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Inherited Individual Retirement Annuity - what are the considerations?

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6 replies to this topic

#1 AndyH


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Posted 22 May 2013 - 08:17 AM

Non-spouse beneficiaries (2) inherit Individual Retirement Annuity from person past 70 1/2 and receiving minimum distributions.  Annuity was long term, and was crediting 4% interest currently.  Not a lot of money, about $50,000 split to two beneficiaries, both in high tax brackets unlikely to change soon.  Beneficiaries in late 40's.


Options presented by insurance company seem to be:


Immediate payment and taxation


Five year deferral of total but annual Minimum distributions required


Transfer to another Individual Retirement Annuity


Some type of conversion to an annuity over beneficiary's lifetime with the existing insurer



The distribution paperwork is of course full of sales nonsense and legaleze, and is very unclear.




1. Transfer to a non-annuity IRA does not appear to be an option.  Is this true, and if so why?


2. If converted to an annuity over the lifetime of the beneficiary, is this like an individual fixed immediate annuity where the insurer prices the annuity however it chooses, including interest, mortality, expense assumptions of it's choosing?


3. What other considerations are important to minimize taxes, commissions, and maximize return?

Edited by AndyH, 22 May 2013 - 08:31 AM.

#2 masteff


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Posted 22 May 2013 - 10:02 AM

Q1 - Because that's not what the insurance company sells.  You might ask the ins company: "so if it's moved to another individual retirement annuity, would that simply be a check or is there a contract and the contract would have to be moved".  You're hoping they say it's a check in which case I don't know why it couldn't be moved to a traditional IRA.


Q2 - I'm not sure that's an entirely valid option because of the MRD rules.  But if we change the question to "an annuity that meets the MRD rules", then I'd suspect you're correct.  Given how you describe the paperwork, I wouldn't have high hopes.


Q3 - As a general rule of thumb, don't take investment advice from an insurance salesperson.  Otherwise, just remember if the first distribution isn't taken in a timely manner then can inadvertantly be locked into taking it out over a 5 year period. 


And I'm far from expert on the MRD rules w/ respect to annuities, so if anyone knows better on Q1 & Q2, please speak up.

Edited by masteff, 22 May 2013 - 10:05 AM.

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#3 AndyH


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Posted 22 May 2013 - 11:08 AM

Thank you for the comments.    Very useful.

#4 Bird


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Posted 22 May 2013 - 12:12 PM

It sounds like this is an annuity that was not in pay status.  So it generally functions much like any other investment, which means you should be able to roll it to an inherited IRA anywhere.


Yes I think if you annuitized it the insurance company would be using their own assumptions, but once determined it would be guaranteed.  (I don't think we are talking about a variable contract.)  That would basically be locking in current low rates for life and doesn't seem like a very good idea to me...


It doesn't make sense to me that they would say you could defer for 5 years but still have to take annual minimums.  That's clue #2 that something is a little "off" with the options/advice (clue #1 being that it is coming from an insurance company).

#5 AndyH


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Posted 22 May 2013 - 12:25 PM

Thanks, I have the same observations on each point.

#6 Borsley


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Posted 22 May 2013 - 03:05 PM

** edit -- I was assuming the IRA was in pay status when crafting my response here.  I see from another's comment (posted while I was typing up mine)  that maybe that is not the case. **


I'm assuming this is a traditional IRA and not a Roth IRA inherited annuity. 


I believe the applicable cite is Code Section 401(a)(9)(B) which essentially states that after that IRA owner dies, the remaining portion of the account must be distributed at least as rapidly as under the method used prior to the IRA owners death.


Related directly to the questions.


Q1: The insurance company can only offer the products they sell.   That said,  if you were to transfer to an IRA (non-anniuty) presumedly with another financial institution,  you'd need to be sure it is set up as an inherited IRA and associated RMDs are set up correctly.  I would think that would be part of their processes in setting up an inherited IRA?


Q2: Since 401(a)(9)(B) requiries payment to be at least as rapid as prior to death,  I believe using the lifetime expectency of the bene would only be an option if the original RMD was calculated using the bene life expectancy as part of the calucuation (which I believe is allowed under applicable  RMD rules found in 401(a)(9)(A)    In the end,  if the insurance company provides an illustration for the SPIA (Single Premium Immediate Annuity - which I assume is what is being referred to here) and the guarantee payments are "at least as rapid",  then I'd assume this would be fine.


Q3: I'm not an expert but did notice you didn't mention anything about protecting principal,  guaranteeing income streams, looking for possible death benefit, etc.   These would all be features of annuities so maybe consider that observation into your equation when deciding what makes sense long-term for these inherited IRAs.  


Good luck!  

Edited by Borsley, 22 May 2013 - 03:33 PM.

#7 AndyH


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Posted 11 June 2013 - 02:18 PM

P.S. After quite a bit of time researching this issue, in particular my question #1, I have learned that the election forms provided by the insurer need to be "modified" by crossing out "annuity' wherever it exists in order to facilitate transfer to a non-insured inherited IRA.      In other words, the forms issued by a major insurer were, in my opinion, grossly misleading.  I would bet that no more than 1 out of 100 people would transfer the money to a non-insured IRA based on the options presented on the election forms.


In other words, thank you all, the answers provided in this thread were correct, and I could find them nowhere else.  


(I confirmed my conclusion with an inside contact who works at the insurer.  He said the forms needed to be modified.  The customer service people would not or could not answer any of my questions)