Tax Facts
3642 / What is an individual retirement annuity?
An individual retirement annuity is an annuity or an endowment contract issued by an insurance company that is structured similarly to an individual retirement account, but must meet certain additional requirements to qualify as a retirement plan.1 An endowment contract issued after November 6, 1978 will not qualify.2
To qualify as an individual retirement annuity, as provided by IRC Section 408(b):
A contract will be considered transferable if it can be used as security for any loan other than a loan from the issuer in an amount not greater than the cash value of the contract. Even so, a policy loan would cause the contract to cease to be an individual retirement annuity or endowment contract as of the first day of the owner’s tax year in which the loan was made ( Q 3649).5
The Eighth Circuit has held that a premium was not fixed when a lump sum was rolled from an IRA into an individual retirement annuity because funds taken from an IRA did not constitute a premium if used to pay for an individual retirement annuity.6
Proposed regulations state that for a flexible premium annuity to qualify as an individual retirement annuity, the contract must provide that (1) at no time after the initial premium has been paid will a specified renewal premium be required, (2) the contract may be continued as a paid-up annuity under its nonforfeiture provision if premium payments cease altogether, and (3) if the contract is continued on a paid-up basis, it may be reinstated at any date prior to its maturity date by a payment of premium to the insurer.
Two exceptions allow the insurer to set a minimum premium, not in excess of $50, and to terminate certain contracts where premiums have not been paid for an extended period and the paid-up benefit would be less than $20 a month.
A flexible premium contract will not be considered to have fixed premiums merely because a maximum annual premium is set, an annual charge is placed against the policy value, or because the contract requires a level annual premium for supplementary benefits (such as a waiver of premium feature).7
The IRS has privately ruled that a contract that includes a substantial element of life insurance will not qualify as an individual retirement annuity.8
A participation certificate in a group annuity contract meeting the above requirements will be considered an individual retirement annuity if there is a separate accounting for the benefit allocable to each participant-owner and the group contract is for the exclusive benefit of the participant-owners and their beneficiaries.9
A “wraparound annuity” contract entered into on or before September 25, 1981 as an individual retirement annuity will continue to be treated for tax purposes as an individual retirement annuity provided no contributions are made on behalf of any individual who was not included under the contract on that date. “Wraparound annuity” refers to an insurance company contract containing typical deferred annuity provisions but that also promises to allocate net premiums to an account invested in shares of a specific mutual fund that is available to the general public without purchase of the annuity contract.10
Effective November 16, 1999, annuity contracts in which the premiums are invested at the direction of the IRA owners in “publicly available securities” (i.e., mutual funds that are available for public purchase) will be treated as an individual retirement annuity contract if no additional federal income tax liability would have been incurred if the owner had instead contributed such amount into an individual retirement account where the funds were commingled in a common investment fund.11
1. IRC §§ 408(b), 408A(a).
2. Treas. Reg. § 1.408-3(e)(1)(ix).
3. IRC §§ 408(a)(6), 408A(c)(6).
4. IRC §§ 408(b)(3), 408A(c)(6).
5. IRC § 408(e)(3); Treas. Reg. § 1.408-3(c).
6. Running v. Miller, 778 F.3d 711 (8th Cir. 2015).
7. Prop. Treas. Reg. § 1.408-3(f).
8. Let. Rul. 8439026.
9. Treas. Reg. § 1.408-3(a).
10. Rev. Rul. 81-225, 1981-2 CB 12, as clarified by Rev. Rul. 82-55, 1982-1 CB 12.
11. Rev. Proc. 99-44, 1999-2 CB 598, modifying Rev. Rul. 81-225, 1981-2 CB 12.
To qualify as an individual retirement annuity, as provided by IRC Section 408(b):
(1) The contract must be nontransferable.
(2) Contracts issued after November 6, 1978 may not have fixed premiums.
(3) The annual premium on behalf of any individual may not exceed the maximum annual contribution limit for the tax year except in the case of a SIMPLE IRA ( Q 3706) or a simplified employee pension (SEP) ( Q 3701).
(4) Any refund of premium must be applied to the payment of future premiums or the purchase of additional benefits before the close of the calendar year of the refund.
(5) With respect to non-Roth individual retirement annuities, distribution must begin by April 1 of the year after the year in which the owner reaches age 73 (72 for 2020 - 2022 and 70½ prior to 2020) and the period over which distribution may be made is limited.
(6) With respect to both traditional and Roth annuities, required minimum distribution requirements must be met on the owner’s death ( Q 3687).3
(7) Distributions must comply with the incidental death benefit requirements of IRC Section 401(a)(9) ( Q 3686).4
(8) The interest of the owner must be nonforfeitable.
A contract will be considered transferable if it can be used as security for any loan other than a loan from the issuer in an amount not greater than the cash value of the contract. Even so, a policy loan would cause the contract to cease to be an individual retirement annuity or endowment contract as of the first day of the owner’s tax year in which the loan was made ( Q 3649).5
The Eighth Circuit has held that a premium was not fixed when a lump sum was rolled from an IRA into an individual retirement annuity because funds taken from an IRA did not constitute a premium if used to pay for an individual retirement annuity.6
Proposed regulations state that for a flexible premium annuity to qualify as an individual retirement annuity, the contract must provide that (1) at no time after the initial premium has been paid will a specified renewal premium be required, (2) the contract may be continued as a paid-up annuity under its nonforfeiture provision if premium payments cease altogether, and (3) if the contract is continued on a paid-up basis, it may be reinstated at any date prior to its maturity date by a payment of premium to the insurer.
Two exceptions allow the insurer to set a minimum premium, not in excess of $50, and to terminate certain contracts where premiums have not been paid for an extended period and the paid-up benefit would be less than $20 a month.
A flexible premium contract will not be considered to have fixed premiums merely because a maximum annual premium is set, an annual charge is placed against the policy value, or because the contract requires a level annual premium for supplementary benefits (such as a waiver of premium feature).7
The IRS has privately ruled that a contract that includes a substantial element of life insurance will not qualify as an individual retirement annuity.8
A participation certificate in a group annuity contract meeting the above requirements will be considered an individual retirement annuity if there is a separate accounting for the benefit allocable to each participant-owner and the group contract is for the exclusive benefit of the participant-owners and their beneficiaries.9
A “wraparound annuity” contract entered into on or before September 25, 1981 as an individual retirement annuity will continue to be treated for tax purposes as an individual retirement annuity provided no contributions are made on behalf of any individual who was not included under the contract on that date. “Wraparound annuity” refers to an insurance company contract containing typical deferred annuity provisions but that also promises to allocate net premiums to an account invested in shares of a specific mutual fund that is available to the general public without purchase of the annuity contract.10
Effective November 16, 1999, annuity contracts in which the premiums are invested at the direction of the IRA owners in “publicly available securities” (i.e., mutual funds that are available for public purchase) will be treated as an individual retirement annuity contract if no additional federal income tax liability would have been incurred if the owner had instead contributed such amount into an individual retirement account where the funds were commingled in a common investment fund.11
1. IRC §§ 408(b), 408A(a).
2. Treas. Reg. § 1.408-3(e)(1)(ix).
3. IRC §§ 408(a)(6), 408A(c)(6).
4. IRC §§ 408(b)(3), 408A(c)(6).
5. IRC § 408(e)(3); Treas. Reg. § 1.408-3(c).
6. Running v. Miller, 778 F.3d 711 (8th Cir. 2015).
7. Prop. Treas. Reg. § 1.408-3(f).
8. Let. Rul. 8439026.
9. Treas. Reg. § 1.408-3(a).
10. Rev. Rul. 81-225, 1981-2 CB 12, as clarified by Rev. Rul. 82-55, 1982-1 CB 12.
11. Rev. Proc. 99-44, 1999-2 CB 598, modifying Rev. Rul. 81-225, 1981-2 CB 12.
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