More On Tax Planningfrom The Advisor's Professional Library
- Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
There are many reasons not to buy a deferred annuity with IRA or 401(k) plan dollars. But for those clients who want to purchase deferred annuities within their retirement plans, the IRS reporting requirements have historically been so confusing that they’ve served as a further deterrent to such purchases. Clients were often forced to accept less attractive options. Recent guidance from the IRS has solved this problem, making the purchase of an annuity with retirement dollars much simpler.
QJSA and QPSA Requirements for Defined Contribution Plans
Qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) rules generally impose a series of spousal consent, notice and election requirements upon certain lifetime income options. While the rules regarding whether a defined contribution plan is subject to QJSA and QPSA requirements are relatively clear, it has been much more difficult to determine when these requirements would apply to a plan that contains a deferred annuity contract.
A defined contribution plan is not subject to QJSA and QPSA requirements as long the plan participant’s spouse (or, if none, a designated beneficiary) receives all accrued benefits when the participant dies, the participant does not elect to receive benefits in the form of a life annuity, and the plan is not a direct or indirect transferee of a plan subject to QJSA and QPSA requirements.
New IRS Guidance
Revenue Ruling 2012-3, recently released by the IRS, outlines the QJSA and QPSA reporting requirements in situations involving defined contribution plans that contain deferred annuity contracts.
If a defined contribution plan contains a deferred annuity contract, QJSA reporting requirements are not triggered until the plan participant irrevocably elects to receive the retirement funds in the form of an annuity. So, in situations where participants have the option to change their minds and choose another investment option or receive a lump-sum payment, the plan will not be subject to the reporting requirements until the annuity starts making payments (or until the participant can no longer change his investment options).
QPSA reporting requirements will not be triggered if the annuity contract gives the plan participant’s surviving spouse a nonwaivable right to the QPSA benefit. If it is not certain that the surviving spouse will receive the benefit, then the QPSA reporting requirements apply.
Of course, there are many reasons not to purchase a deferred annuity with retirement plan funds. Some may not see the value in purchasing a tax-deferred annuity within a tax-deferred retirement account. Despite this, many clients will prefer the certainty that annuity payments provide. This new IRS guidance will make it easier for these clients to get the certainty they want with respect to retirement income.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, AdvisorFX, for a free trial.