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Feds Offer Valuation Relief

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The Internal Revenue Service has published temporary annuity valuation rules for taxpayers who are converting traditional individual retirement accounts that have not yet been annuitized into Roth IRAs.[@@]

IRS Procedure 2006-13 spells out safe harbor methods for determining the fair market value of an annuity contract involved in an IRA conversion.

Taxpayers need the valuation rules because they must include the value of any IRA annuities converted in their gross income when filing income tax returns, Larry Isaacs and Robert Walsh, IRS officials, write in the revenue procedure.

The IRS published temporary IRA annuity conversion regulations in August. When the IRS issued the temporary regulations, it asked for comments from the public about the formulas that should be used to determine an annuity’s fair market value.

“Commentators indicated that a more specific methodology for valuing the annuity contracts is needed,” Isaacs and Walsh write.

One section of the temporary regulations defines an employee’s interest in an annuity that has not yet been annuitized as the sum of the dollar amount credited to the employee and the actuarial present value of any additional benefits, such as survivor benefits, that will be provided.

The IRS included that formula in the temporary regulations to help employers determine an employee’s required minimum distribution, Isaacs and Walsh write.

Isaacs and Walsh point out that some provisions of the temporary regulations let employers exclude some benefits when computing the value of an employee’s interest in an annuity.

Under Revenue Procedure 2006-13, traditional IRA holders who convert to Roth IRA holders before Jan. 1, 2006, can come up with the fair market value of an annuity by adding the past 12 months of front-end loads and other non-recurring charges to the value generated by the formula given in the temporary regulations.

The IRS calls the pre-2006 valuation method a “simplified safe harbor method.”

For annuities converted on or after Jan. 1, 2006, taxpayers can use similar valuation rules, but they must leave future distributions out of the determination of the actuarial present value of additional benefits. Those taxpayers also must include the value of extra benefits excluded in the temporary regulation valuation formula.

A copy of Revenue Procedure 2006-13 is on the Web at //


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