Simple question re: annuity

[imoldernu]

No big deal, but thought it needed some other opinions. Jeanie and I are in different camps.

Involves a simple annuity, that started in 1984, when jeanie received an $8000 annuity when her mom passed away. In the beginning the interest rates were really high, in the 11%+ range, but gradually reduced to the current minimum of 4%.

Here'[s where it stands today:
Total annuity value. $65K
Surrender value $56K
If we take the annuity today, It will pay $701.01 per month for 10 years.

If we leave it, and don't do anything, the surrender value grows at 4%.

Now... here's the small question... Since we retired, in 1989, our income/outgo balance has kept us under the income tax limits, so no income taxes. I still file, (but don't have to) just to stay out of any possible trouble.
Should we take the monthly pay out, or just leave it for the capital to grow at 4%.

Currently in the slowdown period of life at age 82, we don't have high expenses, and strange as it seems, no real needs or even wants.

So... no big deal, but thought it might be an interesting question.

 

[pb4uski]

$701.01 for 10 years for $56,000 seems too good to be true.... payments of $84k vs surrender value of $56k if taken in cash today.... that is a 9.8% internal rate of return. (IRR is 5.5% based on $65k annuity value). I assume that if she were to die before the end of the 10 years that the remaining payments would go to heirs.... right?

The $701.01/month would probably be mostly or all taxable so would increase your income by $8,412/year at most. You could add that to your last year's taxable income and see if the added income might be subject to tax.

 

[imoldernu]

$701.01 for 10 years for $56,000 seems too good to be true.... payments of $84k vs surrender value of $56k if taken in cash today.... that is a 9.8% internal rate of return. (IRR is 5.5% based on $65k annuity value). I assume that if she were to die before the end of the 10 years that the remaining payments would go to heirs.... right?

The $701.01/month would probably be mostly or all taxable so would increase your income by $8,412/year at most. You could add that to your last year's taxable income and see if the added income might be subject to tax.

Thanks... That put into context what I was fuzzily thinking. We're right on the edge of taxable income, so it looks like the tax on the $8400 would be about $1000.

Re: the heirs... I'm not sure. The 12 page contract is too hard for me to understand, but from what I thought in the beginning, the remainder that would would go back to the heirs, would be based on the remaining cash out value... not the pay out. If that happened, then the inheritance tax would end up around 35%. To put a fine edge on that, if the payout by month went for 5 years,
8400 X5 =42,000 less 5,000 taxes =37,000.
65,000 current annuity value, less 5 yr payout of 42,000, equals $23,000 which would go to heirs and be taxed at an estimated 35%, leaving $14,000.

If that's right, after 5 years, the total "spendable value" would be $37,000 plus $14,000 or a total of $51,000.

Yes... before anyone says.. nitty gritty on such a small amount. My thought went beyond our own situation to what might be the case for someone buying an annuity today... Obviously at a much, much higher initial cost.

Here's a calculator that might help in making a decision.
https://www.newretirement.com/services/annuity_calculator.aspx

 

[Jerry1]

If you want to leave the money to someone or some organization upon your passing, I would continue to let it grow at the 4%. Wouldn’t it pass at the current value tax free? If you want to give it to charity, maybe you could find a way to donate the payments to them while living so you get the benefit of seeing the money being used. Unfortunately, You likely can’t just take the payments and then write a check for the same amount so it would be tax deductible, since you’re probably using a standard deduction.

If I don’t need the money, I like letting it grow. There may come a day when you do need it. Never know.

 

[Jerry1]

before anyone says.. nitty gritty on such a small amount.

It’s not a small amount. I remember sitting down with the Fidelity rep and the look on her face was precious when I told her my $40,000 annuity was something I didn’t really care about. That it was just something I bought because I wanted to understand annuities better. She said something like “only $40K? Some people don’t make that much in a year”. That’s went I felt we had a good rep. Unfortunately, she moved on.

 

[Texas Proud]

Just curious... why taxed at 35%?


Is the payout to heirs considered life insurance? My mom has an annuity that is growing at 4% and I just leave it since that is a good rate right now... but it has a life insurance component to it and as long as she does not take the money it will be distributed as life insurance with zero tax.


BTW, the annuity is not in her name anymore... we moved it to a trust in '89...

 

[imoldernu]

Just curious... why taxed at 35%?


Is the payout to heirs considered life insurance? My mom has an annuity that is growing at 4% and I just leave it since that is a good rate right now... but it has a life insurance component to it and as long as she does not take the money it will be distributed as life insurance with zero tax.


BTW, the annuity is not in her name anymore... we moved it to a trust in '89...

Hmmm thanks...I didn't know about that... just assumed the tax rate was based on the total amount of the inheritance. I'm not very smart about these things. Back to the drawing boards. Will call the company.

 

[Texas Proud]

Hmmm thanks...I didn't know about that... just assumed the tax rate was based on the total amount of the inheritance. I'm not very smart about these things. Back to the drawing boards. Will call the company.

If you estate is big enough then you will owe estate taxes on it as long as you own it... when we put my mom's annuity in a trust a long time ago the estates were taxed at a much lower asset level...



Be aware that not all annuities have a life insurance component to them... we bought on that specifically had one so we would not have to pay income tax if it was never used...





https://www.elderlawanswers.com/make-sure-your-life-insurance-is-not-taxed-at-your-death-8296