Taxable or not? Distribution from non-qualified annuity


T

Tom B.

Hello!

I have a friend who invested in a non-qualified variable annuity in
2000, but now he wants to get out of it due to cost concerns. I'm
trying to help him. My question is will he have to pay taxes or the 10%
penalty if he surrenders the policy? The surrender charge period has
past, so I know he won't have to pay surrender charges. I'm just not
sure though about taxes. His contract is currently "underwater"
(premiums paid > current value), so I was thinking any distribution
would be totally tax free. However, the statement from the insurance
company says something about a large federally taxable gain. How can
that be?

These annuity product are sure complex!

Thanks,

Tom
 
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C

cal lester

Tom B. said:
Hello!

I have a friend who invested in a non-qualified variable annuity in
2000, but now he wants to get out of it due to cost concerns. I'm
trying to help him. My question is will he have to pay taxes or the 10%
penalty if he surrenders the policy? The surrender charge period has
past, so I know he won't have to pay surrender charges. I'm just not
sure though about taxes. His contract is currently "underwater"
(premiums paid > current value), so I was thinking any distribution
would be totally tax free. However, the statement from the insurance
company says something about a large federally taxable gain. How can
that be?

These annuity product are sure complex!
Annuities themselves are NOT complex at all. However the variables involved
in the VARIABLE Annuity (similar to ANY investment vehicle) do tend to be
complex.

Generally speaking, the proceeds received from ANY N/Q Annuity are subject
to Income Tax on the GAIN (Proceeds minus Investment). If the NET Proceeds
are LESS than the Total Investment, then there should be No Gain, ergo No
Income Tax.

Unless there has been a change in the Federal Tax Law, the 10% Penalty is
applied
if the surrender is prior to age 59 1/2, TO THE INCOME TAX DUE. Therefore
if the Income Tax Due were $1,000 the PENALTY would be another $100 =
$1,100.
Cal
 
T

Tom B.

Cal,

Thanks for the reply. I subsequently figured out why my friend has a
taxable gain in his annuity (despire the reported "premiums paid" being
greater than the value). It turns out he originally bought an annuity
in 1992 that was later exchanged into another annuity in 2000. The new
2000 one has lost about 25% of its value, but its basis is based on the
original 1992 investment, not the 2000 exchange amount.

Anyway, I guess his best option is to do a 1035 exchange into a
low-cost annuity, such as the Vanguard Variable Annuity.

Can you think of any reason why the exchange would not make sense? The
current annuity charges 2.25% per year while Vanguard will charge .58%.

Tom
 
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C

cal lester

Tom B. said:
Cal,

Thanks for the reply. I subsequently figured out why my friend has a
taxable gain in his annuity (despire the reported "premiums paid" being
greater than the value). It turns out he originally bought an annuity
in 1992 that was later exchanged into another annuity in 2000. The new
2000 one has lost about 25% of its value, but its basis is based on the
original 1992 investment, not the 2000 exchange amount.

Anyway, I guess his best option is to do a 1035 exchange into a
low-cost annuity, such as the Vanguard Variable Annuity.

Can you think of any reason why the exchange would not make sense? The
current annuity charges 2.25% per year while Vanguard will charge .58%.

Tom
In answer to your LAST request above, I am NOT qualified to discuss the
costs
of one V/A over another, BUT "There is NO Free Lunch".

There are MANY costs related to any & all V/A's, that are NOT found in a
FIXED Annuity. Most Fixed Annuities pay an Annual Interest as stated in
the contract, PLUS an added "current Interest" on top of that.
Whereas most V/A's do NOT pay interest, but are "invested" in one or
more Mutual Funds (each usually incurring sales & other charges).
Therefore, if you are suggesting above "a low cost annuity", then IMHO,
you should look at a FIXED ANNUITY.
Cal Lester CLU
 

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