Help With Annuity/IRA Question

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ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Help With Annuity/IRA Question

Post by ResNullius » Sat Aug 28, 2010 4:33 pm

Basic question: Can a person purchase an annuity within an IRA, without creating a taxable event and so that the annuity payments become the distributions from the IRA? My wife's sister is in an unsual situation. She is about to inherit $500K, which will cut her off from SSI and Medicaid (she's 54 and has been disabled all her adult life). It's too late to change wills or any of that. She is totally incapable of handling her own finances, but she also refuses to accept advice from anyone in the family. She's paranoid, in addition to being disabled. Her father originally had a needs trust set up in his estate, but unknown to my wife and others, he changed it a year ago to give the money outright to my wife's sister. If she can purchase an annuity within the rollover/inherited IRA, this would almost guarantee that she can't blow the money quickly, and it would guarantee she has a monthly income at some level for life. Yes, annuities suck and I don't like them, but the question is can she purchase an annuity within the rollover/inherited IRA, then take the annuity payments as defacto distributions from the IRA? I think the answer is yes, but I just wanted to check with the folks here. Thanks.

kenbrumy
Posts: 394
Joined: Sat Feb 28, 2009 5:13 pm

Post by kenbrumy » Sun Aug 29, 2010 7:36 am

I agree the answer is probably yes but you would need to contact an IRA provider. Unfortunately, I've seen people get sold annuities inside their IRAs but they are usually the variable type. I don't recall anyone with a SPIA.

I do see four problems. First, you said she doesn't trust family members so why would she listen to you now. Second, even if she bought an annuity she would have the later ability to sell it to one of the "we buy structured settlements and annuities" firms for pennies on the dollar but she'd have "her money now." Third, there is a requirement for minimum withdrawals from inherited IRAs. That could be a problem with level payments. Fourth, you say she'd disabled so a lifetime annuity in her case might not be a good deal for her.

My suggestion is to show her the IRS withdrawal schedule and show her how the "automatic" payments she'll receive from the IRA will last the rest of her life. The IRA can be set up to pay her the RMD although it may have to be paid annually and not monthly. She doesn't have to trust you. She can trust the IRS and her IRA custodian. That's a scary thought.

ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Post by ResNullius » Sun Aug 29, 2010 9:22 am

kenbrumy wrote:I agree the answer is probably yes but you would need to contact an IRA provider. Unfortunately, I've seen people get sold annuities inside their IRAs but they are usually the variable type. I don't recall anyone with a SPIA.

I do see four problems. First, you said she doesn't trust family members so why would she listen to you now. Second, even if she bought an annuity she would have the later ability to sell it to one of the "we buy structured settlements and annuities" firms for pennies on the dollar but she'd have "her money now." Third, there is a requirement for minimum withdrawals from inherited IRAs. That could be a problem with level payments. Fourth, you say she'd disabled so a lifetime annuity in her case might not be a good deal for her.

My suggestion is to show her the IRS withdrawal schedule and show her how the "automatic" payments she'll receive from the IRA will last the rest of her life. The IRA can be set up to pay her the RMD although it may have to be paid annually and not monthly. She doesn't have to trust you. She can trust the IRS and her IRA custodian. That's a scary thought.
Thanks for your response. All your points are valid. This is a bad situation. My wife's sister won't listen to anyone, but there's a chance we could get someone to suggest this to her in a positive light. And yes, she probably would sell the annuity down the road. This is a no-win situation for the family, because she's going to end up on our doorsteps asking for money as soon as she runs through this money. Her sisters gave up their inheritance in order for her to get this money. She also likely will figure out a way to lose her house as well, which was paid for by her father. She's crazy, but not crazy enough to be declared incompetent, and she distrusts her sisters and everyone associated with the family. She likely will end up taking advice from a druggie out in Montana where she lives, then lose it all within 12 months. It's a sad situation, but that's the way it is.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Sun Aug 29, 2010 9:24 am

This is a question that has no clear answer. Even the IRS has trouble with it.
Annuity distributions from an insurance company. Special rules apply if you receive distributions from your traditional IRA as an annuity purchased from an insurance company. See Regulations sections 1.401(a)(9)-6 and 54.4974-2.
http://www.irs.gov/publications/p590/ch ... 1000230790

Which lead you to
http://www.taxalmanac.org/index.php/Tre ... 9%289%29-6
http://www.taxalmanac.org/index.php/Tre ... _54.4974-2
or, directly from the IRS,
http://www.irs.gov/pub/irs-tege/reg401a9_6.pdf
http://www.irs.gov/pub/irs-tege/reg54_4974_2.pdf

And yes, an IRA is a qualified retirement plan. See reg 54.4974-2
Q-2. For purposes of section 4974, what is a qualified retirement plan?
A-2. For purposes of section 4974, each of the following is a qualified retirement plan —
...
(d) An individual retirement account described in section 408(a) (including a Roth IRA described in section 408A);
(e) An individual retirement annuity described in section 408(b) (including a Roth IRA described in section 408A);
[Note: it is not completely clear to me, but "buying an annuity" in an IRA may actually mean rolling your Individual Retirement Account over to an Individual Retirement Annuity and instantly annuitizing the full amount under the terms of your new Individual Retirement Annuity.]

The key point from the IRS's point of view is that the money be taken out over the lifetime of the individual. The annuity satisfies the RMD requirement on that portion of your IRA if it does not extend beyond the lifetime of the individual. For example, an 80 year old could not buy an annuity with a 40 year certain and have it meet the RMD requirements. Nor can a 70 year old buy a joint life annuity when his wife is only 40. Insurance companies have experience with this. Here is what AIG says on behalf of Vanguard:
Will an income annuity satisfy my RMDs?
Required minimum distributions (RMDs) are the minimum amounts the IRS requires you to withdraw each year from tax-deferred retirement plans (excluding Roth IRAs) after you reach age 70½. If you purchase an income annuity with qualified (pre-tax) money, you can satisfy the RMD rules as long as you select payments that are not designated to be made over a period that exceeds your life expectancy.

Consult your tax advisor for more information.
http://www.aigretirementgold.com/vlip/V ... r?page=FAQ

An annuity purchased with funds from the IRA to meet the RMD must be non-assignable (although I can't find the exact reference right now); it would be like selling your IRA (account or annuity) to someone else for cash to avoid the early withdrawal penalties. That would follow automatically if the annuity is a rollover Individual Retirement Annuity (as I speculated above).

You need to ask questions of the custodian of the IRA and some insurance companies.

And you need to convince your wife's sister that she wants the money to keep coming over her lifetime. Otherwise there is nothing to stop her from withdrawing the whole amount of the inherited IRA in one lump sum.

ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Post by ResNullius » Sun Aug 29, 2010 12:27 pm

sscritic...thanks for the information. I appreciate it.

jdarling
Posts: 1
Joined: Wed Apr 13, 2011 11:24 pm

IRA CD

Post by jdarling » Wed Apr 13, 2011 11:37 pm

Hi, I was hoping to get some help with this question. I am the caregiver of my In-Laws, who are 79 and 80 years old. Their monthly income has been cut by $3000 a month, due to the son mis-manageing their family owned company. They where receiving $3000 a month from the lease on the property which the company is operated from. Now that the son, has not paid them for 7 months, their monthly bills, are more then what money they receive from their SS and another source. They both have Alzheimers, so I take care of their bills. My question is, They have about $108,000 in two IRA CD's. They don't receive a monthly checks from them, they only get the once a year distribution, which is not going to help them currently. How should I proceed in helping them to receive a monthly income from their IRS's without a hugh tax hit?

Thanks for any help you can give me!

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