IRA Question Concerning Annuities W/ Income Riders

[beachbum2012]

Say a client has either a VA or IA within their IRA. Their annuity also has a income rider which they've already started (and can't stop) and are taking distributions from. If the client decides they don't actually need to spend this money, I know the money has to come out of the annuity contract, but does it have to come out of the IRA at this point too? Or, can the client simply take the lifetime withdrawal amount from the annuity contract and put it into another financial product (stocks, bonds, cash, etc.) and still keep it in the IRA? Maybe the client could use this money to do a Roth conversion if they don't need to spend it too.

I don't see any reason why they shouldn't be able to keep these funds within the tax-deferred account, but I'm not sure if I'm missing something. Anybody have any experience with a situation like this?

 

[edwarda1]

The annuity is the financial vehicle the IRA is invested in so same thing. Most annuity income riders allow you to start & stop the rider (unless the client is annuitizing, then no stopping the distribution )
Once they pay the taxes on the distribution they can do anything they want with the money (like invest in a FE so their heirs have a tax free benefit!!) I've used this strategy many times to great success
Hopefully this helps!

 

[scagnt83]

Say a client has either a VA or IA within their IRA. Their annuity also has a income rider which they've already started (and can't stop) and are taking distributions from. If the client decides they don't actually need to spend this money, I know the money has to come out of the annuity contract, but does it have to come out of the IRA at this point too? Or, can the client simply take the lifetime withdrawal amount from the annuity contract and put it into another financial product (stocks, bonds, cash, etc.) and still keep it in the IRA? Maybe the client could use this money to do a Roth conversion if they don't need to spend it too.

I don't see any reason why they shouldn't be able to keep these funds within the tax-deferred account, but I'm not sure if I'm missing something. Anybody have any experience with a situation like this?

Technically they can reinvest the payouts into another IRA via a 60 day Rollover. Keep in mind that you are now allowed only 1 Rollover per year. So the payout would have to be taken on an annual basis.

It might be possible to have a standing order to do a Transfer of Qualified Funds to a set custodian for each payout... but that would be a carrier specific question... I doubt they would do it but it wouldnt hurt to ask, especially if they are monthly payouts & you cant change to annual.

You could also do Roth conversions with them.

But remember once the client is age 70.5, RMDs will kick in. So they will be forced to pay taxes on a certain amount no matter what they do.

 

[DHK]

If the client decides they don't actually need to spend this money, I know the money has to come out of the annuity contract, but does it have to come out of the IRA at this point too?

Yes... the annuity is titled as an IRA.

Or, can the client simply take the lifetime withdrawal amount from the annuity contract and put it into another financial product (stocks, bonds, cash, etc.) and still keep it in the IRA? Maybe the client could use this money to do a Roth conversion if they don't need to spend it too.

Yes. The distributions need to be made, otherwise a 50% IRS penalty applies to the amount they should've taken. What the client decides to do with those distributions is up to them.

Call the annuity company regarding IRA to Roth IRA conversions. Just make sure a new contract (and surrender schedule) won't be necessary. Also, double check the taxable implications. If you convert the entire annuity, that annuity just became fully taxable in the year of conversion and can add significant taxes to their current year's tax situation.

In addition, you don't want to sacrifice the lifetime income benefits either. If that benefit is eliminated due to conversion, you'll want to think twice about that.

I don't see any reason why they shouldn't be able to keep these funds within the tax-deferred account, but I'm not sure if I'm missing something. Anybody have any experience with a situation like this?

The only thing I can think that you're missing... is a full fact-find to determine what the client would rather do with these distributions. You're finding out what you CAN do... but you don't yet know what the client wants... at least according to your post.

 

[scagnt83]

Yes. The distributions need to be made, otherwise a 50% IRS penalty applies to the amount they should've taken.

Only if they owe RMDs.

Plus, RMDs are based on cumulative Qualified Funds. So nothing says they must be fulfilled from any specific Qualified Account. He could Roll them over and satisfy RMDs via another Qualified Account.... or if the RMD for that year is lower than the annuity payout, he could take the excess and Roll that over (assuming a yearly payout), or convert it to a Roth.

 

[beachbum2012]

The only thing I can think that you're missing... is a full fact-find to determine what the client would rather do with these distributions. You're finding out what you CAN do... but you don't yet know what the client wants... at least according to your post.

Well one example is a 69-year old client of mine who works part-time. Last year he got more work than he expected and his higher earned income caused his taxes to be higher than expected, especially considering the tax-torpedo effect of his social security income. He's got an IA that he draws ~$5k/year from. I was just wondering what the mechanics were for him to leave the GLWB amount in his IRA because he didn't need it last year.

A couple other options for him would be to just make an IRA contribution with his earned income up to his $6500 contribution limit, or to do a Roth conversion of some or all of this $5k. If he did the Roth contribution, his AGI is the same as if he collects the GLWB and spends it or puts it in the bank or whatever (if I understand the tax rules right), but now he can invest it back into something in a tax-free Roth account.

 

[scagnt83]

I was just wondering what the mechanics were for him to leave the GLWB amount in his IRA because he didn't need it last year.

He cant leave it in the same IRA, but as I said before, he can do a Rollover into a new IRA.

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A couple other options for him would be to just make an IRA contribution with his earned income up to his $6500 contribution limit

Starting next year (age 70) his only option will be to contribute to a Roth IRA. You cant make normal IRA contributions after age 70.

But, he can Rollover his Annuity/IRA Payouts into a different IRA... however, he will need to make sure he satisfies his RMD requirement for the year.

 

[bill3173]

The only thing I can think that you're missing... is a full fact-find to determine what the client would rather do with these distributions. You're finding out what you CAN do... but you don't yet know what the client wants... at least according to your post.

Good one..I had a client recently that when we first began the discussion of annuities, I was laying out ideas, based on what "I thought" she wanted, so after the conversation moved a little sideways, I had a bright idea that I would ask her to be more specific. All she wanted to do was purchase an annuity with an income rider that would eclipse two spia payouts that would end in 5 years. The rest was easy.