L1: Account balanceWhat account balance can you use in your calculation method if you are in a variale annuity ? Account value, guaranteed minimum income benift base or original ammount rolled over.2009-04-09 17:49, By: gecko, IP: [22.214.171.124]
L2: Account balanceJim is more into variable annuities, but I would think that the appropriate value to use is the net surrender valueavailablewhenyou start theplan.
The surrender value is reallythe cash that youown and could transfer to another funding vehicle. Anything beyond the surrender value is merely a promise.2009-04-11 12:47, By: Gfw, IP: [126.96.36.199]
L3: Account balanceI agree.
A GMIB is only of use at the time of annuitization and after a waiting period. 2009-04-11 22:00, By: Alan S., IP: [188.8.131.52]
L3: Account balanceI agree with Alan that GMIB is not the figure to use since it involves annuitization of the contract and 72(t) is more correctly associated with a systematic withdrawal plan which does NOT involve annuitization.
My vote is to use the current market value of the contract or a value within 6-months of your first distribution for your calculation. This is the same concept as using a mutual fund or stock portfolio to fund the SEPP Plan. I do not agree with Gordon to use the surrender value for the calculation for the following logic:
A few years ago a company came up with a concept of using the surrender value of an annuity as the basis for doing a Roth IRA Conversion. They wouldput $100,000 into a fixed annuity with a large (25%+) surrender charge, processed the conversion from a Traditional IRA to a Roth IRA using $75,000 as the conversion amount and thus avoid paying tax on $25,000. The key is the fact the money never left the annuity and the contract value remained at $100,000, plus interest earnings. The IRS finally rulled and disallowed this concept for the scam it really was. My opinion is that the IRS would probably rule in a similar fashion if you used your surrender value vs current contract value to calculate SEPP distributions.
I think they would rule that you were not using the true value of the contract for calculations. If you use a 3-year surrender period contract and we know your SEPP Plan will last for atleast 5-years, then you would be out of surrender before the plan wouldterminate. I don’t think (that’s dangerous) the IRS would make you assume a worst-case scenario of incurring any surrender charge when you calculate your SEPP Plan distribution amount. Besides, what value do you use if you fund your plan with either “B Share” or “C Share” mutual funds? You use the currentmarket value of the fund without taking into account theContengent Deferred Sales Charge (CDSC). Typically the “B Share” has a 5% CDSC for about 7 years and the “C Share” fund has a 1% CDSC for 1-year. Surrender charges in both annuities and B & C Share funds all fall into the same category of having to deal with theCDSC issue in the same way.
Just my opinion and definitely not a legal opinion.
PS: One more thought. Some mutual funds have a “short-term trading charge” of 50 to 100 bps. Would you take this into account when determining the amount to use in a mutual fund account for your SEPP Plan? Probably not so this is one more example to support my position of not using a VA surrender value for your calculations.
2009-04-13 14:39, By: Jim, IP: [184.108.40.206]
L4: Account balanceI like your Roth example except that the big problem is that it favored the tax payer and not the IRS and at the same time diminished the tax owed/collected. Similar examples can be found for “Jumping Cash Value Life Insurance” and 412(i) Fully Insured Defined Benefit plans.
What the surrender value resembles is the market value of a mutual fund, a stock or a bond.In each case,it has the amount equal to the amount thatcould be transfered. In the case of an annuity, the surrender cash value more closely resembles the market value of the investments, not the gross cash value.
Check with a few of the insurance companies that use variable annuities to fund a SEPP plan – they surelymust have a PLR to back that position, or they should at least be able to put their position in writing for a given client. I know that for regular annuities, we always used the surrender value, not the gross cash value.
2009-04-13 15:00, By: Gfw, IP: [220.127.116.11]
L5: Account balanceGordon:
I took your advice and contacted myprimary VA company (they are a biggie) to discuss this. Their advanced legal team person agreed with my position to use the “account value” and not the “surrender value” for the 72(t) calculation. He then referred me to this site for more definitive information, which I thought was a nice touch. Then I revealed who I was and what was going on and he went to the site and we looked at Rev Rulling 2002-62 together. When you read Part 1, Section 2(.02)(d), Account Balance, it is clear that types of investments used in funding SEPP Plan accounts is not mentioned. That section is pasted here:
(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002 to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on the December 31 of the prior year or on a date within a reasonable period before that year’s distribution.
If you fund an IRA with a bank CD, do you assume early surrender and the interest penalty that will be assessed to determine the “account balance” for 72(t) calculations?
Like I stated earlier, do you assume paying the CDSC of B and C Share mutual funds to determine the “account balance” for 72(t) calculations?
So there is no logic to assuming that you should use the “surrender value” rather than the “contract value” of an annuity for 72(t) calculations.
That’s how I see it. This has been an interesting discussion.
Jim2009-04-13 16:02, By: Jim, IP: [18.104.22.168]
L6: Account balanceNice post – it is always to know where people look for answers.
However, I really don’t see much difference between buying a 5 year bond at a discount and then using the market (discounted value)value even though at the end of the 5 years,I am guaranteed the face value – very similar to an annuity with 5 year surrender charge.
I have no problem using either, but if were my SEPPI would get something in writing from the “advanced legal department” – if they are sure, then a written statement should be an easy way to satisfythe client.In fact, if they have any thing in writing or would like to create a definitivearticle, I would be most happy to publish it for them onthesite.
2009-04-13 16:17, By: Gfw, IP: [22.214.171.124]