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Cash in annuity when it matures?
Old 01-27-2021, 08:50 AM   #1
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Cash in annuity when it matures?

DW has a 10 year annuity that matures in 4 years, The options are:
1. Cash in the annuity when it matures and give the money to her sons

2 Do a 1035 exchange for a new one.
I ran the numbers through TT, and we would owe $24 K in taxes if we cashed it in.
Fortunately, we do not need the money, and I am leaning toward option 2. DW is 77, and if she passes, the sons would get the stepped up basis.
Comments?
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Old 01-27-2021, 08:54 AM   #2
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Unless her sons really need the money now, I would think it would be better to roll it over to a new MYGA and have them inherit it as beneficiaries and avoid the tax hit because of the stepped-up basis.

I suspect that there might be a window of time after they inherit it that they can withdraw the money without any surrender charges.
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Old 01-27-2021, 12:17 PM   #3
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In general (understanding that no one has read the annuity contract), when the sons inherit it must they jointly decide how to deal with the annuity (i.e. cash out, continue etc.....) or can one son decide to cash out his half and the other decide to continue his half? I realize that this is a general question and that the terms of any individual annuity can differ. My 85 year old inlaws have a number of annuities and with 4 sisters this issue will certainly arise.
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Old 01-27-2021, 09:20 PM   #4
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To those who have mentioned stepped-up basis, I have always been under the impression that such is not applicable to tax-deferred vehicles like annuities, IRAs, etc. Have I been missing something all these years?
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Old 01-27-2021, 09:30 PM   #5
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Quote:
Originally Posted by friar1610 View Post
To those who have mentioned stepped-up basis, I have always been under the impression that such is not applicable to tax-deferred vehicles like annuities, IRAs, etc. Have I been missing something all these years?

You are correct. I just did some research, and there is no stepped up basis on the appreciation of the annuity. However, given the choice of me paying taxes, or the survivor paying taxes, I will let the survivor pay them. They are probably in a lower tax bracket than I am.
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Old 01-27-2021, 09:45 PM   #6
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Yes, you are correct... I was going on what the OP had written and didn't think to verify it.

Another thing to remember about annuities is that they are income first and then principal.... so if you have $100k invested and it is worth $150k then the first $50k out is taxed and the following $100k is not taxed.... this is for a non-qualified annuity (taxable account).... if you have the annuity in a tax-deferred account then it is all income (assuming no basis/deductible IRA).
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Old 01-27-2021, 11:09 PM   #7
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4 years away is a long time away. Who knows what new options they will have or what the interest rates will be I would think you could just renew the annuity if they offer you a good rate. I would also do a MYGA and that my require a 1035 exchange.
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Old 01-28-2021, 07:08 AM   #8
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Oh yeah, annuities and basis. Generally, no step up. Survivors pay.

My Dad passed in '14. My siblings and I had options that spanned over 5 years regarding the annuity. I chose to continue deferral for 5 years, knowing I'd *probably* retire in 2018. And I did. So, '19 was a good year to absorb that income.
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