Variable Annuity Inside of an IRA

L1: Variable Annuity Inside of an IRAI know this isn’t specifically SEPP related but I’d appreciate your help.
A guy puts his IRA into a variable annuity – $200,000. It loses significant money and upon his death has a surrender value of $120,000. The annuity has a death benefit so that it pays out the full $200,000 at his death.
1 – I assume that if hisspouse is the beneficiary, she could roll that payout into an annuity in her name if she does so within 60 days of receiving it.
2 – However, if the beneficiary is anyone other than his spouse, because it comes out of the annuity and thus out of the IRA, I assume the beneficiary loses the ability to stretch out the inherited IRA and that they are taxed entirely in the year of death / distribution.
Is this correct?
Second, if it’s non-qualified money. Let’s say the investor puts in $100,000, it grows to a high water mark of $200,000 and then drops to $120,000 and the investor dies. The death benefit pays out $200,000. Is the entire difference between the initial basis of $100,000 and the payout of $200,000 taxable as ordinary income or is $80,000 of it considered a tax free life insurance payout, and only $20,000 considered ordinary income?2005-04-02 13:27, By: Mobey, IP: [67.106.28.17]

L2: Variable Annuity Inside of an IRAGood morning Mobey. Your question brings to light one of the really great advantages of using annuities, variable or fixed, to fund an IRA, and that is the death benefit. I have had 5 cases since March, 2000, where the VA DB far exceeded the account value upon death. As a result I have a group of very happy beneficiaries.
As to your scenarios, there is no simple answer because death distributions of an IRA has so many facets. Does death occur before or after RBD? Is there only one beneficiary or multiple, and is it spouse or non-spouse? Should the resulting IRA become the beneficiaries IRA, or should it become a “Beneficiary IRA?” What options exists to “streatch out” the IRA payments to the beneficiary(ies)?
My suggestion is for you to contact the Advanced Marketing section of your annuity provider to help you with your questions. They will give help but will also direct you to a CPA since this is also a tax question. This is one of those cases where you really need inputs from both disciplines.
Good luck.
Jim2005-04-04 09:23, By: Jim, IP: [70.184.1.35]

L2: Variable Annuity Inside of an IRABy: Jim Date: 4/4/2005 Subject: Variable Annuity Inside of an IRA
Good morning Mobey. Your question brings to light one of the really great advantages of using annuities, variable or fixed, to fund an IRA, and that is the death benefit. I have had 5 cases since March, 2000, where the VA DB far exceeded the account value upon death. As a result I have a group of very happy beneficiaries.
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The use of a VA inside of and IRA is akin to using an umbrella indoors. The guarateed return of premium death benefit costs at least 100 basis points asa Mortality and Expense charge. How many of these VA were sold since 2000 with the guarantee return of premium as a death benefit becoming a non-issue. Yet the 100 basis points M & E charge is payable for the life of theVA contract. Additionally, the M & E charge guarantees lifetime annuity income rates. But this is of no importance to those that will never annuitize their balances. I would rather see one buy term insurance for their insurance needs and buy no-load mutual funds with adequate diversification for the pre-tax retirement savings needs.2005-04-04 12:27, By: Joel, IP: [68.197.111.95]

L2: Variable Annuity Inside of an IRAI think everyone is missing the point.
I am not proposing nor condemning the use of VA in an IRA.
My understanding is that the death benefit payout of a VA by definition takes the funds out of the IRA. If this is so, then nothing else matters to a non-spouse beneficiary. They cannot “put it back into” an inherited IRA. Instead it is taxable in the year of the distribution.
Is my understanding correct? If I name my child as beneficiary, it must pay “out of” my IRA to her and therefore she cannot stretch it. There is nothing to stretch. It’s already paid out of the IRA.
Is this not correct?2005-04-05 09:33, By: Mobey, IP: [66.191.14.111]

L2: Variable Annuity Inside of an IRAThanks – I understand now.2005-04-05 11:35, By: Mobey, IP: [63.161.151.4]

L2: Variable Annuity Inside of an IRAmobley-the ONLY rules that apply when the IRA owner dies are the IRA rules. If there is a VA in the IRA, it doesn’t matter whether it’s value is the actual value or the DB value, the IRA bene has the same options they would have if it were a mutual fund in the IRA.
By the way, the only option available to the bene which does NOT require them to take the money out of the IRA within 5 years is the “exception to the 5 year rule” option which allows the bene, irrespective of their age, to take out any amount at any time without being subject to the 10% penalty. This is why the best option is the exception rule in almost all cases. The above applies onlyif the owner is not yet 701/2.
2005-04-06 13:29, By: john, IP: [66.190.154.234]

L2: Variable Annuity Inside of an IRAMobey:
I am holding firm to my original position that you have so many possible answers to your scenarios that you should get some guidance from Advanced Marketing at the VA company. Also, I recommend CPA Ed Slott’s publications, and I would recommend “The Plain English Guide to IRA Distributions,” published by “The IRA Doctor,” Leo Martin, 800 255-2593. I assume that you already have TheBadger’s book.
DB & Non-qual VA: This is a tax question but anything over your total, net premiums paid into a VA is considered ordinary income whether growth of the separate accounts or a Death Benefit. So the answer to your second question in your original post is: Ordinary income tax rules apply to the gain.
While it’s true that IRA rules apply to IRA’s regardless of the funding method, the VA gives you more options than other types of investments. Do you take the DB or take distributions over the life expectancy of the beneficiary? This decision depends on the situation at the time of occurrence. According to thevery handy charts in Leo’s book, if the IRA owner dies before RBD, the spouse beneficiary has all 6 options while the non-spouse beneficiary has only 3 of the 6 options. If the IRA owner dies after RBD then the spouse has all 4 while the non-spouse only has 2 of the 4 options.
If we tried here to address all possible answers to the “Death of the IRA Owner” question, Gordon would charge us for space on the site since he would probably have to add atleast one more server.
Good luck.
Jim2005-04-06 13:59, By: Jim, IP: [70.184.1.35]