Can't transfer to IRA

[asb2012]

My aunt passed away and my mom has insurance policy from her death of $10100. The insurance company gave her few options one which was to transfer to IRA. She goes to her bank to get account number so she can transfer the money over and the credit union tells her because she is not the spouse she can not transfer that money to her IRA. And Basically it's a new IRS rule. Anyone ever heard of this ? She was trying transfer money to avoid paying taxes and to put more in her retirement

[disneysteve]

I know there are rules about inheriting an IRA but I've never heard anything about being able to invest life insurance proceeds into an IRA. I don't think that's a new rule at all.

Does she already fund an IRA? If not, she could just use her regular income to make a contribution this year and next year and use the insurance proceeds to pay her normal expenses that she normally would have paid from her income.

[asb2012]

Very true I didn't think of that
Thanks

[GoodSteward]

My understanding is that you can only invest earned income into an IRA, or any tax sheltered option. Money you inherit, win, etc. must be saved elsewhere.

[disneysteve]

My understanding is that you can only invest earned income into an IRA, or any tax sheltered option. Money you inherit, win, etc. must be saved elsewhere.

This is incorrect. You can put an inherited IRA, Roth, or qualified retirement plan (401k or 403b) into your own IRA. The rules regarding who can do what and when you must take distributions are different for inherited IRAs so if you're ever in that situation, make sure you get all of the details.

However, this is all referring to you inheriting the IRA or qualified account of the deceased, not insurance policy proceeds.

[kork13]

She was trying transfer money to avoid paying taxes and to put more in her retirement

If I remember correctly (someone please speak up if I'm mistaken), in most cases life insurance payouts are not taxable if you are the designated beneficiary. Any interest gains on that money becomes taxable, but the payout itself is not, and doesn't even need to be reported on your taxes.

[asb2012]

The paperwork says it from an annunity so i am not sure if thats a life insurance policy or not and yes they will be taking 20% out if she just cash it out. They also gave her the option to get a check every month for minimum of 5 years with payments. This is all very new to us and i just want to make sure she makes the right choice simce she is seeking my advice.

[disneysteve]

The paperwork says it from an annunity so i am not sure if thats a life insurance policy or not and yes they will be taking 20% out if she just cash it out. They also gave her the option to get a check every month for minimum of 5 years with payments.

An annuity is not a qualified retirement plan so I she can't roll that into an IRA.

Whether to take a lump sum or annuity payments is a more complicated question. How old is she? How is her health? Does she need the money now or would it be more beneficial to get the monthly payments? What happens to the payments if she dies?

If she takes a lump sum, anything that remains upon her death passes to her heirs. If she takes the monthly payments, it sounds like they continue for 5 years no matter what but if she dies after that, they would stop and nothing would go to her heirs.

She probably should consult an accountant for professional advice in this situation if the amount involved is substantial. It would be worth paying a few hundred dollars for a one-time consultation.

[kv968]

You would also have to find out if the premiums/contributions to the annuity were done on tax-deferred or post-tax basis. If it's the latter your mother wouldn't owe taxes on that amount.

As Steve said, your mother would be better off going to a tax professional for this matter to make sure she makes the right decision since annuities can be pretty complex.

[asb2012]

Thanks