Can you aggregate an SPIA and a VA, but take SEPP from SPIA?
L1: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?I understand you can aggregate assets to get a “total” but then take the 72(t) SEPP payments from any or all accounts. I have $400,000 in IRA, age 51. I’m considering purchasing an SPIA for 10 year Certain (no life), just sending them enough to meet the Annuity Factor Method amount. THen allowing the other money to sit in a VA with a roll-up income benefit for 10 years. While this does nothing for my current income (that’s determined by 72(t) payments), it substantially increases the income I’ll have at age 60.
Can you annuitize a fixed annuity to get the higher payout, leave the VA account untouched, and satisfy the SEPP guidelines? Thanks for your help.2009-05-27 17:37, By: dmorganoh, IP: [184.108.40.206]
L2: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Yes, that would work. Just be totally sure to correctly calculate your SEPP amount, then set up the 10 year period certain annuity by direct transfer with the exact amount needed to produce the SEPP distribution. Then document your original account balance and SEPP calculations carefully. 2009-05-27 19:48, By: Alan S., IP: [220.127.116.11]
L3: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Alan, the fixed annuity company I’m talking with says aggregation is not allowed. Something about IRS limits on SPIAs and that they work on different interest rate assumptions than SEPP. Is there a RR or PLR that specifically says aggregationis possible? Thanks.2009-05-27 20:45, By: dmorganoh, IP: [18.104.22.168]
L4: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?They are allowed if properly setup.
For starters, you should have an IRA Custodial Account that includes your regular IRA and the SPIA. The SPIA is merely an investment of the IRA Custodialaccount. It would be owned by theCustodial Account and the annuity payments would be payable to the Custodial Account.
The SEPP distributions would bethen be made from the CustodialAccount.
Maybe what your annuity company is saying is that they don’t provide custodial accounts – if they don’t, other companies will.2009-05-27 20:50, By: Gfw, IP: [22.214.171.124]
L5: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Custodial Account? Do you mean something like Pershing? Or Schwab? then just put it all inside there?2009-05-27 20:59, By: dmorganoh, IP: [126.96.36.199]
L6: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?An IRA can be a Custodial Account or a Trusteed Account. Most Insurance company IRAs use a rider that is attached to an annuity to get it approved as an IRA meaning it is self-contained – easy, but not always the best alternative. The insurance company that I was associated with before I retired used a Custodial IRA.
A Custodial Account is merely the document that outlines the provisions of the IRA and what investments are allowed. They may be used by banks, insurance companies or brokerage firms. Typically they can include any or all investments that would otherwise qualify under the IRS Code as eligible to be included in an IRA.
Now I have a question… why do you even want to include an annuity in the SEPP?The payments from a 10-yearannuity will consist of part interest and part a return of premium. It may sound good this year, but what if interest rates go up by even 2% or 3%in the next 2 years – it won’t look quite as good then andyou will have another 8 years togo.
2009-05-27 21:11, By: Gfw, IP: [188.8.131.52]
L7: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Thanks for your assistance. It’s not a 10-year annuity, it’s a SPIA and it’s an IRA. Are you saying rather than annuitize to just take withdrawals out of an annual-rate SPDA? How then, do I guarantee 10 years of payments, which gets me to when my VA income level doubles? Your insight is appreciated.2009-05-27 22:35, By: dmorganoh, IP: [184.108.40.206]
L8: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?SPIA stands for Single Premium Immediate Annuity – you described it as a 10-year payout which makes it a 10-Year SPIA. The insurance company is right if you look at the annuity in it’s own terms – it doesn’t work.
What I outlined is the procedure for includingan SPIA (of any duration) in a SEPP plan. At your direction, the IRA Custodian purchases and ownsa 10-year SPIA payable back toyour custodialIRA.
The SEPP distributions are then paid from the IRAaccount under the terms of the SEPP.
>>when my VA income level doubles?Another question… money doubles every 10 years at 7% – did your VA earn 7% last year?
2009-05-27 22:46, By: Gfw, IP: [220.127.116.11]
L9: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?>>when my VA income level doubles?Another question… money doubles every 10 years at 7% – did your VA earn 7% last year?
My guess is the poster is referring to a rider added to the VA which creates a “protected income base” that is guaranteed to grow at 7% per year for the first 10 years of the contract. The “protected income base” is separate from the actual “market value” of the contract. It’s like having two buckets of money to deal with … real money or the contract market value and “imaginary but spendable money” which is the protected income base.
My suggestion is for the poster to check with the annuity company to be sure the 7% rider is still available. Due to the poor markets we have had over the last couple of years, VA companies have drastically scalled back the benefits offered in these riders.
Jim2009-05-28 12:58, By: Jim, IP: [18.104.22.168]
L6: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?You are looking for a Custodial IRA Account held at a brokerage firm, such as Schwab, Pershing (gag), National Financial (NFS), etc. The annuity assets are “bought” through the Brokerage IRA Account andNOT purchasedseparately then transferred into the brokerage account. The annuity will be registered to the custodian, IRA, FBO: (Your Name).
CAUTION: Not all brokerage custodians will allow you to buy an annuity (SPIA, VA, Fixed) through their brokerage platform, so you need to do your homework first before settling on a custodian.
Once you have all of the assets within your Brokerage IRA Account, then set up the SEPP and the assets will “dump” cash into the account from which your SEPP distributions will be made.
Jim2009-05-27 21:15, By: Jim, IP: [22.214.171.124]
L7: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Jim, et al,
Can I just set the three accounts up separately (one was opened 4 years ago), and say, print the balances from May 31 or whatever, and use those three balances as the basis for my calculation? I actually will be taking money from the existing account, and the rest from thenew SPIA, leaving the new VA untouched for several years. It appears like I won’t be able to do the consolidated custodial account. Is that the only way to do it? Or can I set them up separately? Since I’ll be doing the Annuitization method, I only set it up once, so I won’t have to calculate each year. Again, much thanks.2009-05-28 13:43, By: dmorganoh, IP: [126.96.36.199]
L8: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?I feel that you CAN do it this way, notwithstanding the fact that the custodial setup is preferable. One obvious disadvantage of receiving the SEPP payout from the 10 year annuity is that you will not be able to take advantage of the one time switch to RMD if you wanted to. Your payout will be locked in.
If the insurer uses different interest rates etc, that should not matter. Your SEPP calculations are done by you and if your annual distribution is the correct amount, your SEPP is good. You would ask the insurance company how much they need to produce a payout equal to (your SEPP calculation). Once they tell you, you would need to transfer funds into or out of the annuity to get to the right starting balance. The problem here is that doing these transfers may not be possible with this insurer, and you lose personal control to the regulations of the insurer, who is NOT sensitive whatsoever to your needs as a SEPP participant. In summary, you are trying to fit more variables through the head of a needle, and if one of them won’t fit, then you have a busted plan. I advise against it, but wish to clarify that IF and only If you address all the issues effectively with the carrier, your plan would pass muster. You would probably need a 5329 to claim the exception, but that is now commonplace.
Final warning – if this insurance company does not seem well versed on SEPP rules, your potential for problems multiply.2009-05-28 20:59, By: Alan S., IP: [188.8.131.52]
L9: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Thanks, Alan, for your help. And sorry for the additional thread (I’ve never done this before).
Should it matter if the insurance company is “well-versed”? If I do the calculations, and know how much to send them to start, isn’t their annuity payment all I’m concerned with?
And your point of not being able to switch to RMD, I thought about that, but find it unlikely. If not needed, the reason would be new employment, and if so, I can then simply start a new IRA to offset it. Maybe higher taxes, but I’m concerned about the guaranteed payment for 10 years more than I am the flexibility to lower to RMD.
Thanks.2009-05-28 21:35, By: dmorganoh, IP: [184.108.40.206]
L10: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?It matters because if the company does not understand SEPPs, they will not understand why you are asking for certain procedures and will care only about their own rules which are unlikely to have considered SEPP considerations. Support from the custodian is not a requirement, but it is much better to have it than not.
You indicated that the company uses their own interest rate, mortality tables etc, so only they will be able to determine how much of an initial balance is required to produce the exact SEPP payment that you calculated. For example, using the balance of all your “SEPP universe IRA accounts” and the highest available rate, assume you calculate a SEPP distribution of 14,723. You would then have to ask them what balance their 10 year annuity would require to generate an annual distribution of 14,723. The answer will be different than your current balance so you will have to transfer funds in or out to get to the exact number. I don’t know what that would entail, but would need to get done before your distributions could start and prior to the date that your interest rate might drop or the number changes and you start all over again.
If you are going to do this, why not create a brokerage IRA with a modest balance that is part of your SEPP universe and from which you can make a withdrawal just in case the annuity distribution falls short? You can then make up the difference from the brokerage IRA. If they distribute too much, then you can roll over within 60 days the excess to the brokerage IRA, creating another safety valve.
You may also have read about the benefits of having an IRA account outside the SEPP plan. In case you need more money, you can take the distribution from this outside account, and while you would pay the penalty, your SEPP would be preserved against all those retroactive penalties and interest. Of course, you must have enough money to create a separate account for emergencies, since that balance cannot be part of your SEPP plan.
Finally, with a fixed 10 year annuity, you should select a sound company because the payouts are only guaranteed by the ability of the company to remain solvent or get a bailout. As gfw indicated, there is a real chance that interest rates could skyrocket in a couple more years due to bailout caused inflation, and that would make the current rate look paltry.
2009-05-28 23:11, By: Alan S., IP: [220.127.116.11]
L11: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Again, many thanks.
Your suggestion of having a separate IRA to withdraw from to be sure and take out the correct SEPP is what I was doing anyway. Without knowing I was confusing the issue, I was trying to make my question more simple. If you remember, I posted the separate thread with the nearly the same info. In it, I detailed that I plan to have 3 IRAs, with two of them distributing income, similar to your suggestion. What I had done with the new thread is take what answers I had already gotten in the original posting from you and gfw, and tried to clarify what I was doing, as I could see that you didn’t see the whole picture. Hence, it appeared like I was repeating myself.
The other thread is more clear as to my intentions, which I felt would get more accurate answers from you and others.
I think this is my final question: if the two annuities distribute SEPP income, and Box 7 is a “1” (premature – no exception noted), is that easily fixed on the Form 5329 each year? My guess is yes, because the payment will be Annuity Factor or Amortized, which is fixed until I’m 59 1/2 (51 now). As long as I don’t break the SEPP, and as long as I file the 5329, I should be OK, right?
Thanks so much for your help and assistance.2009-05-29 14:30, By: dmorganoh, IP: [18.104.22.168]
L12: Can you aggregate an SPIA and a VA, but take SEPP from SPIA?Right. The 5329 is simple to complete for any 1099Rs that are coded “early”, when the distribution rightly qualifies for exception “02”, which is entered on line 2 of Form 5329.2009-05-29 22:16, By: Alan S., IP: [22.214.171.124]