Forced Annuitization: EDU #2624

Speaker A: The retirement denier ratio represents the words and views of the show hosts exclusively and should not be construed as investment, legal or tax advice. All information is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy. All economic and performance information is historical in nature and is not indicative of any future results. Any indices mentioned on the show are unmanaged and cannot be invested indirectly. Diversification and asset allocation strategies do not assure profit or protect against loss. Never make any investment or financial decisions based on information offered, um, on this show without first consulting your financial, legal or tax advisor. Financial planning services offered through Jim Solnier and Associates llc. Ah, a registered investment advisor.

Speaker B: This is the Retirement and IRA show coming to you from beautiful northern Colorado. Join us as certified financial planner Jim Saulnier as well as Colorado State University finance instructor and certified financial planner Chris Stein teach you about IRAs, 401 s, annuities, Social Security, pension plan plans and estate planning in a fun and enjoyable show. Whether you are listening live in Colorado or streaming from their website or itunes podcast, Jim and Chris want you to know that they're available to help you plan for your retirement. Just visit their website@jimhelps.com that's Jim H E-L-P S.com and click the Meet the team button on the homepage. Now here's Jim and Chris with today's show.

Speaker C: Well, hello everybody and welcome to the Retirement and Ira Show Edu edition. For this week moving one more episode into National Annuity Awareness Month. And on today's Edu show, we're going to continue chatting about, uh, a uh, situation, ah, that was brought forth to us via an email from a listener where if you haven't heard last week's episode, I'll give you a quick uh, summary. I guess essentially the story was this listener's, uh, mother, many years ago, some 20 years ago or so, maybe longer, had purchased a variable annuity and had it positioned in the sub accounts in a way, uh, that it would have potential for growth over time because they didn't need the money anytime soon and the growth happened. So there's a tremendous amount of growth in this variable annuity. The mother's now about 90 years old and they just faced the realization that at age 95, this particular annuity has what we call forced annuitization, which means it'll no longer be the noun annuity, which is in our verbiage, uh, the dollar amount in the annuity that you could actually take out, access, transfer, do things with and it will be transformed into what we call the verb annuity, into a stream of income payments instead of that account balance that exists currently. And so they're not, uh, really excited about this annuitization situation, but they're realizing that if they were to take the money out of this due to the tax treatment of the distributions on an annuity, um, LIFO plays a part which is last in, first out, meaning that those gains or that growth in the annuity is going to come out first and be fully taxable as ordinary income. And she's already bucking up against her with other income sources. She has, uh, worried about things like IRMAA affecting her Medicare premiums and other, you know, tax effects that would be caused by recognition of additional income. But there's this, you know, this iceberg out there that we can see five years from now. And so he wrote in to see if there were, you know, to discuss this situation or at least get our thoughts on it. And so we'd started talking about that last week. And we're going to continue with a few ideas, um, for cases similar to this. And to just explain this gave us an opportunity from an educational standpoint, since this is an edu show, to talk about this idea of the forced annuitization, how these, uh, uh, tax deferred annuities work, how the LIFO affects the taxation of the distributions, turning it into a verb annuity or leaving it as an account balance, all those types of things. So that's, that's why we decided to bring forth this email, even though this isn't a Q A show, uh, just gave us an opportunity to talk about a lot of things that people should know about how annuities work. So I'll bring Jim in. Hopefully that summarized what's needed to progress in case you missed last week's episode. And, um, Jim is, uh, might add a few more details that I left out, but we'll let him guide where we go from here.

Speaker D: Perfect. Thank you very Chris. Thank you very, Chris. Thank you very much, Chris, um, for that summary. So I'm kind of geeking out on this case, folks. And I know you guys, uh, are the vanguard again. I call that you're like the vanguard. Vanguardians. By vanguard, you're in the front. Your friends, your family, your neighbors, your colleagues are going to be asking you for advice and you geek out on this stuff. And a Vanguardian, that's my nice little, uh, nickname for all of you. Do it yourself. Investors who have the engineer mindset, and you generally manage your own assets and you probably have some, if not all of them at Vanguard. So I call them Vanguardians, um, or VG ers for Vanguard Engineer style person. Anyways, some of you are going to geek out on this as well, but many of you may come across a situation like this, and that's what I'm trying to teach you. You may not have this particular situation yourself, like this listener. It's not a common situation, but it's common enough where we come across it quite often and insurance companies have solutions for it, but you also have to kind of evaluate what works best. And we did cover some M of it last week, but I wanted to dive into it a little bit more and share some potential solutions. So remember, the mom, I believe has about 1.7 million still of gain inside this annuity. The gain is ird, which is what

Speaker C: chris income with respect to a decedent.

Speaker D: So as you know, IRD is bad. You don't want to die with it because it gets no step up in basis. You certainly never want to leave IRD to a trust, um, if that trust is a conduit trust, maybe because it's just going to pass it out. But if it's a discretionary or accumulation trust, IRD will be taxed at the highest trust tax rates, which kick in at about $16,000. So if you put 1.7 million in the discretionary trust, pretty much all of it is going to be taxed at the highest trust tax rate, which right now is 37% because it's the highest marginal bracket, is what trusts will pay in income taxes. On any IRD that is not passed out to the beneficiaries of the trust, that's a big cut. And then there's going to be the state income tax on top of that. So depending on what state you live in, you could be paying another 8, 10, 12, 13%. So IRD is not good. Well, the mom's got a hell of a lot of IRD in this annuity. The other issues are the insurance company is going to force her to begin annuitizing it, which is the verb. And by that, the 1.7 million of gain that's inside there goes to the insurance company. And the woman is going to get lifetime income payments based on her remaining life expectancy. They're going to be huge. She's got forced annuitization at 95. She's already beaten life expectancy. It's going to be huge distributions. So the son was writing in saying, hey, right Now I'm taking 350,000 a year out. But based on that, with her other income sources and Social Security, I think in the email I forwarded it to you, Chris, I don't have it open in front of me. I think he said, she hit the second or third tier of irmaa.

Speaker C: She's going to be slammed with Irma as a single person with that much income coming in plus income taxes.

Speaker D: So he said, is there anything we can do? And, uh, we didn't have a chance to get deep in. And before I get to a potential solute, well, there's several potential solutions, but one thing I want to begin is encourage any of you who are trying to help people in this situation. And, and it's perfectly normal to have an annuitization date, that all annuities come with one. So it's not the insurance company being nefarious, it's not the insurance company being jerks or trying to get the money they have to have an annuitization date. It's just that many of these older annuities, when it was sold 26 years ago, 95 was probably considered, oh God, she'll never get there. But our, uh, life expectancies are changing. So don't vilify the insurance company for having these annuities. Must have, according to the government, must have an annuitization year. At the time the actuaries thought, well, this is a good year. 95. This woman pleasantly, hopefully she's healthy and for a 90 year old she's uh, staring down the barrel of forced annuitization. So you might come across this. First thing you should be asking is what does the mom want to do? And find out what her main aim is. And one of the potential options could be, and I tried to encourage him to get a hold of the insurance company, find out what the annuitization options for your mom are. Because the thing to remember, if someone dies with a non qualified deferred annuity, which this is, non qualified means what

Speaker C: Chris means it's not held within the IRA wrapper, so it deals. Its distributions are based on annuity rules. Not on IRA rules exactly, but we

Speaker D: don't mean it's an industry bastardized term. It does not mean qualified in the 401k sense, meaning it's protected and backed and governed by ERISA. It's just an industry term that pretty much says a non qualified annuity. An industry geek will know, oh, that's an annuity that's not inside an ira. A qualified annuity. Oh, that's an annuity inside an Iraq. So that's kind of what we mean by non qualified annuity. The rules of distribution on a non qualified annuity are um, very black and white. They're there, it's pretty easy. And then there's a whole gray area. And we're going to talk a little bit about the gray area. We spoke about the gray area in the past. We're going to speak about it again. And I'm changing, I shared that with Chris, changing my opinion on the gray area a little bit. So where am I going with this? Let's back it up. Find out from your mom what her intent is or what she would like to do. Because it's possible the insurance company will allow her to annuitize it over a period certain. Here's again where you're going to run into some issues. The annuity should be annuitized. So your mom would probably, I don't think your mom would be able to annuitize it and say, give me, uh, a 30 year period certain. She's 90 years old. I think the annuity rules are it has to be annuitized based on your life expectancy. So it would be life and period certain, not just period certain. Number two, I think the insurance company may restrict period certain is usually in five year increments. 5, 10, 15, 20, 25 or 30, with the most common being 10, 20 and 30 or 5. But find out from the insurance company if they would let her annuitize it for life with periods certain and if so, what is the periods? So let's just say I don't know the insurance company will allow, but let's say they did for a 90 year old allow 15 years as the maximum period certain life or 15 years. So those payments are going to be spread out essentially over 15 years. Although your mom could live to 105. But that would give you more time because the forced annuitization is in five more years. So just find out what the insurance company will allow. It's a simple first question. What are the annuitization options for your mom and what are the period certain options with that? And then what I'm getting at is those periods would continue to whoever she names as beneficiaries, income beneficiaries. So it would be based on her life with a period certain of 15 years. So the payments would still be fairly large. I'm not disputing that they're not going to be $350,000 large, but they're going to be large. But if your mom sadly passed away three years into a 15 year, period. You and your sibling will be able to continue those payments for 12 more years because it's annuitized now. It is now an annuitized, it's a verb annuity, not a noun annuity. And the verb annuity will continue for those payments. So that kind of is a potential option to give you guys more time. Now if the insurance company says, hey, for a 90 year old the maximum we're going to give is five years life or five years, whatever is longer, then that is kind of the bind you're in right now and this won't work. But if it does work, it's the simple, it's straightforward, there's no ambiguity. It's black and white. You're not dealing with the gray matter that I'm going to talk about shortly. It could, Chris, in a way allow the mom to start taking out money and then continue those payments to her children. I believe there's two, him and someone else, I forget. And those payments would continue. So that to me could be a simple solution depending on what the insurance company is going to allow. And I think that should be the very first thing you look at. Anything you want to add on that, Chris?

Speaker C: Yeah, and it's always best to ask the insurance company, don't try to interpret some document that you have in hand. Don't try to go out and research it on your own because every insurance company and every insurance policy is unique and it's best just to ask these pointed direct questions of the insurance company directly and get this from them in writing so that you know you have not at your your best estimate as to what the options are, but truly what the options are.

Speaker D: Exactly. Now if your mom were to pass unexpectedly tomorrow, and I hope she doesn't, before the forced annuitization date and before you have a chance to implement either a period certain annuitization or another strategy that I'll talk about in a second. What happens folks? What happens with a non qualified annuity at the death of the owner? Well, the beneficiary is inherited if the beneficiary is a spouse. A spouse generally through spousal continuation, which is in the tax code and every insurance company I've ever seen, but I'm sure there's some that might not allow it, allow the spouse to essentially step into the shoes of the deceased owner and continue the policy as if it was theirs. Well, your mom doesn't have a spouse and if she did, probably be someone just as old and they too would have to be faced with a forced annuitization at age 95. But when you as a non spouse beneficiary inherit a non qualified annuity, I think you have a very two options that are in black and white and one option that I now call in gray. This is a lot of positives with it, but negatives with it. The two options that are in black and white are fairly straightforward. You must annuitize it over your named beneficiary over your remaining life expectancy. Actuarially sound life expectancy within one year of death. And here's the key, it's not. Chris, when you inherit an IRA, your RMDs must begin when. I didn't word that very well.

Speaker C: Um, so your RMDs have to happen in the year following the year of death by December 31, right? If the decedent, you know, hadn't taken their RMD for that year, then they might have to take it one that year. But it's not technically yours, but you have until December 31st of the following year. So you might have, you know, more than a year, a year from the, from the date of death to actually take that first distribution slash rmd.

Speaker D: That's where I was going with that, folks. That's why I quickly corrected myself and said that that's a bad example. But Chris, hit it the December 31st with an IRA using IRA rules, even post secure, if you are subject, if you're eligible to stretch, remember, post secure did not kill the stretch ira. The stretch IRA is the Black Knight. Now, it's gravely wounded, but it's not dead. And if you are in my generation and you went to college, you grew up with, or at least in college went to see Monty Python and Search of the Holy Grail. So, you know, the Black Knight is that night none shall pass. And he's not letting anybody pass the road in front of him. So one of the knights are fighting him and he cuts off one arm, then the other arm and a leg and the other legs. And that was just a stump sitting there. And he's saying, come here and I'll bite you in the ankle. The Black Knight was gravely wounded, but he wasn't killed. The stretch was gravely wounded, but it's not killed. So if you are allowed to stretch, you must begin your payments by December 31st of the year following the date of death. And as Chris rightly pointed out, if somebody died January 1st of 2026, the first payment must begin no later than December 31st of 2027. Technically speaking, two years annuities is different It's a little bit grayish. I've read some arguments that you could go as late as December 31, but most arguments are new one year from the date of death. So today we're recording this on June 16, 2026. You would have to begin it by June 16, 2027, in my opinion, not December 31st of 2027. But I have seen different interpretations. But my interpretation is one year from the date of death. The annuity you inherited must be annuitized over your actuarially sound life expectancy or you don't have to take anything out. Chris, for how long?

Speaker C: For five years. You've got kind of the old five year rule where you can leave it in there for up to five years, right.

Speaker D: Which is how we thought the ten year rule was going to work until they pulled out Alar from, from the you know what, which is in the tax code. They actually had a reference in and say, no, seriously, we're not making this up. Alar, the tax code at least as rapidly. And they applied that to the new ten year rule. And we won't get into all of that hubbub because we've talked about it before. But a non qualified annuity, if you miss that one year period where you are allowed to annuitize it over your life expectancy, essentially stretch it if you will, over your life expectancy. If you miss it within that one year period, no, don't worry about it. You got four more years. But you must close the entire annuity within five years of the date of death. So those are your two current options. But if your mom, in this particular case listener is allowed if the insurance company allows her to annuitize it at her age 90 for a single life plus period, certain. And if that period is long enough, you, you might prefer that. But if she dies either before the first annuitization or she dies before being able to complete the paperwork of, um, taking it out over her remaining life expectancy in a certain number of, of years, period certain. Then you're going to be faced with having to annuitize it within one year of death, which isn't a bad thing. It's kind of giving you a stretch on IRAs. It's been killed. Non qualified annuity rules, the black and white rules, because they're right there. I say black and white, black ink on white paper, it's right there. Annuitized within one year of death or close the entire annuity within five years of death, your choice. So those are still the options if your mom, though annuitizes, uh, it with a period certain greater than five years or 10 years, you're already coming out ahead. So those are the things that I wanted to teach you. But there is another option. So there are some annuities out there called Iovas. Do you know what those stand for, Chris?

Speaker C: Investment. I'm uh, not only variable annuities.

Speaker D: Perfect. He got it. ILVAs. We don't talk about them often, talk about VAs every now and then. But uh, I O VA is unique. It's a form of variable annuity. It's the IO investment only insurance company is pretty much telling you we've stripped everything out of this variable annuity. It's just an investment vehicle. Remember variable annuities, the money is put in, it does not become. And we're going to get into this probably next week or the week after. For all of you who sent in again the letter, excuse, uh, me, the article rather, which I believe was from NBC News with the woman who allegedly lost $99,000 in a variable annuity. We're going to get to that, trust me. Anyways, a variable annuity, the money inside a variable annuity is not part of the general fund of the insurance company. It is a separate account. Do you know what both of those mean, Kris, do you want to explain those?

Speaker C: Yeah, it's essentially the general account of the insurance company is money that they own and control and is susceptible or exposed to the creditors of the insurance company. Whereas a variable annuity, because they keep separate accounts under your name, separated, not, I'm um, using that word too much from the general account, they are protected or not available to the general creditors of the insurance company itself. So you kind of have a little more connection to those specific dollars. Because they really do have your name on them.

Speaker D: Exactly. Because most fixed annuities, all of you people with the uh, fixed indexed annuities that are pushed heavily. Again, I'm not a huge fan of them, but we're not against them though. And mygas, which we do talk about quite often, SPIAs and DIAs and QLACs. Oh my. These are all, you know, you always heard based on the claims paying ability of the issuing insurance company. That's because all of those annuities, including Rideless, the love child, between a fixed index annuity and a variable annuity, all of them are separate accounts. The ryle is to a degree a separate account. So they're again kind of the love child. So they're a little different. But for the most part all of those annuities are part of the general account of the insurance company. You don't have a true individual separate account at the insurance company. Many people think you do, but you don't. All of the money gets given to the insurance company and it's subject to the insurance company's creditors. Why am I going into this? Because you need to understand how Iovas work and why you don't see a iofa, um, investment only fixed annuity. Because, uh, fixed annuity, uh, assets are ah, part of the general account of the insurance company. They are not a separate account. Variable annuities are. They're a separate account and the insurance company can't access it. It's your money. Their creditors, the creditors of the insurance company cannot access it. An insurance company can go belly up. And unless they were doing something nefarious and stealing money, and I've never heard of an insurance company doing that, but if they went belly up with a variable annuity, your money's going to get tied up because there's nobody at the insurance company. They went belly up. You need somebody there to release the money and the regulators have to get in and review the books and clear things up. It's not going to be quick and easy and smooth. But the money in the variable annuity sub account is protected, at least from the general creditors of the insurance company. It's been invested and your investments might be tanking and there's nobody at the insurance company or uh, the website is probably down and you're not going to be able to reallocate your account. So there can be issues. And yes, you can lose money in your variable annuity if it's invested aggressively and the market's tanking and you can't move your money. But for the most part, the money in the variable annuity sub account, separate account rather is protected. That's why iovas can work the way I'm about to describe. Because it's your money, the insurance company is just providing the annuity wrapper that you need. So it's called investment only. There's no bells, there's no whistles. It's just a simple, straightforward Iova. Therefore you generally do not find these for sale from registered reps of broker dealers, which is how a traditional variable annuity must be sold. In other words, stockbrokers who happen to hold insurance licenses can sell variable annuity products. But because these Iovas have, you can put your money in on Monday and take it out on Tuesday is where I'm going with this. You can't sell These via a, uh, commission. Now that's not to say I'm not big in the commission world. So maybe there is a commission version of an Iova investment only variable annuity that will impose a deferred sales charge if you try to close the annuity with a certain amount of years. But I know in my realm of the world, the registered investment advisory realm, any Iova that we use, clients can open it on Monday, close it on Tuesday, insurance company just gives them the money. No penalties, no nothing. Now there's fees that the insurance company is going to charge. I'm not going to get into those. But there are fees insurance company charges, generally speaking, on an, uh, advisory sold Iova, the insurance company is going to make their money on an annual fee. The one that I'm thinking of and will describe has a $200 a year annual fee, no matter how much money you have in it. Now that said, the insurance company really makes their money off of the revenue sharing of the investments in the sub account. And there's 300 plus inside the annuity that you can choose from. Those investments will have management fees and the insurance company will get a portion of those management fees. I've seen the fees as little as 10 basis points to over 1% depending on which investment option you choose. I'm just trying to share. You need to understand how an Iova works to understand what this gentleman's mom might want to consider. I say might because this is not a recommendation. I don't know them. You could put the mom next to a hole in the wall. I wouldn't tell the difference between the two of them. I don't know anything about her. She's not a client. This is not legal tax or financial planning advice or insurance advice. It's just me opining and sharing a little bit of education on how these products work and what he might want to consider. So an investment only variable annuity, which is not part of the general account. It's your money sold not through a commission registered rep that might not have it quite as liquid, but through a registered investment advisory firm where, yes, be cautious. Anyone you find to put you in this is probably going to want to charge their quote, unquote AUM management fee. So you might want to look for a fixed fee advisor like our firm. There's many firms out there that charge just one set fixed fee. But these investment only variable annuities would be an option. So I reached out to an insurance company that I'm very familiar with and I said, hey, on your Iova and I described a situation. I'm like, I think your product would work. But I'm just trying to confirm, and here's a couple of things that they shared with me. They will allow people to open an Iova up to age 95. Your mom's only 90. They do not have a forced annuitization age until 121. And if your mom lived that long, I'm sure by then there'll be another iova with 141. So your mom could put the money in on Monday, take it out on Tuesday if she wanted. So it's completely liquid. She has no forced annuitization until 121. What happens when she passes away? Well, I already explained to you a couple of things you can do is during the deferral phase, which is now 121 instead of 95, you can start working with your mom on getting all the IRD income with respect to decedent out of the Iova now. But that's going to push your mom into high tax brackets. And Irmaa and I said, one of the things you need to find out from your mom is what does she want to do with the annuity. Maybe she doesn't want to leave it to you and your siblings. Maybe she wants to leave it to charity. Chris, if it was left to charity, mom could just let it sit there right. Until she passed.

Speaker C: Yeah, because the, uh, charity has no problem receiving IRD because it's a tax free entity and one doesn't have to worry about taxes.

Speaker D: Exactly. Your mom has quite a bit of assets. That's why I said, ask her what she wants to do with it. Is she charitably inclined? All or a portion of the Iova could be left to charity. It's just sitting there. When she passes all of whatever she wants to leave of that Iova to a charity would go to the charity. Your mom has a very big. You have it in front of you. I believe she has a million plus Roth. Right? Or am I wrong?

Speaker C: 1.6 Roth.

Speaker D: Yeah, 1.6 million Roth plus real estate. All of that is going to be received tax free. The real estate gets a step up in basis. The Roth. I think she had a small 400,000. I'm doing this all from memory. A $400,000 IRA somewhere around there.

Speaker C: $300,000 IRA and about a little over 400,000. A taxable brokerage account.

Speaker D: So the taxable brokerage account step up in basis for you and your spouse. Excuse me, you and your sibling. If mom was going to leave it to you too. The IRA of 300,000 is IRD, so you're going to have to deal with the 10 year stretch on the IRA. But on the non qualified annuity, if your mom was charitably inclined, that could be the money that she leaves to a charity. I'm not saying she's going to leave all of it, but I don't know how charitably inclined your mom is. Now, you can get it out from being forcefully annuitized at age 95 or be limited to whatever the insurance company will let your mom, uh, annuitize it over as far as the period certain goes, which could be as little as just five years because of her age, or maybe I don't think it'd be longer than 15. But now in the Iova, if your mom lives to 100, it just sits there and continues to grow. Then when she passes away, if it's going to charity, it just goes to charity. 100 tax free. But what if it was going to go to you guys? You guys being you and your sibling?

Speaker B: Hmm?

Speaker D: Hm. Well, I've already explained, you can now annuitize it if you want an income stream now within one year, not December 31st of the year following. In my opinion it's a little gray area, but in my opinion it should be within one year of death of your mom. You can annuitize your share of the annuity that you're inheriting if you so choose, over your remaining life expectancy, which ineffectively creates the stretch. And being that you are significantly younger than your mom, you could do a period certain, you could do an installment refund. You may be able to, if you have a spouse, um, leave her because of spousal continuation, name her as a joint income beneficiary. So there's many things you can do within that one year with annuitization. Spread the taxation out. Because when you annuitize, you're only taking a little bit of the taxable gain out every year. There's a lot of, trust me folks, there's a hell of a lot of taxable gain in that annuity. I think she put In Chris, right. 145,000 twenty something years ago and is 1.7 million today.

Speaker C: Yeah.

Speaker D: So there is a lot. 90% plus of the distribution is going to be taxable, but it's now spread out over your life expectancy, which is better than the 10 year rule of IRAs that you're going to inherit from your mom. Granted, there's only 300,000 in her IRA, but her Roth can stay open for 10 years and then would have to be closed, but that's still 10 years of tax free growth. So there's a lot of options inside this Iova. The other, you could just let it sit there. If you miss that one year, ah, annuitization, then you have to close the IOVA within five years. So don't miss that. But Chris, there is another option that I shared with you beforehand that I said I'm softening on. Since I've talked so much. Why don't you burst everyone's bubble? Not their bubble, but you give them the cliffhanger. What's this gray area that Jim's talking about that he's softening on? This particular insurance company offers something we've talked about on the past. I have softened my approach on it, as luck would have it, and this was not planned. But the insurance company that I'm talking about with this Iova, probably about four weeks ago now, folks, maybe five, had an online seminar on this strategy that Chris will mention. Then I'll dive into it. That really opened my eyes because we've talked about this strategy before and I was looking at it through jaundiced eyes. But he made me think of it a little differently where I'll actually concede, even though I'm hesitant, I'm more in favor or more liberally saying, yeah, it might work than in the past. What am I getting at, Chris?

Speaker C: I think you're getting at the step into the shoes situation. Is that what you're alluding to? And I'll explain.

Speaker D: Nope, nope, nope, nope. Oh, uh, the non qualified stretch. So similar to what you were saying.

Speaker C: Yeah,

Speaker D: long time listeners will know because we've spoken about this. Non qualified means non qualified annuity. The non qualified annuity stretch. What the hell is that? And in order to talk about that, you guys need to understand a few things. The stretch IRA of which we talk about regularly, everybody loves the stretch. Iraq was never passed in law. The stretch IRA didn't come about because of, of some act. It came about through a few different things. Tifra was one. It came out in 81, 82. I can't remember what TIFRA stands for. Can you Google real quickly? Tifra T I, F, F, R A, I think, Chris. Um, so TIFRA got the ball rolling in the early 80s. Well, it took Congress, excuse me, took the IRS until 2001, 2002, to start releasing their interpretation of TIFRA and other items in the tax code.

Speaker C: So it's TEFRA for Most people T E F R A, the tax.

Speaker D: Well, in my native tongue, yeah.

Speaker C: Tax Equity and Fiscal responsibility act of 1982.

Speaker D: Okay, so TEFRA came out and it started the ball rolling where people were looking at it saying, huh, huh, based on this and this IRA, RMDs could change depending on how the IRS interprets things. And the IRS came out in 2001 and 2002, which is not a surprise, very long time, and started giving their interpretations back then of how they would allow IRAs to be distributed because its internal revenue code 401A, um, and I, I think nine in parentheses is paragraph nine, Chris. I think section 401A six, uh, paragraph nine or whatever, I don't know. It's 401A with nine in parentheses. I forget what the, the nine is that governs IRAs. So in 2001 and 2002 the IRS came out with opinions very similar, Chris, to the opinion that came out in July of 2024, which interpreted the Secure act and said, hey, this is how we're going to interpret the ten year rule and do all of this. So as these things started coming out, people were saying, I think the IRS is essentially saying if a, uh, IRA is distributed, an inherited IRA is distributed over the remaining life expectancy of the person who inherited it, it would satisfy the RMD rules. And the IRS kept saying, yes, yes, yes. And then the stretch IRA was born. But there was no stretch ira act of 2001, 2002. It was just opinions being released by the IRS and TEFRA from the early 80s that started getting the creative juices flowing. Congress didn't really reach out and specifically say something. So in 2001 an insurance company named Jackson applied for a PLR. And the thing to remember is that I, uh, excuse me, annuities apply to section 72 with in a parentheses a little S72S. Section 72S. I don't even think it's close to section 401A. 9 seems to be far apart. I don't know. I don't have the IRC in front of me. 72s is what governs the distributions from non qualified annuities. Why doesn't it govern, Chris, the distributions from annuities inside IRAs? Then why is 401A doing that?

Speaker C: Because once it's inside the IRA, that overwhelms or overtakes the rules of the annuity. And it's now playing by the rules of 401 section, which is IRA rules.

Speaker D: Exactly. So the Jackson PLR was saying, hey, you're coming out with all of this saying, IRAs can stretch based on the remaining life expectancy. Section 72s that governs, I think it's 72s2. And again, I apologize folks, because this isn't a, uh, video. But the S and the two are all in their own little parentheses. I think that's where it starts to get even. Knee deep in and saying, hey, must be annuitized within one year of death and the payments must be based on the actuarially sound, this is key life expectancy of the named beneficiary of the annuity or the five year rule applies. So Jackson was kind of saying, hey, would you accept a stretch payment the same way you are allowing under section 401A, paragraph 9 or section 9, this new stretch thing that is being coined, which again is not a word in the tax code. It was a word given by someone and it stuck. And the IRS came back and said, you know, yeah, we will. And then the non qualified stretch was born. But plrs, Chris, do they apply to every insurance company or just Jackson?

Speaker C: Nope, it's going to apply just to Jackson. But most people take existing PLRs and if their situation is the same or substantially similar, assume the IRS will treat them the same way as they treated Jackson. So a lot of people will rely on others PLRs, but technically they only apply to the entity, the person or the company in this case that applied for and received the plr.

Speaker D: Right. Or, uh, insurance companies who apply for their own. Yeah, and that's why many did. Now, a PLR is just reflective of, of the opinion of the IRS and whoever was addressing the PLR at that time. It is not a revenue ruling that is much more firmer and applies to anyone and can be relied upon. It is just, yeah, this is what we're thinking. So that's what's always given me pause on this non qualified stretch post secure. Because I know that the PLR can be changed. And the IRS doesn't have to announce we're no longer honoring this plr. They can just announce it during an audit of someone who happens to be stretching, using the old stretch rules as their remaining life expectancy and turn around and someday say, hey, under secure, there is no more stretch. So no, we're not going to allow it. And doesn't matter that we gave a PLR 24 years ago and we're holding you, Mr. Mrs. Individual, responsible. That was always my fear until I attended this seminar because it was that person at the seminar who got me to finally understand. I couldn't see the trees because of the forest. Who finally got me to understand? Secure act applied not to section 72s. SECURE act just applied to 401A9. That's what SECURE changed section 401A parenthesis small a parenthesis 9. It did not change section 72 parenthesis, small s. And that was his opinion on why the non qualified stretch would still work. And it was his explanation that 72s always said, uh, annuitized within one year. And also what Jackson was saying is, hey, rather than traditional annuitization, where the money is now part of the insurance company's general account and we're giving lifetime payments or lifetime and joint lifetime or period certain, but it's gone. It's the verb. Rather than that, would you allow the noun annuity. Would you allow as part of the lifetime stream of actuarially sound lifetime payments to be based on the same thought process you gave or, uh, are giving section 401A, AH9 on this stretch in these opinions you're coming out with in 2001 and 2002, and everybody's getting excited and calling this the stretch. Ira, if we used those rules to set the actuarially sound life expectancy, would that satisfy 72s? And the IRS said yes, that is again, it was like, oh my God, I get it now. And then secure, he was adamant. And I've, uh, chatted it, chat GPT it and said, you are a, a federal tax, uh, expert, and you are an expert in annuities. You know, you set the parameters. And I just said, can you confirm that secure did not alter section 72s? And it did confirm it. It didn't. And it's the same thing that that gentleman said in his seminar. And it's the same reason why this insurance company and many feel post secure. The non qualified stretch is still viable because 72s says within one year of death, not December 31st or the year following the year of death, but one year of death payments must begin based on the actual sound remaining life expectancy of the named beneficiary. I'm still hesitant. There's still part of me because I understand PLRs aren't, uh, worth the paper they're printed on. They can be changed at any time. They reflect opinion, not actual codified law or reasoning. It's just an opinion of whoever wrote the plr. Granted, the commissioner of the IRS signs off on it, but I don't know if he or she reads every single one. So theoretically, the IRS could Come out with any number of reasons I'm certain to say post secure, we're not going to allow this. But right now I told you I used to be very hesitant to believe in the non qualified stretch on an annuity. I've softened. I haven't gone completely over. The presenter of this Semini sat in on from this particular insurance company was adamant. I'm not, I'm a little softer. But I think I wouldn't be against someone saying hey, I found an insurance company that's going to allow. Not every insurance company allows it. Some don't believe it at all. Some did not apply for a PLR. None to my knowledge have applied for PLR Post Secure 2 which I wish they would do a uh, post secure one rather or post secure two. Jackson, when I specifically asked them a year ago at a similar seminar answered my question with Adam Lee. No, we uh, not going to reapply for plr. I don't know why. If they still feel strongly in it. They don't. I'd feel more comfortable if they did. So you're relying on a 25 year old PLR. But Secure did not alter 72s. It only altered 409A9. 401A9. Right. So what does this mean? Listener? If your mom did something like this, that annuity can just sit there. Forced annuitization is 121. Then you can come in with this particular insurance company and they will allow the beneficiary to do a non qualified stretch. So you can start stretching that under the old stretch IRA rules. So it's not the 10 year rule. It'll be what your remaining life expectancy is. The only caution I give you is I believe, don't quote me on this but I'm fairly certain this gentleman also said they would allow a successor beneficiary, which is someone you name listener, to receive the money because this is a noun, payment. You don't annuitize it. The money inside the annuity is sitting there and you are just taking a certain percentage of it out every year designed to be zero. To have nothing left at the end of your life expectancy which will use the single life table in the year following, uh, the year of your mom's passing. The old stretch rules allowed a successor beneficiary to step into your shoes, which is where Chris went. He missed the first part. He got the second part right. Under the old rules, let's just say your remaining life expectancy when you inherit this annuity is 35 years. Let's say you're somewhere in your 50s, I have no idea. If, uh, you're in your 60s, it might be 20 something years. Irrespective, it's a hell of a lot more than 10. So let's just for my sake of argument, say it's 35. That non qualified annuity under the stretch provision can stay open for 35 years. This, I believe this particular insurance company allows. Successor beneficiaries do quote, unquote, step into the shoes. So if you died 10 years into it, there's still 25 years left. Someone else steps in and continues the payments from the annuity for 25 years, and if they live 20, there's still five more years left. Someone else can step in. That's how stretch rules pre secure used to work. I'm hesitant on that. And I chatted with chat on this deeply and chat kind. And I know chat's programmed to please me, but it did feel because section 72s says it's to be based on the named beneficiary of the annuity, could the IRS say, hey, no, no, no, no, that's not the named beneficiary of the annuity. So that person, he's a successor beneficiary. He wasn't named on the original annuity, he can't continue. I don't know. And there's no guidance and no insurance companies applying for a PLR on this. So I'm just saying this is an intriguing solution. I'm more receptive to the non qualified stretch annuity, but, uh, I'm not 100% convinced it's rock solid. And if you were ever audited and hauled before the irs, they could say, hey, no, you're violating and they're going to impose penalties and so on and so forth. But it's, it's intriguing and I understand now what they're saying. 72s. Now, could Congress specifically go after section 72s and impose the stretch, excuse me, the 10 year rule on that? Absolutely, but they haven't yet. Anyways, Chris, I know we have to wrap up, but what are your thoughts on this? You're a pretty smart guy. What do you think? What's your gut telling you?

Speaker C: Well, I think if we're going back to the original concern that the person had, which was they're facing within five years forced annuitization. And that's what was bothering them. Removing that, or at least kicking the can down the road substantially from 95 to 150, 21 might be the, you know, the main thing they're looking for now, there's, you know, all these rules about what's going to happen, uh, you know, post, um, death of the original annuity holder. Um, but maybe in the short term, the key issue and that, you know, when I read through it, you forwarded it to me so I could do the summary. The, the key issue I kind of picked up on there is what was really bothering them was this forced annuitization. And they were thinking their only option was to start taking it out over five years. Right. Uh, they didn't want it to annuitize. Well, here's a potential solution that they could kick the can down the road by moving to a different annuity that doesn't have a, uh, forced annuitization in just five years. It's 26 years from now, which maybe mom will still be kicking at that point, but, uh, certainly buys them quite a bit more time and clearly was not an option they were thinking about. So I think that's probably the main moral of this story. And then depending on the annuity and depending on your intentions and who the beneficiaries are and what you want them to be able to do, then there's all these other explorations into might she annuitize now with a period, certain might they put it off and then have the beneficiaries annuitize. Uh, at that point doing the stretch essentially that you just described to everybody, um, those to me at least seem, you know, kind of secondary questions, questions certainly worthy of consideration. But I think, uh, a lot of people don't realize that there's now an option to move to an annuity with a, ah, much older forced annuitization age. And that for people that find themselves in this, I mean, arguably great situation. Right. They took $145,000 and turned it into $1.8 million. I don't care what. I mean, that. That's good news. Right? That's good news that happened. Um, it's just that they don't want to take some of that good news and have a little dark cloud over it in the form of excessive taxation. And I think there's. They've got some options which we discussed on the show in the last one. So this was an interesting topic and some people, we got into it enough that they're probably boring as heck. But, um, there's going to be a certain group of people out there that this is likely to really open their eyes as to some, uh, opportunities that they didn't know existed.

Speaker D: Exactly. And again with this, as Chris said, you can stretch the traditional way, which is no big deal, within one year of death through a traditional life payment. And there's no if, ands and buts about it. And you essentially stretch for your entire life. Or you can do the non qualified stretch. And the advantage to that is the only advantage over the annuitization is one's the verb, one's the noun.

Speaker C: Yeah.

Speaker D: So the verb option, which is in codified in 72s, no if, ands and buts about it, simply says within one year of death, begin payments with actuarially sound remaining life expectancy. Annuitization, uh, verb. You give up access and control to the money, you replace it with a lifetime stream of guaranteed income. You cannot outlive the non qualified stretch. For those who can't wrap their mind around it, you're just going to have, let's just say this gentleman's 1.7 million in it. So he, let's say he Inherits half, that's 5, 6, about 850ish thousand. I don't know, I'm m doing that math in my head. I'm not very good at it. So you have 850,000. Uh, if he has to take it out over the next 30 years, he's going to be given a divisor and it just keeps dividing the 850 by his divisor. The thing is that money stays invested inside the annuity as well and can be growing.

Speaker C: And if they decided they needed a lot more out for some purpose, they have access to it. Right?

Speaker D: Yeah. So that's just one option. Is one's the verb. One's the noun, the verb. No if, ands and buts about it. The noun. Throw everything I gave you. Again, I've softened before. I was adamant I wouldn't touch the non qualified stretch with a ten foot pole. But again, it took me hearing it seven different times before it dawned on me. Holy moly. I get it now. 72s or uh, 401A9 secure only applies to 401A9. But I don't know if the IRS would still concede and allow for the actuarially sound life expectancy option to do it the old stretch way or if they're going to be. No, let's go back to 401A. Excuse me. 40, uh, 72s original, which is the verb. If your client does the verb annuitizes, uh, it gives up access and control to the money and replaces it with lifetime stream of income within one year it will allow it, that is in the tax code. The stretch is not anyways, interesting. And that's again, neither hand. I found it interesting and we dedicated a show to it. Hopefully you guys found this interesting as well. We're just trying to teach you things that other people aren't talking about and get you guys to understand that annuities, yes, are complex, but they can be really unique tools. And if you know how to use them, um, they created a lot of wealth for this woman. Now this, the son and his, his sibling, uh, need to get a good way of getting it out without giving. They got to give some to the, to their uncle. Unless everything goes to charity. I'm just trying to give them some ideas on how they might be able to reduce or at least prolong make their uncle wait a little bit longer before they get everything. Yeah, all right, that's it.

Speaker C: Well, thanks everybody for hanging in with us on another edu show. Uh, we'll have a new topic for you next week. Still be, uh, annuity Focus, but on a different either email from a listener or a topic that we come up with. Um, and so, yeah, keep hanging in with us through annuity and awareness month and we'll be back with you in a few days with a Q and a show. In the meantime, stay healthy and safe out there and we'll talk to you later.

Speaker B: You have listened to Jim on the radio, read his quotes in the media, and enjoyed his banter on itunes. But even now, now you may wonder what sets Jim Saumier and Associates apart from other financial planning companies. The answer is quite simple. Jim's diverse team of professionals specializes in retirement planning. They form a lifelong relationship with you and measure their success not through product sales, but through the security and prosperity you may achieve in your retirement. Jim's entire team shares his unwavering commitment to placing their clients best interests first while offering their services at fair prices with full disclosures. The professionals at Jim Saulnier and Associates are available to assist you with your retirement planning needs. Visit jimhelps.com that's Jim H E L P S.com or call 970-530-0556.

Speaker A: The Retirement and Ira show represents the words and views of the show hosts exclusively and should not be construed as investment, legal or tax advice. All information is believed to be from reliable sour sources. However, we make no representation as to its completeness or accuracy. All economic and performance information is historical in nature and is not indicative of any future results. Any indices mentioned on the show are unmanaged and cannot be invested indirectly. Diversification and asset allocation strategies do not assure profit or protect against loss. Never make any investment or financial decisions based on information offered on this show without first consulting your financial, legal or tax advisor. Financial planning services offered through Jim Solnier and Associates, llc, a, uh, registered investment advisor.