Income Annuities

[Dot57]

I am considering moving money I have in a Variable annuity into an Income Annuity that would give me a monthly income stream of $4837 until my death. Approximately 1/2 of the money would be taxable. I am age 66 and plan to wait until age 70 to take my social security ($4,000/mo). From my understanding, this would be a more tax advantaged way of handling my monthly expenses. Does anyone have any input? Downsides, other than inflexibility?

 

[SevenUp]

First reaction: don't let the tax tail wag the investment allocation dog.

If this is a Single Premium Immediate Annuity (SPIA) that you choose to buy (e.g., through ImmediateAnnuities.com or similar), it might be appropriate.

If you are being sold an annuity by a "financial advisor" it is very likely a good deal for the advisor but not for you.

 

[pb4uski]

I am considering moving money I have in a Variable annuity into an Income Annuity that would give me a monthly income stream of $4837 until my death. Approximately 1/2 of the money would be taxable. I am age 66 and plan to wait until age 70 to take my social security ($4,000/mo). From my understanding, this would be a more tax advantaged way of handling my monthly expenses. Does anyone have any input? Downsides, other than inflexibility?

More tax advantaged compared to what? Perhaps you are thinking of just withdrawals or a surrender of the variable annuity which are income first and principal second vs payments for life which are each partially income and partially principal.

Inflexibiity is the main downside. Once you start the life annuity that money is inaccessible for life (though technically you can sell your payments but that is a ripoff).

Also, you have inflation impact. If inflation is 2.5% annually in 20 years the monthly payments will have 61% of the buying power that the first benefit payment had.

The taxes may be able to be managed based on your tax situation. Many years ago I helped my BIL's mom get out of a fixed annuity at no tax cost... her only other income was SS so we calibrated the withdrawals so there was no tax... did part in late December and the remainder in January... by splitting the withdrawal in thi manner she was able to get out without incurring any taxes.

 

[Alex The Great]

I would go with dividend stock rather than annuities if you are OK with volatility. In particular qualified dividend which has lower tax. With appropriate stock selection, broad diversity and pretty much non-existent fees equities would outperform annuities in a long run.

 

[pb4uski]

I would go with dividend stock rather than annuities if you are OK with volatility. In particular qualified dividend which has lower tax. With appropriate stock selection, broad diversity and pretty much non-existent fees equities would outperform annuities in a long run.

Its a little too late for that Alex... the OP is already in a variable annuity and is just trying to figure out the optimal exit strategy.

 

[rmorris50]

No way to really know without knowing your complete financial picture, reviewing your existing VA contract, and what exact type of income annuity you may be moving it to.

If this and social security are providing your “base income” and you’d still have access to a good amount of other investments prob not a bad move to get the income annuity. If you’re locking up all your money then maybe not.

The answer could also depend on how actively you want to manage VA withdrawals and the taxes, where an income annuity makes it more predictable.

From your perspective what could go wrong with either approach? You know your financial situation best.

 

[VanWinkle]

You could delay the decision by doing a 1035 exchange into a MYGA at the same Insurance company handling the VA or another company if you prefer. This would give you 3-5 years at 4.5% interest with more flexibility than the SPIA would. At the end of that period you could annuitize the entire amount, or some lesser amount if your situation has changed. Just another option.

 

[pb4uski]

You could delay the decision by doing a 1035 exchange into a MYGA at the same Insurance company handling the VA or another company if you prefer. This would give you 3-5 years at 4.5% interest with more flexibility than the SPIA would. At the end of that period you could annuitize the entire amount, or some lesser amount if your situation has changed. Just another option.

If you did 1035 into a MYGA, I think you could withdraw up to 10% a year without surrender penalty and manage your taxable income.

 

[Dot57]

Thank you all for your thought provoking responses. (Did I mention how much I love this forum)? My main objective is to get an income stream that will fill the gap until I take Social Security in 4 years. I have been anguishing over how to best handle the variable annuity as it's now grown to $860k. It represents 40% of my investments but I am fortunate to be receiving an inheritance next year upwards of $2m. The timing is a bit unclear because its a land development sale. I like the idea of the income annuity for the short term but think I might regret the decision at some point. Does anyone have other suggestions on how to 'tax gracefully' get out of an annuity? The cost basis is $340k. My husband and I are both retired but have an income stream from a rental business so I don't foresee a future of low income.

 

[SevenUp]

Does anyone have other suggestions on how to 'tax gracefully' get out of an annuity?

Short of donating all the taxable withdrawals to charity, not much.

Are you past the surrender fee period?

If so, withdrawing each year up to whatever marginal tax rate you can stomach* and investing taxably (thus allowing favorable tax treatment on any future gains) the amount above what you need for living expenses may be the best you can do.

*This choice is similar to "how much Roth conversion should I do?" so some of the ideas and tools in Roth IRA conversion - Bogleheads may be helpful.

 

[Al18]

The MYGA conversion mentioned above sounds like a good plan. A MYGA acts similar to a CD. MYGA only locks you into the term of the MYGA (usually 3-7 years). MYGA lets you withdraw 5% to 10% per year, depending on the term. You could spend some of the money and roll the excess into a MM or online savings account. When the MYGA comes to the end of the term, you can roll it into a new MYGA or switch to a SPIA.

860K is a lot to keep with one insurer, considering most State Guaranty associations will only guarantee between 100K to 250K.

 

[bada bing]

My main objective is to get an income stream that will fill the gap until I take Social Security in 4 years.

I don't have any tax strategies, just a comment about income annuities. Conventional wisdom is to look at lifetime income annuities as insurance as much or more so than an investment. You typically only insure against risks you can't or don't want to bear yourself, because insurance is relatively expensive in fees and expenses.

Including SS, do you need the full annuity to cover anticipated spending ? If you don't, I personally wouldn't annuitize the whole account. There are much better investments for excess funds than income annuities. I like the safety of an annuity and will be using one in addition to SS. But only to cover my intended basic expenses.

 

[Gumby]

Are there any annuity calculators not connected to an annuity provider? I just want to do the calculation, not "be contacted" or "get a quote".

 

[VanWinkle]

Thank you all for your thought provoking responses. (Did I mention how much I love this forum)? My main objective is to get an income stream that will fill the gap until I take Social Security in 4 years. I have been anguishing over how to best handle the variable annuity as it's now grown to $860k. It represents 40% of my investments but I am fortunate to be receiving an inheritance next year upwards of $2m. The timing is a bit unclear because its a land development sale. I like the idea of the income annuity for the short term but think I might regret the decision at some point. Does anyone have other suggestions on how to 'tax gracefully' get out of an annuity? The cost basis is $340k. My husband and I are both retired but have an income stream from a rental business so I don't foresee a future of low income.

You can take the non-basis amount and split it over 4 years but that sounds like an additional 125K a year in taxable income. The other thought is what may happen when the current tax law sunsets in 2025/26. You may be taking the money at a higher rate at that time, so maybe take it in 3 years instead of 4. This would all be capital gains instead of ordinary income outside of the VA package you own. That is often overlooked disadvantage of the VA product in a non-qualified account. Wish I had a better idea, but charity would be the only other way I know about. Might be worth a CPA's opinion?

https://www.marottaonmoney.com/2026-tax-cliff-on-horizon/

 

[rmorris50]

An 860k VA I am assuming is a pretty old VA. Really understand what guarantees and benefits you would be losing by surrendering the policy and moving the money. Old policies can have great benefits you may not be aware of.

I would probably just call the insurance company and have them set up an automatic monthly withdrawal to your bank account to start draining the policy. I don’t really see why you need to annuitize, esp with your inheritance. You really don’t seem at risk of running out of money.

The question will just be what the withdrawal rate should be, based on your total financial/tax picture.

 

[RetiredHappy]

Are there any annuity calculators not connected to an annuity provider? I just want to do the calculation, not "be contacted" or "get a quote".

immediateannuities.com does not contact you in order to get a quote.