Partial Annuitization of Non-Qualified Annuities
The partial annuitization of non-qualified annuities is a complex financial topic. Many taxpayers need assistance from qualified tax professionals in order to fully understand this subject.
The partial annuitization of a non-qualified annuity, endowment, or life insurance contract is permitted for tax purposes.
Under this rule, if any amount is received as an annuity for a period of 10 years or more, or during one or more lives, under any portion of an annuity, endowment, or life insurance contract:
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that portion will be treated as a separate contract for annuity taxation purposes;
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the investment in the contract will be allocated pro rata between each portion of the contract from which amounts are received as an annuity, and the portion of the contract from which amounts are not received as an annuity, and
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a separate annuity starting date will be determined for each portion of the contract from which amounts are received as an annuity. (Code Sec. 72(a)(2))
Thus, holders of nonqualified annuities are allowed to elect to receive a portion of an annuity contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis. Since “any portion” of an annuity contract is not defined, IRS guidance is needed to expand on this area of the partial annuitization rule.
The partial annuitization rule does not apply to the special rules for qualified employer retirement plans under Code Sec. 72(d).