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.)
In addition, Canter says that the new ruling provides additional flexibility for people who have already started receiving payments. “If you started [receiving payments] before age 59 1/2, previously you couldn’t change the way you were receiving payments until you were 59 1/2, or until five years had gone by, whichever was later,” Canter explains. Now, however, the ruling allows a limited exception. If your payments were determined under one of the two options that provide for an equal, fixed amount for the rest of your life, you can go to the third method, which is used for IRAs in determining required minimum distributions. “If when you first started getting payments you figured on $20,000 a year and the market has gone up, [for example,] now you have the opportunity to bump up payments.” This means, of course, that the value of the subaccounts in the annuity must have increased so that you have a larger pool of funds to draw on; this allows you to increase the dollar amount of the periodic distribution so that the annuitant gets more money in each payment.
Canter points out that this was a change requested of the IRS last year by ACLI.