Equal Distribution

The IRS rule about distributing proceeds from non-qualified annuities has been modified, and while it’s too soon to see results in the marketplace, there’s cautious optimism among insurers.

Previously, there were three methods of determining whether payments to individuals from IRAs or other qualified retirement plans “constitute a series of substantially equal periodic payments” for the purposes of Section 72 of the IRS code, which sets forth the rules on taxation and the penalties for moneys received from an annuity contract. Penalties were set forth for amounts classified as premature or early distributions, and there were exceptions under which distributions would not be penalized. Section 72(q)(2)(D) provided that a distribution would not be subject to a penalty tax “if it is part of a series of substantially equal periodic payments (not less frequent than annually) made for the life (or life expectancy) of the taxpayer. . . .”

While these rules had been written for qualified annuities, says Mark Canter, senior counsel at the American Council of Life Insurers, the ACLI, now the IRS has “said you can apply that to nonqualified annuities–investment annuities people buy off the street.” (The ruling is set forth in IRS Bulletin 2004-9, Notice 2004-15, dated March 1, 2004.)