[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.408-3]

[Page 490-492]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.408-3  Individual retirement annuities.

    (a) In general. An individual retirement annuity is an annuity 
contract or endowment contract (described in paragraph (e)(1) of this 
section) issued by an insurance company which is qualified to do 
business under the law of the jurisdiction in which the contract is sold 
and which satisfies the requirements of paragraph (b) of this section. A 
participation certificate in a group contract issued by an insurance 
company described in this paragraph will be treated as an individual 
retirement annuity if the contract satisfies the requirements of 
paragraph (b) of this section; the certificate of participation sets 
forth the requirements of paragraphs (1) through (5) of section 408 (b); 
the contract provides for a separate accounting of the benefit allocable 
to each participant-owner; and the group contract is for the exclusive 
benefit of the participant owners and their beneficiaries. For purposes 
of this title, a participant-owner of a group contract described in this 
paragraph shall be treated as the owner of an individual retirement 
annuity. A contract will not be treated as other than an individual 
retirement annuity merely because it provides for waiver of premium on 
disability. An individual retirement annuity contract which satisfies 
the requirements of section 408 (b) need not be purchased under a trust 
if the requirements of paragraph (b) of this section are satisfied. An 
individual retirement endowment contract may not be held under a trust 
which satisfies the requirements of section 408 (a). Distribution of the 
contract is not a taxable event. Distributions under the contract are 
includible in gross income in accordance with the provisions of Sec. 
1.408-4 (e).

[[Page 491]]

    (b) Requirements--(1) Transferabil ity. The annuity or the endowment 
contract must not be transferable by the owner. An annuity or endowment 
contract is transferable if the owner can transfer any portion of his 
interest in the contract to any person other than the issuer thereof. 
Accordingly, such a contract is transferable if the owner can sell, 
assign, discount, or pledge as collateral for a loan or as security for 
the performance of an obligation or for any other purpose his interest 
in the contract to any person other than the issuer thereof. On the 
other hand, a contract is not to be considered transferable merely 
because the contract contains: a provision permitting the individual to 
designate a beneficiary to receive the proceeds in the event of his 
death, a provision permitting the individual to elect a joint and 
survivor annuity, or other similar provisions.
    (2) Annual premium. Except in the case of a contribution to a 
simplified employee pension described in section 408 (k), the annual 
premium on behalf of any individual for the annuity or the endowment 
contract cannot exceed $1,500. Any refund of premiums must be applied 
before the close of the calendar year following the year of the refund 
toward the payment of future premiums or the purchase of additional 
benefits.
    (3) Distribution. The entire interest of the owner must be 
distributed to him in the same manner and over the same period as 
described in Sec. 1.408-2 (b) (6).
    (4) Distribution upon death. If the owner dies before the entire 
interest has been distributed to him, or if distribution has commenced 
to the surviving spouse, the remaining interest must be distributed in 
the same manner, over the same period, and to the same beneficiaries as 
described in Sec. 1.408-2 (b) (7).
    (5) Nonforfeitability. The entire interest of the owner in the 
annuity or endowment contract must be nonforfeitable.
    (6) Flexible premium. [Reserved]
    (c) Disqualification. If during any taxable year the owner of an 
annuity borrows any money under the annuity or endowment contract or by 
use of such contract (including, but not limited to, pledging the 
contract as security for any loan), such contract will cease to be an 
individual retirement annuity as of the first day of such taxable year, 
and will not be an individual retirement annuity at any time thereafter. 
If an annuity or endowment contract which constitutes an individual 
retirement annuity is disqualified as a result of the preceding 
sentence, an amount equal to the fair market value of the contract as of 
the first day of the taxable year of the owner in which such contract is 
disqualified is deemed to be distributed to the owner. Such owner shall 
include in gross income for such year an amount equal to the fair market 
value of such contract as of such first day. The preceding sentence 
applies even though part of the fair market value of the individual 
retirement annuity as of the first day of the taxable year is 
attributable to excess contributions which may be returned tax-free 
under section 408(d)(4) or 408(d)(5).
    (d) Premature distribution tax on deemed distribution. If the 
individual has not attained age 59\1/2\ before the beginning of the year 
in which the disqualification described in paragraph (c) of this section 
occurs, see section 408(f)(2) for additional tax on premature 
distributions.
    (e) Endowment contracts--(1) Additional requirement for endowment 
contracts. No contract providing life insurance protection issued by a 
company described in paragraph (a) of this section shall be treated as 
an endowment contract for purposes of this section if--
    (i) Such contract matures later than the taxable year in which the 
individual in whose name the contract is purchased attains the age of 
70\1/2\;
    (ii) Such contract is not for the exclusive benefit of such 
individual or his beneficiaries;
    (iii) Premiums under the contract may increase over the term of the 
contract;
    (iv) When all premiums are paid when due, the case value of such 
contract at maturity is less than the death benefit payable under the 
contract at any time before maturity;
    (v) The death benefit does not, at some time before maturity, exceed 
the greater of the cash value or the sum of premiums paid under the 
contract;

[[Page 492]]

    (vi) Such contract does not provide for a cash value;
    (vii) Such contract provides that the life insurance element of such 
contract may increase over the term of such contract, unless such 
increase is merely because such contract provides for the purchase of 
additional benefits;
    (viii) Such contract provides insurance other than life insurance 
and waiver of premiums upon disability; or
    (ix) Such contract is issued after November 6, 1978.
    (2) Treatment of proceeds under endowment contract upon death of 
individual. In the case of the payment of a death benefit under an 
endowment contract upon the death of the individual in whose name the 
contract is purchased, the portion of such payment which is equal to the 
cash value immediately before the death of such individual is not 
excludable from gross income under section 101(a) and is treated as a 
distribution from an individual retirement annuity. The remaining 
portion, if any, of such payment constitutes current life insurance 
protection and is excludable under section 101(a). If a death benefit is 
paid under an endowment contract at a date or dates later than the death 
of the individual, section 101(d) is applicable only to the portion of 
the benefit which is attributable to the amount excludable under section 
101(a).

[T.D. 7714, 45 FR 52792, Aug. 8, 1980]