72(Q) Rules for annuity with Joint Owenrship
L1: 72(Q) Rules for annuity with Joint OwenrshipI own a non-quailified anuity. I am listed on the account as Owner and my wife is listed as joint owner.I plan to use the amoritization method to set up the sepp plan. My SS# shows up on all tax forms issued by the company.Will my birthdate control the duration of plan? I am 4 years older than my wife.2012-09-04 21:31, By: pal, IP: [126.96.36.199]
L2: 72(Q) Rules for annuity with Joint OwenrshipSomeone else may have a different answer, butI have seen no PLRs that deal with jointly owned annuities setting up distributions under IRC 72(q).
I would strongly suggest that you contact the issuing insurance company’s legal department for guidance. Possibly they will remove the joint ownership and name a single owner. Whatever you do, get their guidance in writing.2012-09-04 21:45, By: Gfw, IP: [188.8.131.52]
L3: 72(Q) Rules for annuity with Joint OwenrshipI am not familiar with 72(q) regulations.
However, I would be surprised that any jointly-owned investments/annuities were allowed in any retirement account.
Was the annuity company aware that a retirement account was buying the annuity ?2012-09-04 21:49, By: dlzallestaxes, IP: [184.108.40.206]
L4: 72(Q) Rules for annuity with Joint OwenrshipDlz…
72(q) basically deals with non-tax qualified annuities – the same SEPP exceptions exist for non-qualified annuities as to an IRA.
I dealt with annuities in an insurance company home for many years and we had several non-qualified annuities set up as SEPP plans, but never with a joint owner. And, without the insurance company saying ‘Ok’ – which I doubt they will – I wouldn’t do it if it was my annuity.
2012-09-04 22:37, By: Gfw, IP: [220.127.116.11]
L5: 72(Q) Rules for annuity with Joint OwenrshipGfw,
Thanks for your input. It sounds like it might prudent to change the registration on the annuity and make me the sole owner, prior to setting up the plan.
Funny thing is that the insurance co has a form to set up the plan and on the form there is a space for joint ownership name & sig! So that implies that it is allowed.
2012-09-04 23:22, By: pal, IP: [18.104.22.168]
L6: 72(Q) Rules for annuity with Joint OwenrshipIt is definitelyallowed, but the real question relates to allowance of the SEPP in addition, backed up by the Code 2 on the 1099R.
The annuitants may also be a factor. Are you both joint annuitants as well as owners?
2012-09-04 23:38, By: Alan S, IP: [22.214.171.124]
L7: 72(Q) Rules for annuity with Joint OwenrshipDefinitely check with the insurance company’s legal department for a rulling and direction on this case.
Some annuity contracts are “owner driven” and others are “annuitant driven” and this is significant, and the operating rules are as clear as mud! Also, different companies do things differently in both cases. I have clients with JT WROS contracts with different companies and one “owner” died in two cases. One company made the transfer to the surviving “owner” since the contract was “owner driven.” The other company required payment to the named “beneficiaries” since it was “annuitant driven.” In the last case the two adult children “beneficiaries” had to “disclaim” their rights to the contract so their Mother … the surviving “owner”… could have the contract re-titled into her name which was the intent from the beginning. Not all companies take this last position and will transfer into the surviving owner’s name withouthaving to jump through these hoops! As a result of these experiences I quit using the “Joint Ownership” for non-qualified annuities, opting to issue in one name and make the other spouse the “primary beneficiary” and adult children the “contingent beneficiaries.” Sometimes we have two separate contracts with each spouse owning their own contracts.
OK, this doesn’t answerthe original question but highlights the point that you have a real delima trying to set up a SEPP Plan for a jointly-held annuity. Like I said above, get a WRITTEN determination from your annuity company’s legal department explaining how the SEPP Plan will or will not work on your contract.
If you can’t set up the SEPP Plan with the current company, then explore making an “ownership change” to remove one of the parties and then set up the SEPP. If the current company will make the owner change but won’t set up a SEPP, then look to process a 1035 Exchange to another company that will work with you after removing the other owner. Lots of options to look at in this case and your Rep will earn his/her commission.
Good luck … you’ll need it!
Jim F2012-09-05 14:10, By: Jim F, IP: [126.96.36.199]
L8: 72(Q) Rules for annuity with Joint OwenrshipThe post by Jim F highlights the variations that could occur when an annuity is jointly owned.
The IRS clarified that RR 2002-62 applied to NQ annuity SEPPs under 72q as well as qualified plans under 72t in Notice 2004-15. But this Notice did not clarify any implications of joint annuity ownership which of course could not be the case for qualified retirement plans or IRAs, which must be solely owned. While it would be logical that such an annuity could be used for a SEPP plan using a joint life expectancy, there is no assurance the IRS would see it that way.
Of course, an annuity can have a totally different annuitant than the owner, and that scenario seems unlikely to fall under any comparable SEPP rules. But we do know that this is being abused by some annuity owners who purchase VAs invested aggressively with very elderly annuitants who will pass and any losses will be wiped out by the death benefit. One guy alone purchased hundreds of such annuities. Insurors failed to underwrite insurable interest in all these cases, so they are also responsible.
In summary, best to amend ownership to one person.
2012-09-06 00:15, By: Alan S, IP: [188.8.131.52]
L9: 72(Q) Rules for annuity with Joint OwenrshipI know that there are many types of annuities. If yours was/is a deferred non-qualified annuity (if there is such a thing), and the payments were/are supposed to be deferred until you are in a lower tax bracket in retirement, then having this investment in a SEPP could be a problem since there would be no annual distributions from the annuity to the SEPP to be paid to you, or the annuity distribution could be less than the required SEPP distribution.
Also, non-qualified annuities have special rules on the taxable portion each year, which adds complexity to an already complex situation.2012-09-06 15:36, By: dlzallestaxes, IP: [184.108.40.206]
L10: 72(Q) Rules for annuity with Joint OwenrshipDLZ:
Based on your two posts in this string, I’ll toss out some characteristics of the “Deferred Annuity” as opposed to the “Annuitized Deferred Annuity” which it seems you may be confusing.
A true “Annuity” or “Annuitized Deferred Annuity” is a stream if income that a person cannot outlive. Basically a sum of money is given to the insurance company in exchange for this “stream of income.” Several options exist for this income stream like “life only,” “life and 10-years certain,” “refund” and the like. Further discussion of settlement optionsis beyond the scope of this post.
You may purchase an “immediate annuity” whereby you give a lump sum to the insurance company and the stream of income starts within 30-days, or you may purchase a the “deferred annuity” with either a lump sum or make periodic investments over a period of time … months or years. With the deferred annuity you MAYat some future date exchange it for the “stream of income” by the process of “annuitizing the annuity.” When this happens the person no longer has a claim to the corpus of the contract, just to the stream of income during his / her life, of course based on whatever settlement option is chosen.
While a person owns a “deferred annuity” it acts just like a mutual fund or stock or other investment vehicle in regards to taking “systematic” or “periodic” distributions. Simplycontact the insurance company and request a sum of money. This request may be by phone or in writing, depending on the company rules and amount requested.
All distributions from an traditional, all tax-deferredIRA invested in anannuity come out as ordinary income. Nothing strange about this.
All distributions from a Non-qualified or after-tax fundedannuity depend on the cost basis of the annuity. All gain above cost basis is taxed as ordinary income and by IRS rule is the first money withdrawn. Distributions of basis are “return of capital” and are not taxed. (OK, so there are different rules for very old annuities issued before some date around 1981.)
All distributions from a Non-qualified deferred annuity after “annuitization” and for the “immediate annuity” have a more favorable tax treatment. These distributions are partially income and partially return of capital. The insurance company will send a Form 1099-R specifying what is taxable and what is not taxable, based of the proration of income and basis.
I hope this helps everyone.
Jim F2012-09-06 16:52, By: Jim F, IP: [220.127.116.11]
L11: 72(Q) Rules for annuity with Joint OwenrshipGreat explanation. Thanks.2012-09-06 17:15, By: dlzallestaxes, IP: [18.104.22.168]