72T distribution to a single premium variable annuity

L1: 72T distribution to a single premium variable annuCan a person with an IRA take an early distribution using the 72T Rule by taking SEPP (Substantially Equal Perodic Payments). However, in this case he his buying a Single Premium Immediate Variable Annuity with a “Life Only” payout option. Because this annuity is “Variable” (funds are invested in equities), the monthly income he’ll receive over his lifetime will fluctuate up or down. Will this still meet the SEPP definition. If it does, do you have some document that that states this example.
2005-03-15 13:54, By: John, IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuThe place to start is with the issuing insurance company. There have been some PLRs issued to companies using variable products, but the ones that I remember used a deferred variable annuity that had distributions built within the parameters of Notice 89-25 and RR 2002-62.
Another question is why would you purchase an immediate annuity? What advantage does it have? What rate of return on a simple mutual fund would you need to equal the VA? Most VAs have charges – coming in, gouing out and while you are there. Just my thoughts. 2005-03-15 14:28, By: Gfw, IP: [172.16.1.72]

L2: 72T distribution to a single premium variable annuHi John:
The answer to your first sentence is “yes” you may use section 72(t) todo a SEPP. The rest of your post makes no logical sense.
Who is “he” that is buying the immediate annuity with the SEPP proceeds? Is that you, did your borker or agent suggest it to you, or are you asking the question for a relative or friend?
My suggestion is to get some good financial planning advice to put together a sound plan. You are mixing “qualified” and “non-qualified” dollars into products that may or may not be best to use either or both of these types of funds. The plan may beok but based on the limited information provided I suspect it is not in the client’s best interest. When selecting an investment product to use, figure out where it is your are trying to go and then develop the plan / product mix to best help you or whomever accomplish the mission. No one can tell you what products are best for your situation until you build the complete plan.
If the broker / advisor is suggesting this plan, my suggestion is to find another advisor, preferably someone who can provide a complete financial plan. I’m simply trying to “wave the red flag” since I suspect something is not quite right.
Good luck.
Jim2005-03-15 15:13, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuI don’t mind the small amount of additional expenses related to investing in a variable annuity versus a mutual fund. In fact mutual fund is taxed on its gains on the capital gains tax versus a variable annuity which gains are taxed as ordinary income which would be a higher tax rate in almost all situations. The advantage of the variable annuity is not for deferral or growth. I am already in a SEP, which is invest in some Index Mutual funds and EFTs.
However, I am going through a divorce at age 46. I cannot touch my SEP until 59 1/2 without the 10% penalty unless I take SEPP (Substanially Equal Period Payment) based over in my case my life expectancy. What Mutual Fund is going to give a lifetime of income? The Immediate Varialbe Annuity will give me a lifetime of monthly income plus the potential for that income to grow. It can also decrease. I do not want to have to calculate my own SEPP each year. And I would rather have a lifetime of income for as long as I live.
By rolling over the $100,000 from my SEP into the variable annuity I will start receive a monthly income that I can use to help support my child support obligations. If I don’t need all of the income for the month I can reinvest it. But the good thing is that the income from the variable annuity has the potential for growth and I don’t have to figure out the SEPP, it is done by the mere fact that the $100,000 was annuitized by the insurance company (payable for as long as I live).
Is there some other way to get monthly income for life with growth by using a mutual fund? If so let me know. But my concern is that whatever, the vehicle used to pay me a monthly income for life, if that income fluctuates up or down, does that still meet the IRS SEPP rules.2005-03-15 15:16, By: John, IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuThank you John for the additional information. The picture is clearer, but I hold to my last recommendation that you find a good financial planner to help put together an investment plan to provide the income. Additionally, with your legal situation, add a good tax attorney and / or CPA to deal with your other issues.
I believe the annuity is a viable tool to use. You’re right that no mutual fund will give the guarantees you seek from the annuity. While the annuity will provide you a lifetime of income, annuitizing or buying an immediate annuity may not be the best avenue. In the last couple of years the variable annuity industry has developed some fantastic riders which can give you guarantees without the loss of control over your money which annuitization causes. You need nore knowledge on this subject.
To your last sentence about variable distributions causing a “bust” of a SEPP plan: Generally the answer would be yes, but with the advent of COLA’s and annual recalculating, I’m going to defer to TheBadger to address this topic.
One more time; build a good plan before turning anything on.
Jim2005-03-15 15:35, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuThanks Jim:
If TheBadger has an answer about the fluctuations of income not meeting the SEPP rules please post if for me.
Who is TheBadger?
Thanks Again2005-03-15 15:40, By: John, IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuTheBadger is Bill Stecker, an authority on 72(t).
Go to the main web site and click on the second blue rectangle on the right side to get information about his book which covers this topic in detail. If you don’t want to do a lot of research, then be sure your advisors have this book for their use is providing sound financial and tax advice.
Jim2005-03-15 15:45, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuAs I mentioned in my first post, there have been PLRs issued to variable deferred annuities. While the IRS basically allowed them to use the number of constant units to satisfy the Substantially Equal’ part of the test, the method selected was one of the three allowed methods, and the annuity was deferred, not immediate.
I have yet to see a PLR issued regarding an immediate annuity used to fund a SEPP. I personally wouldn’t venture into this area without competent tax advice, my own PLRor a guarantee in writing that the plan will work at least that way, if the plan does go BUST, there is also someone to go after to pay the tax and penalties. If the insurance company is willing to set up the plan, they should also be willing to stand behind it.
2005-03-15 15:59, By: Gfw, IP: [172.16.1.78]

L2: 72T distribution to a single premium variable annuLet me tag onto Gfw’s comments about using a “deferred” annuity as opposed to the “immediate” annuity. I don’t know how much you understand about the workings so please forgive me if this sounds too basic.
You do not have to annuitize or buy an immediate annuity to get a stream of income. With this situation, you give up control of your money in exchange for a stream of income you cannot outlive with the lifetime option you have mentioned. Problem is if you die the money is gone to, you guessed it, the insurance company. If you take say “Life and 10 years certain,” then someone gets the payout for atleast 10 years should you die within the 10 year period after you start. Problem is it usually takes about 13 + years to breakeven.
Another option is to take “systematic distributions” from a deferred VA either, constant dollars or constant units. You maintain control and it is still “your money” and not the insurance compny’s. However, because of your age you will have to set up a SEPP to avoid the 10% penalty. Don’t give up on this option as it’s not that difficult to set up and operate. The insurance company will make it automatic. In my earlier post I mentioned some “riders” you may add to the contract for living benefits, especially if the market tanks. Yes, there is a cost but it may be something you would want. Check it out and then make a decision.
Hope this helps.
Jim2005-03-15 16:22, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuHello John:
I think I follow the thread but I am not 100% sure. I am assuming you are contemplating taking your IRA at institution A and transferring it to institution B which just so happens to be a life insurance company and actually opeing an Individual Retirement Annuity. Then, picking one of their products namely a single pay immediate variable annuity for life.
Whether this makes good or bad sensein comparison to other investments you mightmake is not the issue. This transaction or move will not be qualified under IRC 72(t)(2)(A)(iv) as this section really only relates to defined contribution assets: IRAs, 401(k)’s, 403(b)’s, etc. However, this transaction may be qualified under IRC 72(q)(2)(D) which is designed to look at annuity contracts.
Whether such a transaction is qualifed under IRC 72(q)(2)(D) is open to question. I am not qualified to answer that. However, the life insurance company offering the contract MUST be ableto answer qualification question; either withtheir own private letter ruling from the IRS or their own general counsel’s opinion.
TheBadger
wjstecker@wispertel.net
2005-03-15 17:26, By: TheBadger, IP: [66.250.23.21]

L2: 72T distribution to a single premium variable annuMy original question was can I take qualified money and use the 72T rule for early distribution by putting the money in a non-qualified variable immediate annuity. Immediate means their is no more deferral or principal. I let the insurance company take the investment risk and they in turn quarantee to pay me a monthly income for as long as I live. The income will fluctuate since it is invested in equities. But since I am very young and health and I have plenty of life insurance I don’t mind taking the risk that of losing the principal. I have no beneficiaries.
The point is will the non-qualified variable annuity meet the SEPP rule of rule 72T when the payments will “not be equal” each month but will fluctuate based on the investment performance the underlying equities. I think it should mmet the rule of 72T because the monthly payment are calculated on my life expectancy and I have no access to any principal. Maybe the best Idea is to ask the insurance company if they have a PLR on this.
Thanks for your help.2005-03-15 21:37, By: john, IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuJohn-I looked into this matter years ago thru an insurance company which calculated and guarenteed 72t’s from VA’s or fixed annuities. If you use a VA, the fact that you are taking an equal number of units (as opposed to dollars using any other vehicle) does satisfy the SEPP requirement.2005-03-16 08:09, By: john, IP: [66.190.154.234]

L2: 72T distribution to a single premium variable annuJohn-I looked into this matter years ago thru an insurance company which calculated and guarenteed 72t’s from VA’s or fixed annuities. If you use a VA, the fact that you are taking an equal number of units (as opposed to dollars using any other vehicle) does satisfy the SEPP requirement.2005-03-16 08:09, By: john, IP: [66.190.154.234]

L2: 72T distribution to a single premium variable annuJohn-I looked into this matter years ago thru an insurance company which calculated and guarenteed 72t’s from VA’s or fixed annuities. If you use a VA, the fact that you are taking an equal number of units (as opposed to dollars using any other vehicle) does satisfy the SEPP requirement.2005-03-16 08:09, By: john, IP: [66.190.154.234]

L2: 72T distribution to a single premium variable annuJohn-I looked into this matter years ago thru an insurance company which calculated and guarenteed 72t’s from VA’s or fixed annuities. If you use a VA, the fact that you are taking an equal number of units (as opposed to dollars using any other vehicle) does satisfy the SEPP requirement.2005-03-16 08:10, By: john, IP: [66.190.154.234]

L2: 72T distribution to a single premium variable annuI do believe there was one PLR issued to LN who was using a deferred contract and prior to RR 2002-62. But.. as has been noted, if the insurance company stands behind the plan – in writing – all should be ok whether or not it meets the SEPP rules.
Where are you getting the backup (PLRs, documents,etc.) for the usean Immediate Annuities in a SEPP based on uinits?2005-03-16 08:13, By: Gfw, IP: [172.16.7.101]

L2: 72T distribution to a single premium variable annuI just checked with a VA company to confirm my thinking. If you purchase an immediate annuity or annuitize a deferred annuity for a “lifetime” or “life and period certain” payout, then you don’t have to deal with the 10% early withdrawal penalty. If you choose a “period certain” like 10 or 20 years, then you do have to deal with the 10% penalty. If you have to deal with the 10% penalty then you need to use 72(t) or 72(q) rules for SEPP.
In your scenario of setting up a SEPP for your IRA of $100k, then moving the distribution amounts into an immediate annuity with lifetime payouts, this is the part that doesn’t make sense. Using age 46, Single Life expectancy and $100k would only give $2,638.52 per year distribution. This small amount will not fund much of an immediate annuity. If you are going to set up the “lifetime” payout option from an immediate annuity, why not do it with the entire $100k from an IRA, even if you have to transfer the existing SEPinto a new annuity contract? I don’t remember if you have stated the present location but I assume the SEPis not in an annuity contract.
Hope this helps.
Jim2005-03-16 09:41, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuMight want to re-look at Section 72 – The only exemption to the 10% penalty applies to the direct purchase of an immediate annuity contract which is defined as having payments begin within 12 monthsof the date the premiums was received. It ddoes not extend to the conversion ofa deferred annuity to an immediate or to a settlement option.2005-03-16 09:55, By: Gfw, IP: [172.16.7.101]

L2: 72T distribution to a single premium variable annuJim: Who is going to calculate the lifetime income if I just begin to take income from the SEPP? Who is going to gurantee that I will continue to get income for life even though the principal in the IRA is gone. Only by transfering it to an Immediate Annuity are these things taken care of: guaranteed income for liferegardless of investment performance. Why would I want to roll over the SEP into an IRA and then take distributions. Within the SEP I would just purchase the Immediate Variable Annuity in order to take the Lifetime Income. Your annual income of roughly $2,200 may assume it is fixed over my lifetime. Since this is a varialbe contract I am expecting over the next 40 years that the income will grow.
I am not putting the money into a annuity vehicle for any tax favored purpose. I am just using the annuity since it is the only investment vehicle that pays a guaranteed life income plus their will be potential growth of this income.
2005-03-16 10:01, By: John, IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuJim – Here are the revelant sections of IRC72
72(q)(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS. –Paragraph (1) shall not apply to any distribution –72(q)(2)(I) under an immediate annuity contract (within the meaning of section 72(u)(4)), or72(u)(4) IMMEDIATE ANNUITY. –For purposes of this subsection, the term “immediate annuity” means an annuity –72(u)(4)(A) which is purchased with a single premium or annuity consideration,72(u)(4)(B) the annuity starting date (as defined in subsection (c)(4)) of which commences no later than 1 year from the date of the purchase of the annuity, and72(u)(4)(C) which provides for a series of substantially equal
periodic payments (to be made not less frequently than annually) during the annuity period2005-03-16 10:02, By: Gfw, IP: [172.16.7.101]

L3: 72T distribution to a single premium variable annuNo – the post was merely to define what constituites an immediate annuity and what is exempt from the 10% penalty tax under 72(q)
Section 72(q) applies to non-tax qualified annuities.
Tax-Qualified plans are governed by 72(t) and not 72(q).
The post started with an annuity used to create SEPP payments from an IRA – 72(t).
I do think that this has been the series of messageposts to date on a single thread.
Gfw2005-03-16 10:17, By: Gfw, IP: [172.16.7.101]

L2: 72T distribution to a single premium variable annuJim: From your last message is the IRS saying that you cannot use any type of Immediate Annuity to distribute income from a qualified plan and thus not pay the 10% early withdrawal penalty2005-03-16 10:10, By: john , IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuGfw: Thanks for the IRC references, but I don’t have access to the entire text, and not being an attorney probably would spend more time than I have to decipher it. But let me ask one question based on your distinction between “Immediate” and “Deferred” but annuitized.If the deferred annuity were funded with a lump sum, and if the contract is “annuitized” with the appropriate “life” vs “period-certain only” option,andthus paymentsstart within 12 months of contract purchase, would this qualify within the IRC to negate the 10% premature distribution penalty?
John: Now I’m thinking that I completely missunderstood your scenario. From your original and follow on posts, I got the impression you were going to remove money from IRA “A” using 72(t), then use these distributions to fund a new, non-qualified, immediate, “life only” annuity which I couldn’t see working at all. If you are taking the entire amount of your current SEP-IRA, $100,000 I believe, and purchase an Immediate, Life-only annuity, then you shouldn’t have to worry about 72(t) at all. I was interpreting two separate issues but now I think you really only have one issue, which is really a non-issue, assuming I now have the correct picture.
I think Gfw’s documentation supports this position and is the final answer to your question.
Jim2005-03-16 10:34, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuJohn. Now that I think we have the “tax aspects” of your question resolved, let me toss out some planning ideas.
Why move the SEP-IRA to a separate IRA and fund with the immediate annuity? For simplicity and to help isolate your assets given your divorce situation.
I assume that you are self-employed since you have a SEP-IRA. I also assume that after the divorce your will still be self-employed and will have need for this or a new SEP-IRA … depending on the terms of your QDRO which I”m not going near. By isolating the immediate annuity / IRA to use for your child support funding, you will have an easier time (I think) with record keeping and any future litigation issues. By removing these funds from your SEP-IRA you will not have any problems with segregating your new SEP-IRA contribution funds from your former family funds.
In short I just think life will be simplier for you from a bookkeeping and asset identification standpoint if you will separate things out now.
Jim2005-03-16 10:52, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuJim: That’s correct. I am just going to put all the money within the SEP into an Immediate Variable Annuity. According to 72 (q)(2)(I), this is Ok? But is it true that since the point of annutization I will be given a fixed number of units. These units nver change however, the investment performance of the annuity will change and thus will change the value of my fixed units. Since the monthly income will fluctuate, does this violate the Substanital Equal Periodic Payment (SEPP) language in rule 72T? I don’t think it would. But does anyone know for sure?2005-03-16 10:55, By: John, IP: [68.59.20.131]

L2: 72T distribution to a single premium variable annuWhat you are seeking may not exist. However, as I posted earlier… I personally wouldn’t venture into this area without competent tax advice, my own PLR or a guarantee in writing that the plan will work at least that way, if the plan does go BUST, there is also someone to go after to pay the tax and penalties. If the insurance company is willing to set up the plan, they should also be willing to stand behind it.
And don’t confuse 72(t) and 72(q) – short of something in writing from the insurance company, you may want to seek advice from your legal/tax consul -for the time period involved (until you are 59.5) you might sleep better at night.2005-03-16 16:43, By: Gfw, IP: [172.16.1.75]

L2: 72T distribution to a single premium variable annuGood morning John:
I think the bottom line is, we don’t definitively know the answer to your question. Gfw’s last post recommending that you get a definitive determination from your custodian, not the broker, and / or a tax attorney / CPA before going forward is your best course of action.
Here are some thoughts on your last post.
Jim: That’s correct. I am just going to put all the money within the SEP into an Immediate Variable Annuity.
Be sure you are buying a true, immediate variable annuity. I checked with several of the companies I use and no one has such an animal. They have deferred VA’s which can be annuitized after a period, usually 1 to 7 years, but no immediate VA’s. All of their immediate products are fixed. I’m not saying it doesn’t exist, just be sure of what you are getting.
According to 72 (q)(2)(I), this is Ok?
Forget 72(q). This applies to “non-qualified” money and your SEP-IRA is “qualified” and is governed by 72(t).
But is it true that since the point of annutization I will be given a fixed number of units. These units nver change however, the investment performance of the annuity will change and thus will change the value of my fixed units.
Yes. This is the concept of an annuitized VA.
Since the monthly income will fluctuate, does this violate the Substanital Equal Periodic Payment (SEPP) language in rule 72T? I don’t think it would. But does anyone know for sure? See the first paragraph above.
Good luck and I hope all works out to your benefit.
Jim2005-03-18 09:35, By: Jim, IP: [70.184.1.35]

L2: 72T distribution to a single premium variable annuHello Jim:
I read your last post which seems to say that IRC 72(q) only applies to non-qualified annuities and that qualified annuities would be governed by IRC 72(t).
Did I read this right? If so, how do you come to this conclusion?
TheBadger
wjstecker@wispertel.net
2005-03-18 09:45, By: TheBadger, IP: [66.250.23.21]

L2: 72T distribution to a single premium variable annuAsk Gordon.
Jim2005-03-18 09:47, By: Jim, IP: [70.184.1.35]