how to manage annuity withdrawals

[lb]

I'm managing my mother's finances and need to understand how to work with non-qualified annuities. I need to supply around $60K a year for her care in a managed care facility and have a number of sources to draw on. My tax advisor suggests I use the tax-deferred money first.

She has two annuities one around $25K paying 3.5% for another year or so; and another around $370K, paying 5.2% till 2007. I know the cost basis for the little one is $10K. I'm not quite sure about the other one, it may be around $250K; hopefully I'll find out in the next month or so, when they process my POA. I have an IRA that will pay for two years of care (dumb question - can I just take all the money out like that? - up till now she had just been taking the minimum required - she is 77).

I see that I get less money if I cash out - is this always true? What happens if I start withdrawing money - how does that change the cash value vs surrender value? If I annuitize it, can I pick the period? I really would like to spend them down, fairly quickly, to the cost basis value, once the IRA is depleted. Can I stop the withdrawals once I have started them (if I annuitize them?). Or should I just draw money as I need it?

Appreciate any answers you might have. I've never dealt with these before and these are now in their third or fourth company name change since she started them and no local person to talk to.

 

[Martha]

I have an IRA that will pay for two years of care (dumb question - can I just take all the money out like that? - up till now she had just been taking the minimum required - she is 77).

I'll answer the easy question. Yes, you can take out all the IRA money at once. She will have to pay income taxes on it however. There are minimum distributions but no maximum at her age.

 

[Tadpole]

Hey RE experts, what about using ORP on this one? It looked to me like it was trying to maximize the tax considerations of my withdrawal. Will it work on her scenario?

 

[John Potter]

Whoa big fella!

I've learned a lot about annuities and annuity acounts since marrying my wife who had a couple. My advise is tread lightly! Annuities are great for a healthy person whose parents passed away at 96!

First off - you are right to consider her financial needs for the future; my recommendation is to not annuitize for a mother going into managed care. Annuitization turns the money into a revenue source for your mother that ends with the annuity company owning the balance following her demise. If she hasn't annuitized, from what I've read, it is possible to support her fiscal needs by taking increments out every year and still have her be the owner of the remaining funds. Withdrawing monies without annuitization means she must pay tax on the gain of the account just as she would have paid on an annuitized payment, so there is little advantage either way.

A total cash-out may also involve a hefty penalty (maybe even 10% or more depending on how long she has had it) so check out her annuity contract before cashing out. There is likely to be no penalty if you take withdrawals over a period of years - check the contract. The annuity companies think of that money as if it were theirs and become quite covetous!

You are fortunate that she has a number of sources for her future support.

Best wishes to you - JohnP

 

[brewer12345]

I'm managing my mother's finances and need to understand how to work with non-qualified annuities. I need to supply around $60K a year for her care in a managed care facility and have a number of sources to draw on. My tax advisor suggests I use the tax-deferred money first.

She has two annuities one around $25K paying 3.5% for another year or so; and another around $370K, paying 5.2% till 2007. I know the cost basis for the little one is $10K. I'm not quite sure about the other one, it may be around $250K; hopefully I'll find out in the next month or so, when they process my POA. I have an IRA that will pay for two years of care (dumb question - can I just take all the money out like that? - up till now she had just been taking the minimum required - she is 77).

I see that I get less money if I cash out - is this always true? What happens if I start withdrawing money - how does that change the cash value vs surrender value? If I annuitize it, can I pick the period? I really would like to spend them down, fairly quickly, to the cost basis value, once the IRA is depleted. Can I stop the withdrawals once I have started them (if I annuitize them?). Or should I just draw money as I need it?

Appreciate any answers you might have. I've never dealt with these before and these are now in their third or fourth company name change since she started them and no local person to talk to.

For starters, you need to know what the surrender charges and periods are on these annuities. Once you know what it would cost to cash them out in whole or in part, you can make a more intelligent decision.

You really have two choices. The first is to cash out part or all of these annuities and make use of the proceeds. If you have no surrender charge left on these policies (which is ulikely), you could simply cash the whpole thing out at once. If there is a significant surrender charge, find out whether you can cash in part of each contract. Many non-qual annuities allow for a 10% withdrawal without a surrender charge in order to accomodate RMDs.

The second is to annuitize, either with the company the annuity is with, or by doing a tax free 1035 exchange to a company with which you wish to do business. If you choose to annuitize, you generally have a number of options. If the annuities would provide enough money for the care, you could go with a single life annuity for your mother. In this scenario, she would get a check every month for life, then nothing. Alternatively, you could get an annuity period certain, which simply pays out a scheduled amount every month for a specified period of years, after which you get nothing. The annuity certain is attractive in some cases because if the original beneficiary passes away before the payout period is over, the payouts continue, usually sent to an alternate beneficiary (an heir).

The choices you make depend on how long you expect these assets to have to fund the managed care costs and what your mom's intentions are WRT estate planning (i.e. is she hell-bent on leaving an estate?).

 

[lb]

Thanks for the replies. I think I will be able to ask the questions I need when I talk to the companies.

These are non-qualified annuities, and I believe the larger one (that is currently at 370K) has a cost basis of about $240K of her money. Do you mean to tell me if she starts taking money out as annuity and she were to die, they would keep all the money, even her original funding? I got a form from the little one, which say cash value $26K, cash surender value $24K, cost basis $10K. So I lose $2K if I cash it out.

I don't know if she will outlive her money (currently totals about $1M, plus 10K year SS), as her mother died young at 48, her father at 70 or so. She's about the oldest in her whole family. I figure I have 10 years of care before I have to worry, but figure that it won't all be gone before she dies. And it all comes to me. My tax guy wants to avoid me getting slammed with a big tax bill if all the inheritance is in tax defferred money.

Her tax bill won't be too bad, as her care will offset most of the money distributed from tax deferred accts. She hasn't owed any taxes of any significance for last 5 years.

 

[lb]

Oh, and a little more. The statement I got from the little annuity says "this contract must be annuitized to waive the surrender charge on withdrawals". So does this mean if I start taking money out either in one lump sum or under my control, I only get cash surrender value? Or if I annuitize, I get full value, but if she dies, I lose the rest? It does say that I can't make any beneficiary changes under my power of atty.

I don't see any mention about a period in these.

 

[brewer12345]

Hmm, I don't know all of the specifics of the situation, so take my advice with a grain of salt. I would probably deplete the IRA first. Your mom probably won't pay much in taxes, and IRAs are about the ugliest thing to inherit tax-wise.

On the annuities: find out how long you have to wait until the surrender charges fall off, since they inevitably do so after time. If you can wait out the surrender charges while you use the IRA to fund current expenses, you gain.

As I tried to make clear, you can annuitize several different ways. If you choose a single life annuity, payments stop when your mom passes away. That means principal and everything. If you choose an annuity period certain, you get payments for a specific number of years (you choose) regardless of wether your mom is alive or not. After the payments are done, you get nothing, since the have aid out all your rincipal over time.

I would probably try to wait out the surrender charges and then cash out the annuities. It is simpler that way.

 

[JohnP]

Brewer12345 is right in saying that there are many ways to annuitize.

Annuitization is a reasonable proposition as long as you understand what you are signing on for. Yes, several of the options include the annuity company keeping "... all the money, even her original funding..." were she to pass away after annuitization.

Annuity "accounts" are a curious enterprise; before annuitization they are like many other investment accounts only with pretty high fees and sometimes some insurance on the account value. Annuitization is the company's agreeing to pay you for a dizzying variety of periods and conditions, which typically ends with little or nothing for a person's estate.

As long as you do not annuitize the account grows in value based on what investments have been chosen by the buyer. I would not recommend either cashing out or annuitization for these funds; instead you can typically withdraw funds yearly to support your mother's needs with little or no penalty. The tax rate would be less than an IRA as you only pay on the appreciated portion of what is withdrawn for her support.

My best wishes JohnP