Managing One's MYGAs when AFTER TAX Moneys were use to purchase them. Tax Implications etc.

[ShokWaveRider]

This thread is for those with MYGAs and how they manage them when they were purchased with AFTER TAX money. This could be very problematic if one's MYGAs are part of one's withdrawal strategy.

This is not applicable to those who purchase their MYGAs with qualified funds (IRAs Etc.) as any withdrawal is subject to regular taxes regardless. Roths do not apply either as they are not taxable when money is withdrawn from them.

Depending on one's age and stage of their retirement, the returns could present a problem when taken out. With MYGAs any withdrawals are always interest first, principle second. So if one is not careful the interest can mount up, and if one wants to withdraw all the funds at maturity, could generate it's own Tax Torpedo.

What we do is take money (Interest accrued only) from our MYGA(s) annually in December, and use the money to prepay our Income "Estimated" taxes. Being very careful not to go below the original principle. This eliminates our need to do quarterly payments to avoid penalties. By December we have a good idea what our Income Tax burden will be and withdraw the funds, holding back the estimated taxes. We have Multiple MYGAs so this is easy to manage once a year and takes about a week till funds are received. We typically only have to withdraw interest from one or 2 contracts to satisfy our income tax commitments. We also are careful not to go over IRMAA levels. Any other withdrawals we may require are made from our after Tax bucket.

It would be interesting to see how others manage this.

 

[Livefree]

We have 3 (just signed for a new one today) @ Fidelity. We staggered the maturities so they don't come due all at once. This gives us more room to do Roth Conversions for the next few years.

 

[Al18]

That's a good plan. Only have one MYGA in an IRA. Probably do one in a taxable account this year, making sure the end dates are staggered. With many MYGA's, you can withdraw up to 10% per year to help manage your taxes. It's simpler than handling multiple CD ladders.

 

[Koolau]

Yes, our last MYGA withdrawal (taxable) threw us into IRMAA territory. I wasn't watching closely enough.

Thankfully, all other MYGAs are Roths!! Yay!!!

 

[pb4uski]

The interest first. principal second is the quid pro quo for tax deferral and makes managing annuities a little more challenging. Just thinking, can you at least partially sidestep interest first, principal second by annuitizing?

 

[Koolau]

The interest first. principal second is the quid pro quo for tax deferral and makes managing annuities a little more challenging. Just thinking, can you at least partially sidestep interest first, principal second by annuitizing?

I don't know but how would you know what is interest and what is return of principal?

 

[ShokWaveRider]

I don't know but how would you know what is interest and what is return of principal?

Ask the MYGA company. I do annually.

 

[Koolau]

Ask the MYGA company. I do annually.

Thanks!

I wonder if they would just send a form (1099??) or similar with that info?? I'd want something simple and easy to deal with tax-wise. Not looking for any more complication in my life.

 

[GenXguy]

It would be interesting to see how others manage this.

I have at least a few years left before I have to worry about it, but my plan from the beginning was to annuitize with fixed distributions over a period like 10 years, which is then NOT interest first, but a mix of principal and interest.

 

[ShokWaveRider]

Thanks!

I wonder if they would just send a form (1099??) or similar with that info?? I'd want something simple and easy to deal with tax-wise. Not looking for any more complication in my life.

They do AFTER you have done a withdrawal, by which time iti would be too late in my case for Tax Planning.

 

[TickTock]

We plan to leave the principal and interest in the MYGAs until after Medicare age. It's part of our ACA MAGI management strategy.

 

[TickTock]

As far as annuitizing, yes there is a return of principal involved that doesn't count as income. For example, if you buy a SPIA the IRS looks at their estimate of your average lifespan and how much the SPIA returns during that time. For example, if you buy a $100k SPIA and the expected return is $120, then 100/120 *100 = 83.3% of each payment is considered return of principal and therefore not income. (If you live past the expected age, then 100% of any future payments are income as all the principal has already been returned.)

ETA: The technical term for this is the 'exclusion ratio'.

 

[pb4uski]

I don't know but how would you know what is interest and what is return of principal?

It will be reflected on the 1099 that they provide to you at tax time. Nonetheless it is wise to be aware that withdrawals are interest first and principal second so you don't inadvertently end up with an unexpected huge tax due.

 

[Al18]

When you bought the annuity, you probably received a breakdown of how much interest was earned each year, along with the maximum penalty free withdrawal allowed each year.

 

[Dtail]

When you bought the annuity, you probably received a breakdown of how much interest was earned each year, along with the maximum penalty free withdrawal allowed each year.

I do get updates of interest earned from the period to the next period on the MYGA's. Since I don't take any principal out, it should be smooth at redemption.

 

[VanWinkle]

SO will have a MYGA mature Jan 2027 and we're thinking about a 15 year income annuity to spread the taxes over a 15 year period to take advantage of the exclusion ratio. She will just reinvest the proceeds in a taxable account as she doesn't really need the income. Another MYGA is also being considered if rates are still elevated compared to other interest bearing investments. IRS requires 10 year or longer income annuity to use the exclusion ratio.

 

[ShokWaveRider]

I will have to research and understand the exclusion ratio as this is the first time I have heard of it. I assume this is for qualified funds.

 

[VanWinkle]

I will have to research and understand the exclusion ratio as this is the first time I have heard of it. I assume this is for qualified funds.

This would only apply to non-qualified funds. Qualified funds are 100% taxable unless they include after tax contributions.

 

[ShokWaveRider]

This would only apply to non-qualified funds. Qualified funds are 100% taxable unless they include after tax contributions.

I looked it up, I get it. Applies to how much of the returns (Say an SPIA) are original non qualified distributions back to the owner vs accumulated interest distributions which are taxable. Usually Interest is taken first then non qualified funds.

 

[Tommyboy]

I have 3 mygas non qualified. Each expires in different years. First two are back to back years, the third is still 5 years out.. My plan was to roll into a 5 yr then a 10 year period certain SPIA. This spreads out the taxes and adds rocket fuel to our travel budget in early retirement.

 

[Mulligan]

Yes, our last MYGA withdrawal (taxable) threw us into IRMAA territory. I wasn't watching closely enough.

Thankfully, all other MYGAs are Roths!! Yay!!!

I was surprised to read that only about 7% of all Medicare recipients actually pay IRMAA. As I am not a wealthy person, and I will trapped in the throes of it when I turn 65. I just have to limit the damage and stay under the second level as it gets more painful each level broached.
Being single with a decent pension puts one right on the fringes out of the gate. MYGA’s are likely my only option, unless I want to hunt down every person I know and have them gift me IBonds with my money, ha.

 

[Koolau]

I was surprised to read that only about 7% of all Medicare recipients actually pay IRMAA. As I am not a wealthy person, and I will trapped in the throes of it when I turn 65. I just have to limit the damage and stay under the second level as it gets more painful each level broached.
Being single with a decent pension puts one right on the fringes out of the gate. MYGA’s are likely my only option, unless I want to hunt down every person I know and have them gift me IBonds with my money, ha.

Option 2 would be to marry a spouse who has little income.

By the way, is that gifting of I-Bonds a real thing? If it is, it just might w*rk.

 

[Mulligan]

Option 2 would be to marry a spouse who has little income.

By the way, is that gifting of I-Bonds a real thing? If it is, it just might w*rk.

I actually have that option! My lady of 20 years lives with me and is retiring soon. But things are going great the way they are, so I will focus on managing income over finding a marriage certificate, ha.
I have not gifted this year, but did the previous two years. And after the 5 day holding period was able to have them sent to me immediately. One needs to buy their limit first before receiving gifts or they count against your limit when received.
With my lady I gave her the highest amount of money one can give with out doing the IRS letter thing. Then she sent them to me in two transactions as each gift sent was limited to 10k per gift. The other friends just sent me the 10k. One friend I gave more but he botched it somehow, and could only do $10k and just sent me back the rest.

 

[Koolau]

I actually have that option! My lady of 20 years lives with me and is retiring soon. But things are going great the way they are, so I will focus on managing income over finding a marriage certificate, ha.
I have not gifted this year, but did the previous two years. And after the 5 day holding period was able to have them sent to me immediately. One needs to buy their limit first before receiving gifts or they count against your limit when received.
With my lady I gave her the highest amount of money one can give with out doing the IRS letter thing. Then she sent them to me in two transactions as each gift sent was limited to 10k per gift. The other friends just sent me the 10k. One friend I gave more but he botched it somehow, and could only do $10k and just sent me back the rest.

Cool! I had no idea.

 

[gauss]

The interest first. principal second is the quid pro quo for tax deferral and makes managing annuities a little more challenging. Just thinking, can you at least partially sidestep interest first, principal second by annuitizing?

Regarding nonqualified (ie not in an IRA) annuties:

My experience is that nonqualified life annuities do NOT follow the growth first, principal last taxation that nonperiodic annuities do.

I believe that a periodic life annuity applies the IRS "general rule" that prorates a portion of the principal to each payment and this ratio stays consistent over the life of the annuity.

So as pb4ruski points out, annuitizing (lifetime or any other form that uses the "general rule") will partially bring forward some nontaxable income and lower the taxable hit.

My instinct tells me, however, that the longer the term of the annuity (ie lifetime in the limit), the lower the amount of nontaxable income will be.

-gauss