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Annuity question
Old 03-07-2016, 10:21 AM   #1
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Annuity question

Here's the history.
The annuity was part of DW's mom's estate. $8000, in 1984. The initial interest rate was 12% for 2 or 3 years, and then was reduced gradually over the years, but with a guaranteed minimum of 4%. We put the papers away, and just let the annuity continue. For some reason I thought the payout was supposed to be over a 5 year period.
Last year, I called the provider, (third one over the years), and found out that the minimum payout was 10 years.
The current full annuity value is $60K, and the surrender value is $50K....

At present we don't need the money, and the way our finances are structured, our income tax is zero. That's "at present". Our IRA's still have several more years to run, (present plans). Some other "investments" are fixed with a minimum of 5+% return (inflation adjustable up). (IBonds)

The question?... Suppose we "need" for whatever reason $50K... for a car, unexpected bills, etc, etc... Where should the money come from?
Annuity... Investments... Reverse mortgage... or maybe the outright sale of the home. We eventually plan to move to the apartments in our CCRC. Am kinda holding the house sale in reserve, in the event of needing $$$ for nursing home care for an extended period. (medicaid)

Not critical, but just thinking ahead.
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Old 03-07-2016, 09:28 PM   #2
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Annuity questions are often really tax questions. This needs to be looked at by a CPA, to be honest. I know they are massively complicated, and there's a lot of fine print to the contracts.
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Old 03-08-2016, 07:54 AM   #3
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You might also check with a fee-only CFP that has an insurance background to review the contract for details.
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Old 03-08-2016, 11:12 AM   #4
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Actually, the tax situation in this case probably isn't very complicated... most likely, the last $8000 (what your DW's Mom paid) would be last and all other monies taken before that last $8000 would be taxable.

So on one extreme... if you took the CSV of $50k you would have $42k of income and would put you into positive tax territory when combined with your other income. I'm guessing you would have a $3-4k federal tax bill but you could test it out on Taxcaster. The other extreme would seem to be periodic payments and those would be taxable other than the last $8000 but it seems to me would be unlikely to be taxed.

Would the annuity payments you get include the 4% interest or just the going rate?

OTOH, I'm a bit surprised that a 30 year old annuity still had a significant difference between the contract value and surrender value as well as the magnitude of the difference. Who is the issuer? That part just doesn't sound right to me.
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Old 03-08-2016, 11:27 AM   #5
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Quote:
Originally Posted by pb4uski View Post
OTOH, I'm a bit surprised that a 30 year old annuity still had a significant difference between the contract value and surrender value as well as the magnitude of the difference. Who is the issuer? That part just doesn't sound right to me.
Thanks... I had guessed on the tax part... just about what you said.
As to the surrender value... I just don't know. Calling the current holder, is not a pleasant experience. Rude and unhelpful. We're inclined to leave it for another time... when we'll need an advisor to sort things out. Since we're covered pretty well legally for now, will wait, since there are no current money needs, and the 4% interest is reasonable.
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Old 03-08-2016, 12:11 PM   #6
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The insurer should be able to give you an in-force projection of the contract and surrender values at the end of each policy year as well as the annuity payments if you started an annuity at that time which would give you more information to make a decision. I would think that they would be tripping over themselves to get rid of a 4% minimum guaranteed annuity.

You could annuitize it and the annuity benefits would probably not attract any tax (test on Taxcaster) and you could either splurge a bit with the extra ~$6k a year or put it in an emergency fund or perhaps a bit of both.

But you're right that 4% is attractive.
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Old 03-08-2016, 01:18 PM   #7
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Assuming purchased with after tax dollars, a portion of the annuity payments are return of principal and the other part is taxable interest. It is a pretty straight forward for a fixed period payout based on the number of payments chosen. A life annuity uses an IRS life expectancy table.

irs.gov pub. 575
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Old 03-08-2016, 01:51 PM   #8
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Quote:
Originally Posted by pb4uski View Post
Actually, the tax situation in this case probably isn't very complicated... most likely, the last $8000 (what your DW's Mom paid) would be last and all other monies taken before that last $8000 would be taxable.

So on one extreme... if you took the CSV of $50k you would have $42k of income and would put you into positive tax territory when combined with your other income. I'm guessing you would have a $3-4k federal tax bill but you could test it out on Taxcaster. The other extreme would seem to be periodic payments and those would be taxable other than the last $8000 but it seems to me would be unlikely to be taxed.

So no step-up in basis for an annuity?
EDIT: Nevermind. I googled it and this is what I found on a Zack's Website:
Taxation

Unlike other investments, the named beneficiary of a nonqualified annuity does not get a step-up in tax basis to the date of death. However, that doesn't mean the beneficiary will have to pay taxes on the full amount. Because the purchaser of the annuity made the investment with after-tax dollars, only the amount attributable to investment income is taxed, but it will be taxed as ordinary income and not enjoy any special capital gains treatment. When there is a death benefit that exceeds the value of the account, that additional amount is also taxed as ordinary income. Beneficiaries are not subject to the 10 percent early distribution penalty that applies to distributions before the annuity owner reaches age 59 1/

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Old 03-08-2016, 05:24 PM   #9
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In the present interest rate environment it would seem as long as the annuity company is high rated leaving the 4% to continue earning tax free in any case and if needed for an emergency then taxes are what taxes are...
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