Non Spouse Beneficiary-NQ Annuity-10% Early Withdrawal Question

[CALTCAgent]

If a non spouse beneficiary inherits a NQ annuity, there is no early withdrawal penalty for a pre 59.5 distribution, isn't that correct ?

The company coded a distribution as a #1, early withdrawal with a penalty.

What IRS section can be used to show the company that the non spouse beneficiary should not be subject to the pre 59.5 early withdrawal penalty ?

The NQ annuity is very old, prior to 1979 and was inherited several years ago. No distributions have been taken so far. The company said that the money can sit there and the money can be taken whenever is wanted. They did not force a lump sum payout or say there was a 5 year rule. The annuity was not transferred to a new one either.

 

[Life Hawk]

I think there may be an issue if the beni is a non spouse. Maybe I'm thinking or referring to how the annuity was treated at the time is was pass on?

Maybe I'm not fully understanding. Did they just inherit this annuity?

 

[CALTCAgent]

Maybe I'm not fully understanding. Did they just inherit this annuity?

To add a little more, They inherited several years ago. There were 3 beneficiaries that split the annuity 3 ways. The company said they could just keep the annuity going. No new 1035 paperwork was filled out. I have a feeling the company is saying they started a new annuity and that is why the 10% penalty applies to an under 59.5 age beneficiary.

 

[Life Hawk]

I believe that in the case of a death, the annuity ceases even if a transfer is made, a new owner is named, hence a new contact. Had a contract do this a year or so ago. The spouse took advantage of a newer law and transferred assets to a different company.

 

[CALTCAgent]

I believe that in the case of a death, the annuity ceases even if a transfer is made, a new owner is named, hence a new contact. Had a contract do this a year or so ago. The spouse took advantage of a newer law and transferred assets to a different company.

I know that if they take the 5 year or lump sum payout then that is not subject to the 10% pre 59.5 rule. In this case the company said that it was a group annuity registered in New York under different rules. They originally said you can keep it for life without a lump sum or 5 year payout. I think they are going to say its a "new contract" and therefore the 10% penalty applies. I thought 1035 transfer paperwork had to be filled out to have a new contract.

 

[Tahoe Ray]

I thought 1035 transfer paperwork had to be filled out to have a new contract.

It doesn't. It's just a retitling. That being said, an inherited annuity under distribution should have no penalty,

Now, if they're just taking random withdrawals and have the annuity titled in their name (non-spouse bene), it could be an issue from the carrier but their CPA should be able to clear that up.

Carriers don't have sophisticated one-off options. Everything is a nail and they only have a hammer in most cases.

 

[Allen Trent]

I did this exact thing when my mother died in 2019. She had a NQ Annuity with Lincoln with large taxable gains. My sister & I both chose the inherited RMD (yes on a NQ). Lincoln took half the basis & half the gain & separates it into 1 account for me & 1 for my sister.

Each year, we receive the RMD check each year that is based on the RMD table for non spouse & the RMD factor changes by 1 each year. The 1099 each year is coded as a death benefit check & is not subject to 10% early penalty. We are being taxed on the distribution (also can get hit with the high income Medicare tax on passive earnings too).

2 issues:

1. Not all carriers allow inherited RMD on NQ annuities. Most do not

2. In your example, what death settlement option did they elect on the claim form (get a copy). Something tells me they may have elected the 5 year deferral as NQ usually only have 3 options with most carriers for non spouse living persons:. Lump sum, 5 year deferral, payout annuity & rare cases carriers allow the inherited RMD. In all cases, these should be coded as received as a death claim & not be subject to 10% penalty.

However, the way you explain it, it sounds to me, somehow this carrier merely changed the ownership of the account from the deceased to the others & kept it like it was their own. Otherwise there wouldnt be a way to maintain as is with no distributions. In this case, it would be subject to 10% early because it is theirs. Maybe it was jointly owned before death?

Unicorn for sure.

 

[CALTCAgent]

It doesn't. It's just a retitling. That being said, an inherited annuity under distribution should have no penalty,

Ok good to know about the retitling. Its not under any set distribution. The company said that was not needed in this case.

Now, if they're just taking random withdrawals and have the annuity titled in their name (non-spouse bene), it could be an issue from the carrier but their CPA should be able to clear that up.

They were taking random. They just took their first one. The company is saying this group annuity out of new york goes by different rules.

Carriers don't have sophisticated one-off options. Everything is a nail and they only have a hammer in most cases.

So true. In fact, the annuity should be pre tefra, started in 1974. LIFO instead of FIFO. There is nothing showing a return of principal with the first ever distribution. No distributions from the original owner or beneficiary up until this point.

 

[Tahoe Ray]

However, the way you explain it, it sounds to me, somehow this carrier merely changed the ownership of the account from the deceased to the others & kept it like it was their own.

This outcome isn't allowed.

I'm not saying the carrier didn't do it, just that they're not supposed to. Frankly, if a non-spouse bene could just retitle to their own name, that would be ideal. Unfortunately, the IRS begs to differ.

 

[CALTCAgent]

2. In your example, what death settlement option did they elect on the claim form (get a copy). Something tells me they may have elected the 5 year deferral as NQ usually only have 3 options with most carriers for non spouse living persons:. Lump sum, 5 year deferral, payout annuity & rare cases carriers allow the inherited RMD. In all cases, these should be coded as received as a death claim & not be subject to 10% penalty.

There was no payout selected. The company said it was ok to just keep the account the same as is. Maybe they changed ownership as the key. No payout has been happening.

However, the way you explain it, it sounds to me, somehow this carrier merely changed the ownership of the account from the deceased to the others & kept it like it was their own. Otherwise there wouldnt be a way to maintain as is with no distributions. In this case, it would be subject to 10% early because it is theirs. Maybe it was jointly owned before death?

Unicorn for sure.

It was not jointly owned before death. I think they changed ownership but told the family there would be no consequences to that. One of the beneficiaries is under 59.5 and wants to take money out. I think its still under 5 years since they inherited too.