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Transfer of In-Plan Annuity to an IRA


CharlesS
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Can a participant in a 401(k) transfer their in-plan annuity to an IRA?

I have a client plan in which a participant 20+ years ago was convinced to purchase an immediate annuity as investment option. The Plan was listed as the owner of the annuity and all subsequent annuity payments have been deposited into the participant's 401(k) account. Fast forward to today and the plan administrator is tired of administering this one unique asset in the plan for 'who knows how many more' years and wants it removed. The participant tried to transfer it into an IRA by having it re-titled, but the insurance company has come back (after the participant completed all the paperwork) stating that the IRS does not allow plan changes on annuitized contracts. I do not work with annuities, so I have asked the insurance company for the specific citation. But from a purely taxation standpoint, I don't see why such a transfer would be prohibited as it puts the participant in the exact same position they are in today. Confirmation of or guidance with respect to the insurance company's position from those of you that deal with annuities regularly would be greatly appreciated.

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Wow I would have loved to have heard that sales pitch.  "You should turn your plan account into an annuity which will then be deposited back to the plan.  We are both stupid enough to make this happen!"

I think the insurance company is probably right.  I don't think the owner can be changed, but it might be possible to change the annuitant to the individual instead of the plan.

Ed Snyder

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I agree that it makes no sense as an investment. However, I'm left helping pick up the pieces

If the plan could change the annuitant to the individual, my thinking is that the distribution of the annuity would not be a taxable event.

"If a trust described in section 401(a) and exempt under section 501(a) purchases an annuity contract for an employee and distributes it to the employee in a year in which the trust is exempt, and the contract contains a cash surrender value which may be available to an employee by surrendering the contract, such cash surrender value will not be considered income to the employee unless and until the contract is surrendered." Reg. 1.402(a)-1(a)(2).

I know that typically a plan transfers the annuity prior to payments beginning, but I don't see anything that changes the outcome merely because payments have been made for 20 years already. Of course, all subsequent payments to whom would be taxable and a 1099-R issued by the insurance company. 

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3 hours ago, CharlesS said:

If the plan could change the annuitant to the individual, my thinking is that the distribution of the annuity would not be a taxable event.

Agreed

3 hours ago, CharlesS said:

Of course, all subsequent payments to whom would be taxable and a 1099-R issued by the insurance company. 

Agreed.  It was discussed recently here and would be one of the (rare in my experience) times when liabilities are truly and completely transferred to an insurance company.

Ed Snyder

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1 hour ago, Bird said:

Agreed

Agreed.  It was discussed recently here and would be one of the (rare in my experience) times when liabilities are truly and completely transferred to an insurance company.

Although this, as stated, is an immediate annjuity, I believe the rule would apply regarding taxation from the plan.  In order for the transfer to be nontaxable, one condition is that the annuity contract must be "nontransferrable" [IRC Section 1.401-9(b)]  I may be incorrect with the immediate annuity distribution but I cannot locate any language that makes a distinction in such Section.  Would like to learn otherwise.

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