Principal SPIA

[VolAgent]

https://insurance-forums.com/community/posts/1223280/

IRS Publication 575

Wild, how did I get quoted when I didn't even post on this thread?

 

[scagnt83]

As far as I know; SPIAs are exempt under 72q, ONLY if it is a lifetime SPIA, or if the payment period extends to age 60.

If it is just a 5 year SPIA where payments end before age 60, then a portion of the payment is subject to IRS penalty. (the portion considered gains)

 

[scagnt83]

What we dont know is exactly when the client needs the funds for college.

A normal Deferred Annuity could be an excellent alternative to the CD. Let it defer, then annuitize to age 60 under 72q once income is needed.

Life Insurance is harder, because it usually takes a longer timeline for it to create gains. But it could possibly work depending on the income need.

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A CD at the bank makes zero sense imo. You can get a 5-year treasury bond right now at 2.8%

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Another thing the OP can look at are MLCDs (market linked CDs). They can be sold by agents and act very similar to an Index Annuity... except they are a CD issued by a major bank. Some annuity IMOs have access to these products... but they pay half of what annuities pay... lol.

 

[Allen Trent]

Already did. IRS publication 575 posted above.

IRS publication 575 never says a fixed period SPIA is exempt from the 10% penalty. It is pretty clear that the SEPP must be based on life expectancy, so a 6 yr fixed period SPIA wouldn't meet that standard. I was hoping you had some additional info that would support your statement that SPIA payments are exempt from 10% penalty

 

[Allen Trent]

Actually, your post makes absolute no sense

2) Life insurance is NOT a qualified retirement contract or even an annuity contract. Why would there be a 10% distribution penalty from the IRS??? Makes absolutely no sense. There isn't even any INCOME tax on life insurance proceeds... why would there be a 10% distribution penalty???

Sorry if I wasn't clear, I never meant the life insurance was taxable or a 10% penalty on life insurance proceeds. I meant a young widow that wished to invest some of the tax free life ins funds into something to generate income for the stretch of time raising kids, say 10-15 yrs. A 10 or 15 yr fixed period SPIA would still incur the 10% penalty from all research I have seen to date because it doesn't fit the IRS substantially equal periodic payments definitions I am told

 

[Tahoe Ray]

IRS publication 575 never says a fixed period SPIA is exempt from the 10% penalty. It is pretty clear that the SEPP must be based on life expectancy, so a 6 yr fixed period SPIA wouldn't meet that standard. I was hoping you had some additional info that would support your statement that SPIA payments are exempt from 10% penalty

Source 1:

72q(2)(I) which references 72u(4)...The SEPP does not need to be based on life expectancy.

26 U.S. Code § 72 - Annuities; certain proceeds of endowment and life insurance contracts

Source 2:

Page 35, top left of page. Pub 575. Specifically references immediate annuities. SEPP does not need to based on LE.

Additional source: I have done this before with clients (under 59 1/2) to fund life insurance and they were never penalized.

I still don't understand why we're comparing SPIAs to CDs though...As scagent83 said, a MYGA would be a much better comparison.

 

[Allen Trent]

Source 1:

72q(2)(I) which references 72u(4)...The SEPP does not need to be based on life expectancy.

26 U.S. Code § 72 - Annuities; certain proceeds of endowment and life insurance contracts

Source 2:

Page 35, top left of page. Pub 575. Specifically references immediate annuities. SEPP does not need to based on LE.

Additional source: I have done this before with clients (under 59 1/2) to fund life insurance and they were never penalized.

I still don't understand why we're comparing SPIAs to CDs though...As scagent83 said, a MYGA would be a much better comparison.

Great info. I was incorrectly reading the Wording of "Substantially Equal Annuity Payments" in the section on Pub 575 for immediate annuities to have to meet the wording of SEPP right below it. But it appears the immediate annuity does indeed have a slightly more liberal definition of only needing to be immediate & substantially equal annuity payments not the more rigid 3 options of RMD, amortization, life expectancy of SEPP.

Thanks for the info, have a great weekend

 

[DHK]

Wild, how did I get quoted when I didn't even post on this thread?

I did that. It didn't seem right to just copy/paste your words from another thread without attributing them to you.

 

[Life Hawk]

This post reminds me of some city council meetings when I was on the board...

I have a prospective client (age 47) who was considering a 6-year bank CD for $420K of non-qualified funds. (These days, you can get around 2.50% YoY with an online bank.) So I proposed looking at a SPIA with a 6-year period certain. From a tax perspective, because she's pre-59.5 years old, there's going to be income tax on the gains regardless if the client chose a CD or a SPIA.

Maybe I'm the dense one here (wouldn't be the first time, won't be the last) but what exactly are you attempting to do celiothrkn?

From the above, you may be trying to put it all in one place which might not be the best way to treat it. Is the client looking for growth with flexibility?

Seems to me you need to know what is wanted, what is needed... most likely you will need to split the funds up to accomplish some of what I think you are looking for... just a thought.

 

[goillini52]

Wild, how did I get quoted when I didn't even post on this thread?

It's magic.