
response. Is my assumption that Annuities have the same beneficiary
requirements as IRAs (i.e. that the bene must be spelled out on the
account paperwork) correct, or does that rule not apply?

They certainly should, but if they don't and the annuity
company lets it go, or even if it names a beneficiary who
is no longer alive at time of annuitant's death, it goes to
the estate where it might become messy.
 
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