72(q) and the one year
L1: 72(q) and the one yearHi All,
Thanks for the great site. I want to set up a 72(q) from a non-qualified annuity that has been around longer than one year. Will this work? Going through the IRS codes I noticed a section which points out that payments must begin within one year of the annuity opening date. I was not sure if this applied to an immediate annuity and a 72(q), or just the immediate annuity option.
Mike2010-08-27 13:02, By: Maverick, IP: [126.96.36.199]
L2: 72(q) and the one yearThe one year rule that you mention is part of the definition of an immediate annuity and really has nothing to do with a SEPP using 72(q). By definition an immediate annuity (as opposed to a deferred annuity) must commence annuity payments (be annuitized) with 12 months of the purchase date.
If you are using a non-qualified annuity, merely use the same assumptions )age, interest rate, etc) that would be used for a SEPP using72(t).2010-08-27 13:12, By: Gfw, IP: [188.8.131.52]
L3: 72(q) and the one yearThank you for your response. That was very timely. I do have one more question on this. Can you aggregate two or more Non-qualified annuity contracts and take the 72(q) from just one.
Mike2010-08-27 13:15, By: Maverick, IP: [184.108.40.206]
L4: 72(q) and the one yearPossibly, but given the choice, I would set up a plan for each of the annuities – especially if they are at different insurance companies.
In any case, I would contact the insurance company(s) involved and pose the question to them – by insurance company, I’m not referring to the agent, but their legal department. Also make sure that you keep really good documentation.2010-08-27 13:20, By: Gfw, IP: [220.127.116.11]
L5: 72(q) and the one yearthank you. I am working on an income plan and would like to keep one as is.2010-08-27 13:42, By: maverick, IP: [18.104.22.168]
L4: 72(q) and the one yearShort answer Yes.
But you will have to deal with the maximum annual distribution amount allowed by each companyfrom each contract. Unless you have a “no-surrender charge” VA that allows an unlimited distribution amount at any time, even starting the day after the contract is issued, your 72(t) distribution amounts will have to be less than your allowed “free withdrawal” amount. Typically you are OK by applying the 72(t) distribution amount to each contract separately but you might exceed the maximum withdrawal allowed if you try to take all of the 72(t) amount from one contract if you base your calculations on two contracts.
Jim2010-08-27 13:25, By: Jim, IP: [22.214.171.124]
L5: 72(q) and the one yearGFW is right that you need to talk directly to the insurance company to clarify their rules for withdrawals. If you tell them you are doing a 72(t) then typically they will make the calculations and begin distributions. They are not very receptive to using your calculations. The only way I see to do as you propose is if you have the aforementioned “no-surrender charge” VA whereby the insurance company will make whatever distributions you wish and will issure a 1099-R with Code 1 and you will complete IRS Form 5329 to claim the exception when you do your taxes.
PS: OK, it’s a 72(q) and not a 72(t) but everything I wrote applies to both.2010-08-27 13:30, By: Jim, IP: [126.96.36.199]
L6: 72(q) and the one yearThank you for all of your responses. I appreciate the advice.This is good stuff.
Mike2010-08-27 13:36, By: Maverick, IP: [188.8.131.52]
L5: 72(q) and the one yearThank you. And I will double check.2010-08-27 13:45, By: maverick, IP: [184.108.40.206]
L6: 72(q) and the one yearI agree that it would be wise to double check on this concept, and even then you will probably just get opinions because there probably is no IRS opinion on this subject.
While in 2004, the IRS did confirm that annuity distributions were generally subject to RR 2002-62 and 89-25 in the same manner as IRAs, this may not go far enough.
The aggregation of IRA accounts for 72t purposes was not part of either of the above revenue rulings, but were allowed only under 3 or 4 PLRs starting in 1990. ALL of these PLRs dealt only with IRA accounts, none with annuities, qualified or NQ. Annuities do not qualify for any other IRA aggregation treatment, such as the aggregation of basis or for RMDs. Therefore, it is very possible that the IRS would not approve aggregation of annuities for SEPP plans any more than they would for 401k plans of different sponsors. Again, making 2002-62 apply to annuities is not the same as allowing aggregation of annuities.
BUT – I can also see how a broader interpretation would allow it.
I would be amazed if two different insurors would agree to reflect another annuity for purposes of allowing the 1099R exception code. That leaves the taxpayer to file a 5329, and hope for the best, but there is obviously some degree of risk with aggregation here.2010-08-30 23:10, By: Alan S., IP: [220.127.116.11]