Legality of split annuity strategy
L1: Legality of split annuity strategyI wanted to see if anyone could provide a clear citation from the Treasury Regs, a PLR, or any other source, that would support the idea of the split annuity strategy for 72(t) SOSEPP.
In essence, the strategy assumes that the IRA owner places a portion of the account into investments to accumulate for a period (typically the end of the SOSEPP period), while the remainder of the account is placed into a period certain immediate annuity to fund distributions sufficient to pay the 72(t) amount calculated based on the original total balance of the IRA.
I question the validity of the strategy because, in discussing permissible methods for taking RMDs, Treas. Reg. 1.401(a)(9)-8, A-2(a)(3)requires that distributions from annuitized IRA balances NOT be used in satisfying RMDs from non-annuitized IRA balances.
In other words, the regs seem to draw a line between annuitized balances and non-annuitized balances. Clearly, we are not talking about RMD in the case of 72(t) SOSEPP, but in general, once the IRS develops a logical train of thought, they do seem to have a desire to maintain logical consistency in application.
Common sense would indicate that the strategy is valid. For instance, if the vehicle funding the 72(t) distributions was a self-liquidating mortgage bond, returning sufficient income and principal to satisfy the SOSEPP distributions, I don’t think there would be any question about the validity of the strategy.
However, it would be a big help if anyone had a citation from some authority that indicates that the split annuity treatment is acceptable.
Any thoughts?2009-06-12 20:35, By: alanpp, IP: [188.8.131.52]
L2: Legality of split annuity strategyThere aren’t any citations and it is allowed if properly setup which most insurance companies won’t do. Merely have both annuities asinvestmentsin a custodial account. The payments from the immediate annuity are paid back to the custodial account and the SEPP payments are paid from the custodial account.
My guess is that you are either an insurance agent or you have been talking to an insurance agent. You can probably come out ahead by merely investing the funds outside of any annuity. Most all annuities have expenses like commissions- the funds have to come from someplace.
It amazes me that I still see insurance companies guarantying interest rates on annuities far in excess of any market rates available.If you do invest in an annuity, make sure that you get details on what the insurance company is investing into get those rates. Make them identify the underlying investments. 2009-06-12 20:47, By: Gfw, IP: [184.108.40.206]