NQ Trust Fund Beneficiary 10% Penalty Pre-59.5 Questions ?

[CALTCAgent]

Hello,

I don't run into this situation, so thought I would ask the experts here.

All plan assets are commingled in a single fixed income investment portfolio managed by Nationwide. At first I thought it was an annuity, but found out it is not although it can be 1035 exchanged to an annuity.

The beneficiary of the non-qualified trust fund has 3 options. Lifetime payout, 5 year payout or keep the account as an owner.


If they keep the account as the owner:

1. Will they be subject to the 10% pre-59.5 excise penalty on withdrawals ? (they are under 59.5)

The home office account manager says they will not be subject to the 10% penalty. Could not say why though.

This is an "old" account, I believe pre 1982 started, other than that don't know about contributioins. I thought it was an annuity and therefore was thinking about whether TEFRA would apply for an exception to the 10% ?

"Allocable to the cost or basis portion of a deferred annuity contract issued before August 14, 1982"

Not sure if TEFRA is pertinent as far as the 10% penalty if not an NQ annuity ?

Thoughts, ideas, suggestions ?

Thanks!

 

[DHK]

Get comfortable with IRS Publication 575 and search the PDF for "August 14, 1982".

https://www.irs.gov/pub/irs-pdf/p575.pdf

 

[CALTCAgent]

Get comfortable with IRS Publication 575 and search the PDF for "August 14, 1982".

https://www.irs.gov/pub/irs-pdf/p575.pdf

Thanks for the response!

I read through that, I can't quite find the answer in there, it might be there and I am not seeing it.

My understanding so far is that anything allocable to the cost or basis portion of a deferred annuity contract issued before August 14, 1982 is not subject to the 10% pre 59.5 tax.

If that is correct. Then that brings up 2 more concerns.

They call it a tax deferred savings plan backed by Nationwide, sounds like an annuity. It was started with mutual benefit life.

So the wording as far as not openly using the word annuity is making me wonder as the august 14, 1982 date is applicable to NQ annuities.

Another concern, if it was exchanged after august 14, 1982 from Mutual Benefit to Nationwide and if it had the advantage of not being subject to the 10% pre 59.5 penalty, could it lose that status from the exchange.

Thanks!

 

[scagnt83]

Hello,

I don't run into this situation, so thought I would ask the experts here.

All plan assets are commingled in a single fixed income investment portfolio managed by Nationwide. At first I thought it was an annuity, but found out it is not although it can be 1035 exchanged to an annuity.

The beneficiary of the non-qualified trust fund has 3 options. Lifetime payout, 5 year payout or keep the account as an owner.


If they keep the account as the owner:

1. Will they be subject to the 10% pre-59.5 excise penalty on withdrawals ? (they are under 59.5)

The home office account manager says they will not be subject to the 10% penalty. Could not say why though.

This is an "old" account, I believe pre 1982 started, other than that don't know about contributioins. I thought it was an annuity and therefore was thinking about whether TEFRA would apply for an exception to the 10% ?

"Allocable to the cost or basis portion of a deferred annuity contract issued before August 14, 1982"

Not sure if TEFRA is pertinent as far as the 10% penalty if not an NQ annuity ?

Thoughts, ideas, suggestions ?

Thanks!

You need to consult with a tax attorney or someone in their tax planning or advanced planning dept, not with the home office csr. I cant even count the number of times a home office csr was wrong.


I assume that we are talking about an inherited IRA here that had a Non-Qualified Trust as the Beneficiary and then your client is the Beneficiary of the Trust.

According to the info I have you were told wrong about the payout options.
If the original IRA owner was over 70 1/2 when they died: Lump Sum or Payouts based on the IRA Owner's Life Expectancy.
If the original IRA Owner was under 70 1/2 when they died: 5 Year Payout or the Lump Sum Payout.

http://www.retirementlc.com/documents/20110127TrustasNamedBeneficiaryofIRA.pdf


The 10% Penalty is simply a tax law. It is for active IRAs and not Inherited IRAs. The 10% Penalty is for the saver of the money, not the one who inherits what was saved.


Also, the 5 year payout does not have to be 5 equal payments. It just means that you have 5 years to liquidate the funds from the Trust.

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If that is correct. Then that brings up 2 more concerns.

They call it a tax deferred savings plan backed by Nationwide, sounds like an annuity. It was started with mutual benefit life.

So the wording as far as not openly using the word annuity is making me wonder as the august 14, 1982 date is applicable to NQ annuities.

Another concern, if it was exchanged after august 14, 1982 from Mutual Benefit to Nationwide and if it had the advantage of not being subject to the 10% pre 59.5 penalty, could it lose that status from the exchange.

Thanks!

You need to find out more about the source of funds. If it was an Annuity it would say so. Tax Deferred Savings Plan is IRS speak for a Qualified Plan of some type.

I think that you are overthinking this with the whole 10% worry. This is inherited money. 10% penalties should not apply. Worry about the source of funds and the rules governing the trust.

 

[CALTCAgent]

You need to consult with a tax attorney or someone in their tax planning or advanced planning dept, not with the home office csr. I cant even count the number of times a home office csr was wrong.

Thanks for the response!

I was thinking about this, or talking to my CPA.

I assume that we are talking about an inherited IRA here that had a Non-Qualified Trust as the Beneficiary and then your client is the Beneficiary of the Trust.

It is actually a NQ account not an IRA. Kinda unusual situation. This is a family thing, so it is not for a client. Makes it worse as I have not run into this before.

Lusp Trust

The 10% Penalty is simply a tax law. It is for active IRAs and not Inherited IRAs. The 10% Penalty is for the saver of the money, not the one who inherits what was saved.

In this case the money will possibly be taken over as owner. Again, it is NQ money. Contributions were made after tax.

You need to find out more about the source of funds. If it was an Annuity it would say so. Tax Deferred Savings Plan is IRS speak for a Qualified Plan of some type.

It is NQ. Nationwide will not give me anything but that website. It has been a real cluster, plan administrator, financial planner from Guardian, credit union person and Nationwide account manager all giving conflicting information.

It has been called a NQ group annuity too. I don't see it called that on the website.

I think that you are overthinking this with the whole 10% worry. This is inherited money. 10% penalties should not apply. Worry about the source of funds and the rules governing the trust.

So the 10% penalty does not apply to the person that inherited the money if they keep it in the account as the owner. Then when and if they withdraw the money no 10% penalty applies to them ?

Nationwide told me it could be taken over as the owner of the account as opposed to taking a distribution option.

 

[scagnt83]

Ok. That link clears it up. Just for the record, there is such a thing as a Non-Qualified Trust that can be named as the Beneficiary on an IRA for estate planning purposes. What you have is different. It is simply an after tax pension plan.

No 59 1/2 rules because it is not qualified money. A Group Annuity is simply just a funding vehicle for group retirement plans and the tax rules for the retirement plan are what presides over the participants.

This is a Pension Plan for a Union. So you have Union specific IRS rules that govern this. The link you provided says that Nationwide is the Administrator. So what they say goes on this one.

 

[CALTCAgent]

No 59 1/2 rules because it is not qualified money. A Group Annuity is simply just a funding vehicle for group retirement plans and the tax rules for the retirement plan are what presides over the participants.

What I don't like is the website and brochures say:

If you withdraw your account before age 59 ½ you may be subject to the 10% TEFRA tax on earnings only. This tax is imposed by IRS.

I asked them about that and the answer sounded strange, they said if it is reported as a qualified plan withdrawal. I asked why would that be done ?. They said if a mistake was made.

This is a Pension Plan for a Union. So you have Union specific IRS rules that govern this. The link you provided says that Nationwide is the Administrator. So what they say goes on this one.

I wanted them to give me something in writing and they said they have nothing in writing. The manager of the account said it is not coded as having the 10% penalty when they send the 1099 after a withdrawal.

I wonder if he was certain if a beneficiary assumes ownership that is the case. Or maybe he was talking about taking a payout at death to the beneficiary.

I feel they should give me more than just a verbal statement though.

 

[DHK]

First, as Scagnt83 said, call the advanced underwriting department. That's your best bet.

For non-qualified annuities, there IS a 10% penalty when under age 59 1/2... but I'm also not exactly sure if this annuity would fall under LIFO or FIFO taxation either. I'm just not sure.

If it IS subject to 10% penalty, using a 72q distribution until age 59 1/2 or 5 years... whichever is LONGER can be done. Once started, don't change it, or tax penalties may be imposed back to the initial withdrawal.

The other way to liquidate could be to turn it into an immediate annuity with a period certain payout. This would also avoid the 10% penalty AND give you a much higher payout each year than doing a 72q distribution strategy.

My guess as to what a "qualified plan withdrawal" is... is if you're withdrawing principal & interest... rather than just principal. That is PURELY a guess. And withdrawing principal (basis) is generally a far better tax strategy. Trusts & Estates have VERY high taxation issues, if it is taxed to the trust. (See the attachment for Fiduciary Taxpayers.)

Some of these older grandfathered annuities and life insurance contracts under old taxation rules have some great benefits associated with them, and you don't want to mess that up.

Anyway, when you call the advanced underwriting department, help them walk through your options and back it up with IRS documentation - such as IRS Publication 575 or other IRS codes that apply. And, of course, document everything.

 

[scagnt83]

First, as Scagnt83 said, call the advanced underwriting department. That's your best bet.

That was when I thought this was a Non-Qualified Trust as an IRA Bene. This is a Non-Qualified Pension Plan. What the Administrator (Nationwide) says is the end all be all in this case. The buck stops with the Administrator when it comes to employer sponsored retirement plans.

For non-qualified annuities, there IS a 10% penalty when under age 59 1/2... but I'm also not exactly sure if this annuity would fall under LIFO or FIFO taxation either. I'm just not sure.

But we are not dealing with an Individually Owned Annuity here. This is a Group Annuity that is funding a group retirement plan. The regs governing Non-Qualified Pension Plans govern this situation, not the regs for individually owned annuities.

If it IS subject to 10% penalty, using a 72q distribution until age 59 1/2 or 5 years... whichever is LONGER can be done. Once started, don't change it, or tax penalties may be imposed back to the initial withdrawal.

The other way to liquidate could be to turn it into an immediate annuity with a period certain payout. This would also avoid the 10% penalty AND give you a much higher payout each year than doing a 72q distribution strategy.

72q does not apply here since this is not an individually owned annuity.

My guess as to what a "qualified plan withdrawal" is... is if you're withdrawing principal & interest... rather than just principal. That is PURELY a guess. And withdrawing principal (basis) is generally a far better tax strategy. Trusts & Estates have VERY high taxation issues, if it is taxed to the trust. (See the attachment for Fiduciary Taxpayers.)

A Qualified Plan withdrawal is simply a withdrawal from a Retirement Plan that is classified as Qualified by the IRS.

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What I don't like is the website and brochures say:

If you withdraw your account before age 59 ½ you may be subject to the 10% TEFRA tax on earnings only. This tax is imposed by IRS.

I asked them about that and the answer sounded strange, they said if it is reported as a qualified plan withdrawal. I asked why would that be done ?. They said if a mistake was made.



I wanted them to give me something in writing and they said they have nothing in writing. The manager of the account said it is not coded as having the 10% penalty when they send the 1099 after a withdrawal.

I wonder if he was certain if a beneficiary assumes ownership that is the case. Or maybe he was talking about taking a payout at death to the beneficiary.

I feel they should give me more than just a verbal statement though.

All of this is stated in the SPD (Summary Plan Description). The SPD is available to all participants in the Plan. Just ask them for it.

At the end of the day, in this situation Nationwide is the one who is making sure that all transactions are IRS compliant. What they say goes, period.


As far as the 10% penalty, this is a NON-QUALIFIED plan. The 10% penalty only affects Qualified Plans and Individually owned Annuities.

Basically they told you that the only way a 10% penalty would be imposed was if a mistake in the coding was made. In other words, the 10% penalty will not apply and if it does it is a mistake and would be corrected.