Advisers need to proactively review clients’ annuities that are within individual retirement accounts to avoid “traps” by ensuring required minimum distributions are being taken properly, said Jeffrey Levine of Ed Slott and Co.
IRA or Roth rules trump annuity rules when an annuity is within an IRA, Levine explained Monday at the National Association of Insurance and Financial Advisors’ Career Conference and Annual Meeting in San Diego.
Roth conversions and required minimum distributions, or RMDs, are based on an annuity’s fair market value, which is a complex, “don’t-try-this-at-home” calculation, but an adviser can ask the provider to perform it, Levine said.
It’s also important to make sure a client has enough money in the remaining portion of the account to cover RMDs without “burning through” the account balance, he said.
Levine also reminded advisers that they “can never take an RMD across types of plans.” RMDs can be aggregate across multiple IRA accounts, but not across an IRA and a 401(k), for example, he said.
The beneficiary form
The beneficiary form is the most important form in a retirement account, because it trumps wills and other documents, and this holds true for IRA annuities, Levine said.
Most clients go into estate planning with a per stirpes arrangement in mind, meaning that each beneficiary would receive an equal share, he said. If the beneficiaries were the client’s children and one died before the account owner’s death, a per stirpes arrangement would divide the deceased child’s share equally among that beneficiary’s children.
A per capita arrangement, however, is the default in many cases, Levine said. In such a situation, the children of the predeceased beneficiary would receive nothing, and all of the benefits would then be divided equally among the surviving children, he said.
Definitions of “per capita” and “per stirpes” differ somewhat among states, and carriers vary in how they address beneficiary designations, so it pays to be aware of the rules that affect a particular account, he said. In some cases, an adviser can write “per stirpes” across the beneficiary form, and the company will honor it, he added.
And a major issue that can arise when a beneficiary is not the client’s spouse is that the carrier might allow only two options, Levine said: Keeping the money in an account with the carrier or receiving a check that is immediately taxable and can’t be rolled over.
When using a qualified longevity annuity contract, or QLAC, which were created recently through Internal Revenue Service regulations, clients need to be aware that they can’t invest everything they have in such an account, Levine said. Clients’ QLAC investments are limited to 25% of their retirement savings or $100,000, whichever is less, he said.
With regard to deferred immediate annuities, the tax code allows a 72T calculation to provide a penalty-free income stream from such an annuity before the owner is 59½, but in doing so, advisers should be aware that “the five-year SPIA in and of itself is not a 72T calculation,” Levine said. That calculation involves a formula, and the insurer can provide an illustration based on the target income amount, he said.