Help on an annuity

[imoldernu]

Most of you know I'm not savvy on finances, so i'm looking for any thoughts on jeanies' annuity. It was taken out in 1984 in the amount of $8000. It started out for the first four years with interest rates of about 7+%, and a continuing rate of 4%. The total value is now about $62K, with a surrender value of about 53+K. The 10 year payout is about $750/mo. The annuity is transferrable on death for the total payout value.

That's about all I know. It looks like she'll be able to take it out monthly and based on our taxable income, will allow us to continue without paying federal or state taxes.

Can you think of anything we need to check on, or be aware of when requesting the payout?

Yeah... I know... what's stupid doing here on a financial site. Anyway, your thoughts?

 

[HI Bill]

Here's what I found: "If you buy the annuity with pretax money, then the entire balance will be taxable. If you use after-tax funds, however, then you'll be taxed only on the earnings. If you cash out a deferred annuity in a lump sum, then you'll have to pay income taxes on all of the earnings higher than your original investment."

When my mom passed, I transferred her annuity to me, converting it through an in-kind transfer to an inherited IRA (paying no taxes), and took the RMD for 2018. Easy!

 

[brewer12345]

You are thinking about taking the 10 year payout? If so, I would ask what amount of the monthly payment is taxable and what happens if the annuitant dies before the 10 year payout is finished?

 

[Souschef]

If you will be taking monthly payments, only part is taxable/
I have used the simplified to calculate it.

If you made after-tax contributions to your pension or annuity plan, you can exclude part of your pension or annuity payments from your income. You must figure this tax-free part when the payments first begin. The tax-free amount remains the same each year, even if the amount of the payment changes.You must use the Simplified Method if either of the following applies:

1. Your annuity starting date was after July 1, 1986, and you used this method last year to figure the taxable part.
2. Your annuity starting date was after November 18, 1996, and both of the following apply.
   1. The payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity.
   2. On your annuity starting date, either you were under age 75 or the number of years of guaranteed payments was fewer than 5. See IRS Publication 575 Pension and Annuity Income for the definition of guaranteed payments.

If you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax-free part of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan.
Under the Simplified Method, you figure the taxable and tax-free parts of your annuity payments by completing the Simplified Method Worksheet. You will need to complete the worksheet in the program each year that you file your return.
Determining the taxable portion of an annuity requires that you determine the amount of your contributions that have been recovered in all prior years so that your exclusion does not exceed your contributions. This has to be recomputed each year.

 

[pb4uski]

Most of you know I'm not savvy on finances, so i'm looking for any thoughts on jeanies' annuity. It was taken out in 1984 in the amount of $8000. It started out for the first four years with interest rates of about 7+%, and a continuing rate of 4%. The total value is now about $62K, with a surrender value of about 53+K. The 10 year payout is about $750/mo. The annuity is transferrable on death for the total payout value.

That's about all I know. It looks like she'll be able to take it out monthly and based on our taxable income, will allow us to continue without paying federal or state taxes.

Can you think of anything we need to check on, or be aware of when requesting the payout?

Yeah... I know... what's stupid doing here on a financial site. Anyway, your thoughts?

A few things. First, I am surprised that an annuity issued in 1984 would still have an $9k surrender charge associated with it ($62k account value vs $53k surrender value)... also, surrender charge even for early years are only 15% or less... so the difference in values doesn't make sense.

Second, you have done pretty well... $8k invested in 1984 and grown at 5.72% would be $53k today.. so not bad for a fixed income investment.... $62k would be 6.21% annual return.

Third, based on what you wrote the 10 year payout looks like a good... in fact, a bit too good to be true. So no matter what happens Jeanie or her heirs get $750/month for the next 10 years, right? Assuming $63k account value today, $750/month for 10 years would equate to 8.23% return... so something must be off.

 

[GM Points]

A few things. First, I am surprised that an annuity issued in 1984 would still have an $9k surrender charge associated with it ($62k account value vs $53k surrender value)... also, surrender charge even for early years are only 15% or less... so the difference in values doesn't make sense.

Second, you have done pretty well... $8k invested in 1984 and grown at 5.72% would be $53k today.. so not bad for a fixed income investment.... $62k would be 6.21% annual return.

Third, based on what you wrote the 10 year payout looks like a good... in fact, a bit too good to be true. So no matter what happens Jeanie or her heirs get $750/month for the next 10 years, right? Assuming $63k account value today, $750/month for 10 years would equate to 8.23% return... so something must be off.

It is probably a two-tier annuity. I am pretty sure they aren't sold any longer since a lot of agents/companies marketed them in less than honest ways. Here is a source for them https://budgeting.thenest.com/two-tier-annuity-32616.html

A two-tier annuity is an investment product that requires you to invest an up-front sum in exchange for a promise of future payments. The two tiers comes from the redemption options the annuity offers. If you pull your money out over time, you earn a higher return that if you take your money out in a single lump sum.

 

[Scuba]

The annuity company should be able to tell you what portion of the value is taxable vs a return of principal.

 

[Souschef]

The annuity company should be able to tell you what portion of the value is taxable vs a return of principal.

That is true, if you take a total distribution. If you take monthly payments, you can use the simplified method worksheet to determine what part is return of principal and what part is taxable.

 

[bw5972]

...Second, you have done pretty well... $8k invested in 1984 and grown at 5.72% would be $53k today.. so not bad for a fixed income investment.... $62k would be 6.21% annual return.
...

$8k in the S&P 500 since 1984 would be around $190,000 today. Just saying...

 

[pb4uski]

Yup. And it would be flipping crazy for anyone to expect an annuity or any fixed income investment to keep up with stocks over a 35 year period of time. Just saying....