Another annuity question……..

You are here:
< Back

L1: Another annuity question……..Does an immediate annuity with a lifetime payout and an annual 3% COLA still qualify for SEPP?I’ve heard different opinions.2011-02-12 03:29, By: JT, IP: []
L2: Another annuity question……..No, but it may not have to. The following link explains that one of the approved methods in RR 2002-62 for SEPP calculations also applies to 72q(2)D for NQ annuities. A COLA is not approved as one of the options in 2002-62 and this option was apparently replaced by using a complete recalc method. Therefore, this also eliminates a COLA for the SEPP exception in 72q that applies to NQ annuities. there is another penalty exception in 72q that is different from the SEPP exception. It is 72q(2)(I), the immediate annuity exception and is not bound by 2002-62 as it is a completely different exception. Therefore, the reason it may not have to IF this is NQ annuity and it a bona fide immediate annuity where the payments start within 12 months of purchase, the insurance company should code it with the 2 coding on the 1099R. If not, use a 5329, but do NOT use the SEPP exception 02, because this is not a SEPP. Instead, use Code 12 per the 5329 Inst. Again, if this immediate annuity is an IRA annuity (Sec 408(b)), then 72q does NOT apply and therefore the penalty will apply because the immediate annuity exception does NOT apply to 72t which governs IRAs and qualified plans.Unfortuneately, you will probably get different opinions on this if you talk to different insurance companies. Also, there is a question even for NQ annuities if the contract started as a deferred annuity and was not annuitized within 12 months. This is a gray area even with the immediate annuity exception.2011-02-12 05:00, By: Alan S., IP: []

L2: Another annuity question……..You best apperoach to finding the answer would be to call the insurance company that issued (or will be issuing) the annuity and ask them how they will be coding the distributions.2011-02-12 11:10, By: Gfw, IP: []

L3: Another annuity question……..Both of my annuities are IRA annuities, so they are qualified.When I filed my taxes this week, I opted to take the 10% penalty on the one that was coded a 1, instead of filing a 5329 form. My accountant said code 1 sends a red flag to the IRS computers, and the chances of an audit increase substantially. She said the penalty, $230, was probably better than the hassle or headache of a possible audit and trying to prove SEPP.2011-02-12 14:59, By: JT, IP: []

L4: Another annuity question……..Your accountant is wrong. It may be true that a 5329 might result in a request for more documentation, but I doubt it. But I have never heard that it generated an audit. If it did, we should all submit form 5329 because then the IRS would not have enough personnel or time to audit anything else.This is the same myth that says that filing a tax return under extension, or filing an amended tax return results in an audit. There are 10 million extended tax returns a year, and millions of amended tax returns. The number of audited tax returns is significantly less, and there is nothing in the IRS’ program that triggers audits for either of these situations. They use meaningful criteria.2011-02-12 16:35, By: dlzallestaxes, IP: []

L5: Another annuity question……..That’s what is wrong with the whole system; there are just too many gray areas that a person doesn’t know what is right and what is wrong. I’m sure the IRS does that on purpose to keep people confused.2011-02-12 18:12, By: JT, IP: []

L6: Another annuity question……..I found this on another site, and it pretty well summarizes how 2002-62 changed the SEPP landscape from the acceptance of certain COLAs to the assumed exclusion of them based on the inferred verbiage in 2002-62. It is surprising that no one has shelled out the dough for a new PLR on SEPP COLAs over the last 8 years. Perhaps a huge bout of inflation will be the driving force for a letter ruling request as well as improving the chance of a positive outcome.>>>>>>>>>>>>>>
Can I still use annual recalculation or annual inflation adjustments with the amortization and annuity methods?
In the past, there have been several IRS private letter rulings (PLRs) allowing for annual recalculation with the annuity and amorization methods as well as several allowing the annual SEPP distribution to be increased for inflation or “cost of living” (see PLRs 9503631, 9726035 and 9816028.) Revenue Ruling 2002-62 is silent on these method variations.
In 2004 there were two IRS private letter rulings allowing for recalculation using the amortization method ( PLR 2004-32021 and PLR 2004-32024) and one allowing for recalculation with the annuity factor method (PLR 2004-32023.) To date, there have been no authoritative published references giving guidance on whether inflation adjustments with the annuity or amortization methods are permissible under the new rules.

The Retire Early Home Page has developed an Excel Spreadsheet you can use to keep track of your annual SEPP distributions using the Amortization Method with Recalculation. Click. here.
If you want to use inflation adjustments for a SEPP starting on or after Jan. 1, 2003, it’s probably best to request an IRS private letter ruling on the issue, or wait until another taxpayer spends a few thousand dollars asking the question and the IRS publishes a positive ruling. Then you’ll have the answer for free.

>>>>>>>>>>>>>>>>>Meanwhile, a cheaper version of this effort might include filing a 5329 with an explanatory statement dredging up old PLR 9503631, and see if the IRS falls for it. Perhaps your insurance company fell for it or why else would they have sold you on a COLA if they didn’t think it would fly? One reasonmight be that they do not understand the difference between an IRA and a NQ annuity.In any event, I am sympathetic to your frustration because intuitively you would think that a 3% COLA starting in the first year could be construed as being “substantially equal” if recalc has been approved as such in repeated letter rulings. If we get the inflation that many predict will occur, anyone that expects their SEPP to cover living costs for more than about 7 years will end up with a busted plan.I tend to assign most tax problems to Congress, but this one does appear to be on the IRS.2011-02-13 02:00, By: Alan S., IP: []