Life and Death Planning for Retirement Benefits

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448 Life and Death Planning for Retirement Benefits
This includes a variable annuity contract. PLR 2005-48027. Instead, the recipient pays
income tax on distributions as and when they are received under the annuity contract.
Rule #3: Valuation of Contract for Roth Conversion Purposes. If an IRA is converted to a
Roth IRA , and one of the assets converted is an annuity contract, a special valuation rule
applies.
Until Roth IRA conversions came along, it made little difference how annuity contracts
were valued upon distribution from a retirement plan, because distribution of an annuity contract
is generally not a taxable event. See Rule #2. The arrival of the Roth IRA conversion changed the
landscape. The lower an IRA-owned annuity contract can be valued when the IRA is converted to
a Roth IRA, the less income tax the participant must pay on the conversion. Subsequent
distributions from the annuity contract will go into the Roth IRA, distributions from which will be
tax-free.
According to the IRS, “some advisers” sought to take advantage of this loophole, and
marketed, to IRA owners, “a single premium annuity contract with significant artificial penalties
that apply in the” early years, “causing the annuity to have a low cash surrender value….” The
IRA owner would then convert his IRA to a Roth IRA, and report the contract’s artificially low
cash surrender value (CSV) as the gross income resulting from the conversion. T.D. 9220, 2005-2
C.B. 596, “Explanation of Provisions.”
To stop such abuses, the IRS issued a temporary and proposed regulation providing that
fair market value (FMV), not CSV, must be used to determine the participant’s gross income
resulting from conversion of an IRA-owned annuity contract to a Roth IRA, effective for
conversions on or after (and perhaps even before) August 19, 2005.
Reg. governs Roth IRA conversions. Section A-14 of this regulation provides
a rule for the valuation of an IRA-owned annuity contract that is converted to a Roth IRA. This is
not the same valuation that applies when an annuity contract is simply distributed to the IRA owner
(see Rule #2), nor is it the same as the special rule for valuing annuity contracts for purposes of
the minimum distribution rules (see Rule #1). Rather, A-14 provides that the amount treated as
distributed “is the fair market value of the annuity contract” on the date of the Roth IRA
conversion, and provides guidelines (to be used pending IRS issuance of further more detailed
guidance, probably to be similar to Rev. Proc. 2005-25; see for determining such fair
market value.
11.1.02 RMD extension for insolvent insurance company
Generally, required minimum distributions RMDs) must be taken by a certain deadline,
normally the end of the calendar year to which the RMD is attributable. Reg. A-
1. RMDs can be delayed beyond the normal deadline (in the case of insured plans) if the delay is
caused by receivership of the insurance company. Reg A-7, A-8.
11.2 Plan-Owned Life Insurance: Income Taxes
This explains the income tax and income tax-related rules applicable to the plan
participant and his beneficiaries when life insurance is held in a qualified retirement plan (QRP).
11.2.01 Tax consequences to participant: During employment