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Old 10-21-2021, 10:22 AM   #81
Recycles dryer sheets
Join Date: Sep 2021
Posts: 118
Originally Posted by Dot57 View Post
I purchased a variable annuity from my FA about 20 years ago as a tax shelter. It is now nearly 1/3 of my portfolio at $800k. The cost basis is $360k. I switched FAs and they moved the annuity into a Vanguard product to minimize expenses. The FA advised that I also change the allocations in the annuity to 100% bonds to reduce the growth rate as much as possible. His logic was that I should begin selling off portions each year and reinvest so it would be all Ďconvertedí when I reach 70 1/2 and need to begin taking withdrawals from my IRA. I did not heed that advice and have instead been rolling over IRA money each year into a Roth. Last year I left the FA and am self managing my portfolio via Index funds. Vanguard sold off the annuity to TransUnion and Iím unclear what my strategy should be with this annuity. I turn 65 next year and am still earning income and donít anticipate needing the money in that annuity. Iím considering leaving it in there for my kids to deal with after Iím gone. What are some other recommendations?

Not enough info to make a recommendation. 1st question might be why you declined to take advice to change allocation & convert the VA. Depending on your/heirs tax situation, possibly good decision based on what you have to navigate through over next 7-8 years: changing tax law (if nothing else bracket/rates reverting in 2026), IRMAA, start of social security if not already, RMDs (now at 72 instead of 70-1/2).

If you leave to kids, they won't get basis step-up & will have 10 years to close it out, paying ordinary income tax rates on earning. BTW, due to higher fees, less choices in investments, most VAs will under perform relative to taxable account or ira.

One suggestion to consider though; essentially re-think taking the advice. You should double check this as you go as different providers may have some unforeseen wrinkles. I would suggest doing a 1035 exchange on part of VA into a myga. For example using your numbers, you might convert 10% to a 1 year myga now. That myga would start at $80k, with $36k in basis. When the myga comes due, cash it out & pay income tax on $44k plus myga earnings. That is, you get use of the $36k now without having to pay tax now. This is different than if you took a $80k distribution. You could consider doing a ladder or wait until interest rates might be better. Even if the entire amount isn't converted, it would lower your rmd & might still leave kids with more. It will have result in you having more taxable income and ongoing taxes (but perhaps at qdi/cg rates & eligible for basis stepup later)

Good luck in your decision!
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