Annuity Tax/penalty Question

[bentley]

I have a question concerning an immediate annuity. A 56/57 year old ER's and buys an immediate annuity using IRA money. This is for current income. It's understood that taxes will be due on the payout quarterly. Due to their age being under 59.5, will he also have to pay a 10% penalty?

I recently reached the 1.5mm mark, and am planning on pulling the trigger early next year. My FA suggests taking 30% of the 1.5mm and buying an immediate annuity to cover the basic costs of living.

Your thoughts/opinions are appreciated.

 

[73ss454]

Run Forrest Run!

 

[Rich_by_the_Bay]

That's a big chunk of your nest egg to put into a SPIA (and at a younger age than is common), but hopefully you have made that decision thoughtfully. Not saying it's bad or wrong but definitely runs counter to the usual, at least in this online community.

My understanding is that if you purchase the SPIA with qualified money and begin withdrawals before the age which would apply in the original IRA, you will pay ordinary income tax on the distributions received prior to age 59.5 as well as penalties on the amount distributed before you attain that age. But note that certain 401k's and 457s have different minimal ages for penalty-free withdrawals, so read the fine print.

I'd check with your accountant before you make that decision - it could be an expensive mistake. Any reason you can't tell your advisor to cool his jets, wait til you're 60 and decide then?

 

[RockOn]

I have a question concerning an immediate annuity. A 56/57 year old ER's and buys an immediate annuity using IRA money. This is for current income. It's understood that taxes will be due on the payout quarterly. Due to their age being under 59.5, will he also have to pay a 10% penalty?

I recently reached the 1.5mm mark, and am planning on pulling the trigger early next year. My FA suggests taking 30% of the 1.5mm and buying an immediate annuity to cover the basic costs of living.

Your thoughts/opinions are appreciated.

I don't think you will have to pay the 10% penalty, somebody wll surely help you with that question. The 30% plan seems to be in line with some current FA thinking although many do not like annuities at all.

I have another annuity question. If I have a Variable Annuity, can I do a 1035 exchange into a SPIA? How about something like Variable Life?

Thanks, in advance.

 

[kaneohe]

If the annuity is held within the IRA, don't the payments meet the requirements for 72t
and therefore won't be penalized the 10%? Sorry....for some reason couldn't copy and paste the URL, but try googling something like : immediate annuity IRA early distributions penalty".

 

[frayne]

Consider a 72T, maybe ?

 

[bentley]

found this;
Annuity Purchase and Avoiding 10% Tax Penalty by Meeting the "Substantially Equal" Test


anyone care to interpret?

 

[kaneohe]

Early Withdrawal (Pre 59-½) Penalty Tax Exceptions and Annuities

Try this one......I think it says no penalty.

 

[Peter L]

I have a question concerning an immediate annuity. A 56/57 year old ER's and buys an immediate annuity using IRA money. This is for current income. It's understood that taxes will be due on the payout quarterly. Due to their age being under 59.5, will he also have to pay a 10% penalty?

I recently reached the 1.5mm mark, and am planning on pulling the trigger early next year. My FA suggests taking 30% of the 1.5mm and buying an immediate annuity to cover the basic costs of living.

Your thoughts/opinions are appreciated.

If you take systematic withdrawals over your life expectancy (the IRS defines your LE) you may avoid the 10% penalty. I use this for some of my clients.

 

[bentley]

That's a big chunk of your nest egg to put into a SPIA (and at a younger age than is common), but hopefully you have made that decision thoughtfully. Not saying it's bad or wrong but definitely runs counter to the usual, at least in this online community.

My understanding is that if you purchase the SPIA with qualified money and begin withdrawals before the age which would apply in the original IRA, you will pay ordinary income tax on the distributions received prior to age 59.5 as well as penalties on the amount distributed before you attain that age. But note that certain 401k's and 457s have different minimal ages for penalty-free withdrawals, so read the fine print.

I'd check with your accountant before you make that decision - it could be an expensive mistake. Any reason you can't tell your advisor to cool his jets, wait til you're 60 and decide then?

Thanks for the input from eveyone.
Rich; I have the majority of my retirement money in tax sheltered instruments; IRA, 401k, roth, etc.. Naturally, I am wanting to avoid any 10% penalty, but also did not want to do a 72T if possible. I saw the annuity as a possible way around that. After reading all the posts, and a few links, I'm still unsure. I agree that it could be an expensive mistake, so when I get ready to pull the trigger, I'll check with my CPA first.

Our 401k 'plan' (the plan) does not allow periodic distributions. You have one chance to get money out of it sans penalty, and at the same time, you have to roll over the balance.
I am looking closely at a joint life annuity with a 20 yr minimum distribution. I acknowledge that it's not the best return, but it does bring stability to my income stream.
How are other ER's under 59.5 getting their income? Is most everyone using the 72T ? Or did they do a better job of saving after tax money?

Thanks again everyone.
b

 

[Peter L]

You can roll funds from your 401k (etc) to a Lifetime Income Annuity and satisfy the 72t distribution issue and not pay the 10% penalty.
Once you elect the payout schedule it's fixed. The bad news is you can't change it. The good news is it can't change due to bad economic situations. It's a guaranteed income stream.
You can't use a joint income annuity since it's qualified money.
Using part of you capital to create a guaranteed lifetime income stream might make sense for part of the money in the overall plan.

Peter in Boston

 

[Rich_by_the_Bay]

How are other ER's under 59.5 getting their income? Is most everyone using the 72T ? Or did they do a better job of saving after tax money?

Can't speak with any numbers here (might make an interesting poll) but my impression is that most under age 59.5 rely on after-tax income, defined benefit plans, spousal or own part-time income, etc.

 

[rs0460a]

How are other ER's under 59.5 getting their income? Is most everyone using the 72T ? Or did they do a better job of saving after tax money?

Retired a few months after turning 59. Purchased 28-year guaranteed term SPIA with 10% of our then current retirement portfolio value at age 59.5 (portfolio is all tax-deferred) so the 10% penalty never came up. Have very little after tax $$$ (other than Roth's, but probably will never touch those).

As to the question of "buying early", in our case, SPIA acts like a "short term gap insurance". That is, I'm not as much concerned about loss due to inflation, but rather as a way to delay my SS for 11 years (till age 70) when my SS will be "worth" 2.5x my wife's (taken at her age of 62). The SPIA acts as a pension for this period of time, and to ensure my DW get's the maximum SS benefit (assuming I pass first).

If I die first, my DW continues to get the monthly payment; if we both pass before the 28-year period is up (now 27 years), remainder payments (or lump sum, with all remaining payments) goes to our estate. If either/both live beyond the 28 year guarantee period, the payments continue.

- Ron

 

[Peter L]

The critical issue ER's needed to consider is longevity. Right now the probability that a Couple both at 65 will have one member living into their 90's is 90% +.
Figuring out income now, in ER, is one thing. Having it last 40 years is another.

 

[2B]

Annuities are mathmatically inferior to the return you can expect with a conservative, diversified, asset allocated portfolio. Your FA will certainly appreciate your $500K purchase because he can use the ~$25K for his kid's college tuition. Now he'd make even more with a variable annuity. I'm surprised he didn't suggest one.

I understand the attraction of "income for life" but it comes at a steep price. I don't recommend you sink your money into a SPIA at all and definitely not at your tender age. Your purchasing power will plummet as inflation eats into your payout.

If you can't stand the temptation, price an "equivalent" option from Vanguard's website. They are still an inferior product not worthy of being called an investment but their fees are significantly lower than what you'll probably stumble upon from the typical FA.

Remember you are buying an insurance product. The minute you sign on the dotted line your money is gone.

 

[Finance Dave]

How are other ER's under 59.5 getting their income? Is most everyone using the 72T ? Or did they do a better job of saving after tax money?

I'm not ER'd yet...but plan to in about 6 years at age 52. I have been saving in After-Tax (AT) accounts to allow for ER without having to get into 72t (although I have absolutely no issues with 72t...just a bit complicated if you can avoid it).

For me the saving grace is that my wife is 4 years older than me. We plan to work part-time in relatively low-wage jobs for fun...I'm sure you've heard the term "rehirement". If we make even $40k/year (gross) combined doing this vs. our current $160k/year (gross), it will help a lot. In addition we have AT savings, and as soon as my wife is 59 1/2 we can get to her 401k without penalties.

Added note: We plan to have about $150,000 in AT money at my age 52. Not a huge amount, but enough if spread over 4-5 years along with the part-time work.

Dave

 

[Khan]

Thanks for the input from eveyone.
Rich; I have the majority of my retirement money in tax sheltered instruments; IRA, 401k, roth, etc.. Naturally, I am wanting to avoid any 10% penalty, but also did not want to do a 72T if possible. I saw the annuity as a possible way around that. After reading all the posts, and a few links, I'm still unsure. I agree that it could be an expensive mistake, so when I get ready to pull the trigger, I'll check with my CPA first.

Our 401k 'plan' (the plan) does not allow periodic distributions. You have one chance to get money out of it sans penalty, and at the same time, you have to roll over the balance.
I am looking closely at a joint life annuity with a 20 yr minimum distribution. I acknowledge that it's not the best return, but it does bring stability to my income stream.
How are other ER's under 59.5 getting their income? Is most everyone using the 72T ? Or did they do a better job of saving after tax money?

Thanks again everyone.
b

I took an early retirement offer at age 54. First year pension: ~$25000. Increased to ~$30000 second year of retirement. Still spending less than the pension.

 

[rs0460a]

I took an early retirement offer at age 54. First year pension: ~$25000. Increased to ~$30000 second year of retirement. Still spending less than the pension.

What's a pension?

- Ron

 

[Finance Dave]

What's a pension?

- Ron

pen·chant

Audio Help /ˈpɛn

tʃənt; Fr. pɑ̃ˈʃɑ̃/ Pronunciation Key - Show Spelled Pronunciation[pen-chuh

nt; Fr. pahn-shahn] Pronunciation Key - Show IPA Pronunciation –noun a strong inclination, taste, or liking for something: a penchant for outdoor sports.
[Origin: 1665–75; < F, n. use of prp. of pencher to incline, lean < VL *pendicāre, deriv. of L pendére to hang

]


Oh wait...that's not right.

 

[Peter L]

Early retirement was never part of the thought process when the government began in the 1970's setting up what's become the big variety of tax qualified retirement vehicles. Hence the delema here.

Producing income from retirement money prior to age 591/2 will have a cost. The most significant cost is the opportunity lost of allowing it to grow tax deferred.

The expensive mistake of one using a an immediate income annuity is the loss potential for future growth. The benefit is that you're not suseptible to market corrections, especially if you have to draw down income during those corrections. If you choose the correct payout choice you, or your hiers, always get at least all your money back. If you live long enough, perhaps twice your money back. Check the accumulted payouts into age 90's. Lots of boomers will live well into their 90's.

The other portion of your capital needs to grow. Thus, the well divisified portfolio. But as evidenced by the past 9 months, even well managed diversified portfolios have tanked. So, if you were drawing down money for income from from a declining portfolio since last summer you'd be taking money at substantially less than you originally paid for it.

There's a need for both guarantees and monety at risk for growth.

 

[rs0460a]

The expensive mistake of one using a an immediate income annuity is the loss potential for future growth. The benefit is that you're not suseptible to market corrections, especially if you have to draw down income during those corrections. If you choose the correct payout choice you, or your hiers, always get at least all your money back. If you live long enough, perhaps twice your money back. Check the accumulted payouts into age 90's. Lots of boomers will live well into their 90's.

The other portion of your capital needs to grow. Thus, the well divisified portfolio. But as evidenced by the past 9 months, even well managed diversified portfolios have tanked. So, if you were drawing down money for income from from a declining portfolio since last summer you'd be taking money at substantially less than you originally paid for it.

There's a need for both guarantees and monety at risk for growth.

By George, I think he get's it ...

(BTW, my 28-year guarantee SPIA will pay 2x my initial "purchase price" - more if I/DW live longer).

Again, we still have (at the time) 90% of our portfolio "working for us" as a long term return vehicle. However, in the "short term" (the year since we purchased the SPIA) we certainly look like we know what we were doing in this down market ). Of course, when the market returns to normal (as we all know it will) in the future, and people say that we were "dumb" to get an SPIA, I can always point to the fact that our 90% is still "beating the pants" off of other investments (including SPIA's).

No wonder the only table game I play at the casino is roulette (spit the bet - never go for the straight number, even at 35-1 odds ).

- Ron

 

[Peter L]

I'm just finnishing a book, fiction, about a Vet returning to Nam 40 years after.
He spent time at Tan Son Nhut, Quang Tri - 68 and 72. Good mystery, drama, espionage.
By Nelson Demille "Up Country"
I'm 62-didn't serve-lived through turmoil here-support VVA forever
thanks
Peter

 

[2B]

The problem with any SPIA is that it has a substantial financial discount over self-annuitization with laddered CDs and high quality corporates. The only way you "win" with a SPIA is to substantially outlive your mortality table. Most require about 5 to 10 years no matter how you cut it.

From my perspective, you are better waiting until you see how your health is when you are approaching 70. If you are in primo condition, an annuity might be a reasonable gamble and your payout would be much higher than if you buy one in your 50's.

 

[rs0460a]

From my perspective, you are better waiting until you see how your health is when you are approaching 70. If you are in primo condition, an annuity might be a reasonable gamble and your payout would be much higher than if you buy one in your 50's.

That means that I would have had to wo*k longer, rather than retire at 59. Since it is a type of "insurance", in reality it made sure that my lifestyle (income) was taken care of for the period of my/DW's life that I wanted. Unlike "life insurance" (paid after you die) this is truly life insurance - taking care of us while we're still alive .

Yes, I may have probably gotten by without an annuity for the 11 year period till I drew SS (ages 59-70), but this made it much easier to plan for my "early age retirement income". Additionally, since it only "consumed" 10% of our (at that time) retirement portfolio, it left the rest of our retirement assets "in place" to take care of our "later life".

This is "real life " - not what you "could/should do in the best manner (according to the pundits)" and I can tell you, in our situation, it works well. For us, that's all that counts. It is not a "gamble" (your words) but a vehicle to provide an uninterrupted stream of income for a specific time (e.g. "gap insurance" till SS). I'm not out to "win" (your words) anything other than a current, stable income stream. Additionally, DW/I are leaving our remainder estate to charity (other than funding a SNT trust for our disabled son) so we're not looking to necessarily looking for the "big bang" to pass on to a subsequent generation.

Does it makes sense for you? Don't know - don't care. All I know that it makes sense in our life (especially in these investment "trying times"). If you have another way to "live your life", feel free to do so.

The OP's question was to how to get retirement income below the age of 59.5. My original answer was to add some "real life" information on an "early life purchase" of an SPIA. Nothing more - nothing less.

- Ron

 

[2B]

That means that I would have had to wo*k longer, rather than retire at 59.

I don't see how it would have required you to work longer than you did. You might have even been able to FIRE sooner because a self-annuitized cash stream is higher than you can get from an insurance company.

If you were only interested in an 11 year gap, then I can't see why anyone would actually purchase an annuity. I'm planning on having one in place to bridge to age 70 for SS.

The question of "income for life" is more psychological. Studies have shown (one is referenced on the Retire Early Home Page as I type) that annuities "cost" more than one would expect given the prevailing interest rates and mortality data. Of course, that's where those big insurance building come from. Many people like the feel of a monthly check in retirement. I'm going to get several myself. It's from a pension which for us non-COLA'd types is the same as a SPIA. I can start mine whenever I want but the amounts continue to increase slightly for every month I delay.

I'm not bashing you for getting an annuity. You're already committed and you can't get your money back even if you changed your mind. You also only put 10% of your net worth into one. His FA is looking at 30%.

I just want to make sure that anyone getting "sold" on a mega-sized annuity at his tender age carefully looks at the equivalent IRR.