IRA SPIA “Pop-Up” Payment Increases at Death

gm-bioI’m sometimes asked about IRA SPIA payment “increases” after the SPIA start date and upon the death of the joint annuitant.  The idea is to encourage a SPIA annuitant/owner to elect a joint and survivor feature with the knowledge if their joint annuitant predeceases them, the annuitant/owner will still get the single life rate!  This is commonly referred to as a pension “pop-up” and is a payment feature found in some defined benefit pension plans.

An IRA SPIA brokerage technique combines a single life (life-only) SPIA and a reversionary annuity (RA) to accomplish the same goal.  This is possible if the annuitant/owner is also insurable.  For example; for any given annuitant/owner the single life only annuity rate is $1,000 per month.  A RA providing a $1,000 monthly income to the annuitant/owner’s beneficiary might cost $300.00 per month to fund.   Therefore, the IRA annuitant/owner’s net monthly income is $700 ($1,000 annuity income – $300 RA cost).  This net income is similar to a normal income provided by a joint 100% survivor IRA annuity payment election.

If the beneficiary predeceases the annuitant, the RA terminates and the monthly $300 cost is no longer incurred.  The IRA annuitant/owner’s income increases to the $1,000 single life rate the “pop-up”.  If the annuitant predeceases the beneficiary, the life only IRA annuity terminates but the RA lifetime income pays the $1,000 monthly income to the beneficiary.  However, in this case, because the RA is non-qualified, the RA provides the $1,000 beneficiary monthly income using SPIA exclusion ratio tax treatment (partially non-taxable).  If this was instead, a joint 100% survivor IRA annuity payment it would be completely taxable to the joint annuitant.    The other RA advantage is if the beneficiary is non-spousal, the non-spouse can always get a 100% survivor benefit because the RA is not subject to IRA SPIA RMD payment reduction rules for non-spouses.    This way, for example, a father/mother & child case can be designed to pass 100% of the IRA SPIA annuity income (tax advantaged) to the child.  The combination of a SPIA and an RA, all-in-all, is a clever way of avoiding the IRS SPIA RMD rules for qualified money and maximizing a tax efficient survivor benefit at the same time.

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