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Old 06-27-2012, 03:28 PM   #21
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Here is how taxation of a variable annuity works:
- If you have a VA and you make withdrawals from it, you are considered to be withdrawing any gain in value first and then the basis (what you paid for it.) You will be charged at your regular tax rate for any withdrawals made from the gain. You will be charged no tax on withdrawals from the basis since you already paid tax on that money.
- If you annuitize the VA, a portion of each monthly check is considered to be gain and a portion to be basis. The insurance company sends you a statement telling you how much of each. You pay tax at your regular rate on the portion which is gain and nothing on the portion which is return of basis.
- If you inherit a VA it does not "step up" as after-tax stocks and mutual funds do. If you inherit one, you will pay tax on all the gain at your regular rates.

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Old 06-27-2012, 03:58 PM   #22
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Originally Posted by REWahoo View Post
That's good, but I doubt the OP would be eligible to purchase that product, correct?
The OP mentioned "retirement accounts" and as my account is also a tax deferred retirement account I thought the numbers on my TIAA-CREF deferred variable annuity retirement account I get through the state would be of interest. Valic seems to be offered by quite a few universities and states along with TIAA-CREF. If the OP has access to TIAA-CREF I'd go with them. He won't be able to buy exactly what I have unless he works for Massachusetts.

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Old 06-27-2012, 07:05 PM   #23
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Originally Posted by DebER View Post
That would be my understanding, but of course I'm no expert. Since I took a lump sum distribution on my father's annuity it put me in a higher tax bracket.
Nobody has mentioned it yet, but if you simply surrender the VA today you'll have a taxable loss. That would go through this year's tax return and reduce your ordinary taxable income.

If you do a 1035 exchange to another annuity, that will defer taxes until you eventually take money out of that contract.

Googling a little, there seems to be an uncertainty about where to report the loss on the 1040. It could be a "Miscellaneous loss" in the itemized deductions, or it could be an investment loss (but not subject to capital gains treatment). The first seems "safer", but the second avoids a 2% exclusion.

I have no knowledge of your current or future tax situation, but it is something to think about.
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Old 06-27-2012, 09:18 PM   #24
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Was there an insurance component of this VA? Is it possible that the value of the VA is down but insurance guarantees a minimum payout if you annuitize or hold for a period of time or whatever? I'm all for gettting out of it, but not if you can take advantage of insurance to make up that loss.

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