Annuity taxation question

[Nate insurance]

Hello everyone. I have a annuity taxation question. I have a client that is age 60. His spouse just recently passed away. His wife was in a 10 year AIG fixed annuity. She was in the contract for 5 years before she passed away. The holding company is going to issue a 1099-R code 4 for death. There was no mandatory 20% IRS withholding and I am not sure why? The spouse called AIG and told them he would like the lump sum distribution of $288,000. AIG is going to send a check to beneficiary for that amount. Beneficiary is going to deposit $288,000 into his personal account and keep $100,000 out of the $288,000. Would beneficiary only pay tax on the $100,000 provided he rolled over remaining balance of $188,000 into another qualified annuity contract? Thanks or your help in advance

 

[Allen Trent]

Hello everyone. I have a annuity taxation question. I have a client that is age 60. His spouse just recently passed away. His wife was in a 10 year AIG fixed annuity. She was in the contract for 5 years before she passed away. The holding company is going to issue a 1099-R code 4 for death. There was no mandatory 20% IRS withholding and I am not sure why? The spouse called AIG and told them he would like the lump sum distribution of $288,000. AIG is going to send a check to beneficiary for that amount. Beneficiary is going to deposit $288,000 into his personal account and keep $100,000 out of the $288,000. Would beneficiary only pay tax on the $100,000 provided he rolled over remaining balance of $188,000 into another qualified annuity contract? Thanks or your help in advance

What kind of account was it-- NQ annuity, Traditional IRA, Roth IRA, etc.

What is a holding company--you mention that but also mention AIG

Is the spouse the beneficiary because you mention spouse, but later say the beneficiary.

If you answer these questions, we can help answer your questions

PS-- have him ask AIG what the 1099-R will list as the taxable amount. If a traditional IRA, it 1099 with show total distribution of 288k & also 288k taxable. If Roth IRA, 1099 will show total distribution of 288k with $0 taxable. If NQ annuity, 1099 will show total distribution of 288k & the taxable amount will depend on the clients original cost basis investment in the contract. If they 1035 exchanged a prior NQ annuity to AIG, the cost basis will not be what they started with AIG as they would have rolled over the gains from the prior NQ annuity company

 

[Nate insurance]

It is a qualified annuity. Yes the spouse is the beneficiary. The 1099 is going to say taxable as it is qualified money. My concern is that he took a lump sum distribution and he wants to keep $100,000 and rollover the rest into another qualified annuity. So as long as he rolls over the $188,000 into another qualified account, will he only be taxed on the $100,000 that he keeps as long as he rolls the $188,000 within 60 days? The original investment was a Verizon pension that was rolled over into a AIG annuity.

 

[DHK]

He should try to undo that and have the distribution coded and paid to an IRA Beneficiary account - probably at a bank. Then take the distribution from there and roll over the balance to the IRA Beneficiary annuity.

 

[Tahoe Ray]

It is a qualified annuity. Yes the spouse is the beneficiary. The 1099 is going to say taxable as it is qualified money. My concern is that he took a lump sum distribution and he wants to keep $100,000 and rollover the rest into another qualified annuity. So as long as he rolls over the $188,000 into another qualified account, will he only be taxed on the $100,000 that he keeps as long as he rolls the $188,000 within 60 days? The original investment was a Verizon pension that was rolled over into a AIG annuity.

Roll the 188k first and then withdraw the 100k to make that simpler.

* I'm not an accountant.

 

[Allen Trent]

He should try to undo that and have the distribution coded and paid to an IRA Beneficiary account - probably at a bank. Then take the distribution from there and roll over the balance to the IRA Beneficiary annuity.

As a spouse, why would you suggest he take it as a beneficiary/inherited ira instead of a spousal assumption? And inherited IRA will force RMDs right away even if under age 70 1/2. Also, the inherited IRA also has a greater RMD required as it uses the beneficiary IRS RMD schedule that subtracts the factor by 1 each year rather than the normal RMD table for owners RMD schedules.

Utilizing a spousal assumption seems to allow for the best options. Client could then do the rollover as you suggest, take the 100k distribution & roll the balance.

Ideally, so the client doesnt get hit with the 100k on his tax return in 1 year, it woudl be best to advise them to at least take 50k now & 50k after 1/1 to spread the hit on 100k over 2 tax years. If the client is over age 65 and collecting Medicare, 100k added to their tax return in 1 year can also impact what they will be charged for Medicare premiums, etc.

Best to walk before they run & get tax advice before signing the death claim paperwork. If it has been submitted but not processed, most carriers will let you change your mind & start over

 

[pfg1]

As a spouse, why would you suggest he take it as a beneficiary/inherited ira instead of a spousal assumption? And inherited IRA will force RMDs right away even if under age 70 1/2. Also, the inherited IRA also has a greater RMD required as it uses the beneficiary IRS RMD schedule that subtracts the factor by 1 each year rather than the normal RMD table for owners RMD schedules.

Utilizing a spousal assumption seems to allow for the best options. Client could then do the rollover as you suggest, take the 100k distribution & roll the balance.

Ideally, so the client doesnt get hit with the 100k on his tax return in 1 year, it woudl be best to advise them to at least take 50k now & 50k after 1/1 to spread the hit on 100k over 2 tax years. If the client is over age 65 and collecting Medicare, 100k added to their tax return in 1 year can also impact what they will be charged for Medicare premiums, etc.

Best to walk before they run & get tax advice before signing the death claim paperwork. If it has been submitted but not processed, most carriers will let you change your mind & start over

Agree with you, not an inherited IRA... spousal continuation.

 

[DHK]

Fair enough.

Still better than what he did on his own with a full distribution.

 

[Allen Trent]

Fair enough.

Still better than what he did on his own with a full distribution.

Completely agree. Was just curious if you knew of information that I didn't such a maybe an inherited ira beneficary account allowed for more rollover time or 60 day window that a spousal assumption didnt.

Was genuinely asking, wasn't trying to be critical

 

[DHK]

That's fair - absolutely.

What you said was right. I was just primarily focusing on undoing what he did on his own.