Your client is sitting on a pile of money in a deferred annuity, and now wants to limit the income tax damage upon withdrawal. What are the options?
This means that a policyholder, who invested
There is a way around the tax mess, suggests
You can use what the
Tax experts cite recent
According to the newsletter Tax and Business Alert, published by
Be advised, however, that the new annuity from the 1035 exchange likely will have back-end surrender charges. So the older annuity probably is best surrendered first.
Here’s an example: Say a policyholder’s
However, with the 1035 exchange, the client instead could put half of that
Now, say the policyholder surrenders the annuity with no back-end surrender charge more than 180 days after the 1035 tax free exchange: This gives the policyholder a distribution of
A few words to the wise: Be sure your client is older than 59 ½. Otherwise the policyholder pays an early withdrawal penalty of 10% in addition to the ordinary income taxes on distributions. Alsoa policyholder can’t do the partial 1035 exchange with the same insurance company. Otherwise, the
This strategy works for those that have a large sum in an annuity,” says Coghlan.
Other options to curb annuity taxes:
- Many fixed-interest deferred annuities let policyholders withdraw 10% of their principal each year tax-free.
- You could roll a client’s entire maturing annuity into a new one via a 1035 tax-free exchange to postpone the tax bill.
- There is a spousal rule that may allow the surviving spouse of a deceased policyholder to continue the annuity contract as the new owner. If no money is withdrawn, there is no tax penalty. This rule, however, is limited to spouses, not to other relatives or business partners.
- A deferred variable annuity policyholder could take regular withdrawals from the mutual funds for monthly income. This can stretch out the tax bill over the years.
- Those nearing retirement could annuitize the contract and get insurance company guaranteed lifetime monthly income. They would pay taxes based on the
IRSexclusion ratio, which results in about 50% to 60% of the income taxed as earnings. The rest is considered return of principal. But be advised at today’s low interest rates, a 65 year-old would get about $550in lifetime monthly income on a $100,000investment. A few years ago, when rates were higher, the policyholder could have received $650monthly for life.
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|Source:||Penton Business Media|