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Old 06-04-2012, 11:53 AM   #61
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I don't know what you mean as "hidden", unless you are trying to dodge the tax man (or woman ).

Reduced? Sorry, don't understand.
I think BigE meant "hidden" as in being able to not take any payments in a given year and thus not appearing on the tax return. Like a capital gain is optional if you don't need the income. The $100k you put into the annuity is "hidden" because it is an asset that the IRS does not usually track or tax yearly. Once you buy the annuity, the IRS "sees" that income stream every year and taxes it, whether you needed it or not.
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Old 06-04-2012, 01:07 PM   #62
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....Once you buy the annuity, the IRS "sees" that income stream every year and taxes it, whether you needed it or not.
Like interest on bonds or dividends on stocks...same "disadvantage".
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Old 06-04-2012, 03:33 PM   #63
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RealSkiDaddy, if the government didn't bail out AIG your SunAmerica annuity should have been fine. The major risk would have been that AIG would try to draw capital out of SunAmerica to address its corporate obligations for the CDS the AIG holding company wrote, but there are numerous regulatory restrictions on such draws.
I am not at all sure of this. According to books like To Big to Fail, and the Big Short some of the biggest purchasers of both vanilla MBS and the more exotic CDO and even CDO square were insurance companies. Michael Lewis characterized insurance portfolio managers as dumb money, more sophisticated the hapless towns in Europe that bought these toxic waste product, but no where nears as smart as many of the Hedge Fund managers or Goldman Sachs.

By early 2008 many insurance companies portfolios were filled with "safe" fixed income security with AAA ratings. By now many of the lower tranches of the CDO weren't paying income, and there also wasn't much of a market for these security. My guess is that even the often clueless state insurance regulators were probably getting nervous and pushing insurance companies to minimize their exposure to CDOs etc. One easy way for an insurance company to do this would be buy portfolio insurance (i.e. a credit default swap) to protect against the the mortgage market tanking.

By far the biggest supplier of this insurance was AIG: Financial Products. We know that Goldman Sach was big beneficiary of the government decision to bail out AIG. However AFAIK GS accounted for only a small percentage of the CDS AIG: Financial Products wrote. If AIG didn't get a bailed out lots of companies would be have been left holding hundreds of billions CDS issued by AIG but pretty much worthless. I am pretty sure that lots of Life Insurance companies were a huge benefactor of the decision to bail out AIG. I am not all confident that life insurance companies could have survived the double whammy of huge declines in their mortgage back security and the portfolio insurance they bought turning out to be worthless.

Now this is speculation on my part, but I don't think it is baseless.
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Old 06-04-2012, 04:52 PM   #64
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Like interest on bonds or dividends on stocks...same "disadvantage".
And I've been trying to keep those dividends hidden in the 401k/IRA accounts to avoid the problem of hitting the Roth IRA income limit since DW still works. No bonds in my AA, just a place to park my cash temporarily if I feel like it. And of course, no plans for an annuity other than as Midpack's Plan B.
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Old 06-04-2012, 07:15 PM   #65
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I am not at all sure of this. According to books like To Big to Fail, and the Big Short some of the biggest purchasers of both vanilla MBS and the more exotic CDO and even CDO square were insurance companies. Michael Lewis characterized insurance portfolio managers as dumb money, more sophisticated the hapless towns in Europe that bought these toxic waste product, but no where nears as smart as many of the Hedge Fund managers or Goldman Sachs.

By early 2008 many insurance companies portfolios were filled with "safe" fixed income security with AAA ratings. By now many of the lower tranches of the CDO weren't paying income, and there also wasn't much of a market for these security. My guess is that even the often clueless state insurance regulators were probably getting nervous and pushing insurance companies to minimize their exposure to CDOs etc. One easy way for an insurance company to do this would be buy portfolio insurance (i.e. a credit default swap) to protect against the the mortgage market tanking.

By far the biggest supplier of this insurance was AIG: Financial Products. We know that Goldman Sach was big beneficiary of the government decision to bail out AIG. However AFAIK GS accounted for only a small percentage of the CDS AIG: Financial Products wrote. If AIG didn't get a bailed out lots of companies would be have been left holding hundreds of billions CDS issued by AIG but pretty much worthless. I am pretty sure that lots of Life Insurance companies were a huge benefactor of the decision to bail out AIG. I am not all confident that life insurance companies could have survived the double whammy of huge declines in their mortgage back security and the portfolio insurance they bought turning out to be worthless.

Now this is speculation on my part, but I don't think it is baseless.
Interesting speculation, but totally wrong - but please don't let facts get in the way of your view of the world.

A.I.G. Payments to Counterparties
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Old 06-04-2012, 07:28 PM   #66
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Interesting speculation, but totally wrong - but please don't let facts get in the way of your view of the world.

A.I.G. Payments to Counterparties
Interesting I hadn't seen a list of the AIG counterparty payments before, I see insurance companies aren't on the list.
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Old 06-04-2012, 07:44 PM   #67
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Just took a couple minutes of googling to find.
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Old 06-05-2012, 09:48 AM   #68
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I think BigE meant "hidden" as in being able to not take any payments in a given year and thus not appearing on the tax return. Like a capital gain is optional if you don't need the income. The $100k you put into the annuity is "hidden" because it is an asset that the IRS does not usually track or tax yearly. Once you buy the annuity, the IRS "sees" that income stream every year and taxes it, whether you needed it or not.
Yes, that is what I was getting at. Probably not worded in the best way. In addition, IMHO what we are seeing in Wisconsin may very well filter down to the unsustainable program we know as social security. That is, reduced SS benefits. A reduction in benefits across the board is less likely than giving a haircut to those who saved outside of SS. If you had any advance knowledge that this was coming down the pike, would you give away assets to charity, gift the annual maximum to kids, etc? Just food for thought.
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Old 06-05-2012, 09:55 AM   #69
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Yes, that is what I was getting at.
I'll just refer to Animorph who said you were getting (taxable) income, regardless if you needed it or not.

In that case, I would say that an (SPIA) annuity to give you retirement income is not at all in your best interest.

If you wish to "manage" your income in retirement, there are other ways.

Like I said many times before, you have to show a need for an (SPIA) annuity. It's not for everybody. Nothing wrong with that at all, IMHO.

It's just a tool that should be considered and available for retirement income, but don't use it as a hammer when a screwdriver is what you need ...
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Old 06-05-2012, 11:59 AM   #70
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Only a portion of the SPIA would be taxable, right? Some of it should be considered return of principal. So the tax consequences are probably not as bad as they might look.
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Old 06-05-2012, 01:22 PM   #71
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Yes, only a portion of annuity payments are taxable.

"The money you invested in the immediate annuity is returned in equal tax-free installments over the payment period. If you have a life annuity with payouts that will stop when you die, for example, then that payment period is the IRS's life-expectancy number for someone your age. You'll owe taxes only on any portion of each payout beyond the tax-free return of principal.

Say, for example, you invest $100,000 in an immediate annuity and the annual payouts are $8,000. If the IRS considers your life expectancy to be 20 years, divide $100,000 by 20 to determine how much of each payout will be a tax-free return of investment. In this case, $5,000 of each $8,000 payout would be tax-free and $3,000 would be taxed at ordinary income-tax rates."
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Old 06-05-2012, 01:50 PM   #72
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Some of it should be considered return of principal. So the tax consequences are probably not as bad as they might look.
It depends on the funding. Ours was purchased with funds from our TIRA/401(k).

All distributions in this case are taxable.

Of course, the remaining funds (if we die early) are going to our named non-profit charities. In that case (assuming the law does not change) will be tax-free, for their use.
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Old 06-05-2012, 06:40 PM   #73
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Yes, only a portion of annuity payments are taxable."
Your example only applies if the funds that you used to purchase the annuity came from a non-qualified source. But as Rescueme stated if the funds came from a qualified plan (IRA/401K) then all distributions are fully taxable.
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Old 06-05-2012, 07:24 PM   #74
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The Berkshire Annuity quote gives a detailed breakdown of the taxable and non taxable portions of the payments. Of course if you are rolling a 401/3 into a annuity I believe it is all taxable.
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Old 06-05-2012, 07:31 PM   #75
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The Berkshire Annuity quote gives a detailed breakdown of the taxable and non taxable portions of the payments. Of course if you are rolling a 401/3 into a annuity I believe it is all taxable.
Berkshire does not allow tax-deferred funds (e.g. qualified) to be used to purchase an SPIA. It can only be done with after tax contributions, per:

Frequently asked questions
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Old 06-05-2012, 09:32 PM   #76
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Berkshire does not allow tax-deferred funds (e.g. qualified) to be used to purchase an SPIA. It can only be done with after tax contributions, per:

Frequently asked questions
Berkshire doesn't but other insurance companies do. AFAIK distribution would fully taxable in this case.
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Old 06-05-2012, 10:20 PM   #77
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Many of those in the 80's got too heavy into real estate and had liquidity problems. Liquidity problems can occur and still do. Some insurance company... perhaps Conseco (had problems with too many acquisitions and debt).

.
It should be noted that Consecos annuities ended up paying off it was the creditors of the holding company that got the shaft. Just like in the case of AIG had it gone bankrupt it would have been the holding company not the underlying insurance companies in the US which are regulated by the states. One of the early attemps to help the holding company out was to have the insurance companies upstream some money to the holding company but that was not enough.
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Old 06-05-2012, 10:22 PM   #78
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Interesting speculation, but totally wrong - but please don't let facts get in the way of your view of the world.

A.I.G. Payments to Counterparties
Again one has to understand the corporate legal structure, the holding company made the payments, not the underlying insurance subsidiaries. Legally the books do not consolidate for insurance purposes.
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Old 06-05-2012, 10:43 PM   #79
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Your example only applies if the funds that you used to purchase the annuity came from a non-qualified source. But as Rescueme stated if the funds came from a qualified plan (IRA/401K) then all distributions are fully taxable.
Yes, I agree. I wasn't specific.
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Old 06-05-2012, 10:52 PM   #80
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Again one has to understand the corporate legal structure, the holding company made the payments, not the underlying insurance subsidiaries. Legally the books do not consolidate for insurance purposes.
I agree, many people don't understand that insurance strictly follows the legal entity structure nor do they understand the limitations on the distribution of cash from an insurer to its parent.

But my post was in response to clifp's speculation that insurance companies were a huge beneficiary of AIG FP's payments to counterparties under their CDSs and the data indicated that was not the case.
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