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

[Tommyboy]

this is also my understanding.
MYGA that is converted at term to SPIA in my exploration have been both 5 and 10 year period certain only products. Those would throw off a combination of interest and return of principal throughout the term, thus spreading out the tax hit. My 1st MYGA doesn't come due till next year so I haven't done it yet but, I've had this confirmed.

 

[TickTock]

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.

Yes, until the principal has been completely returned - after that all further payments are fully taxed as ordinary income.

 

[ShokWaveRider]

I think you will find that the interest is returned first or as a combination with the non taxable portion. This would need to be confirmed, but it does make sense.

 

[Tommyboy]

MYGA - Interest is returned first.
SPIA - Payments come with both some interest and return of capital.

 

[Tracer]

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'.

I purchase two SPIA's around 14 years ago totalling $350,000 with after tax dollars. I've been receiving monthly payments from those insurance companies with both totalling about $25,000 per year. I've been taxed on only a little over $9,000 of those payments each year. I assume the difference is considered a return of principal. I'm 77. Based on the exclusion ratio, when will those payments become fully taxable.

 

[VanWinkle]

I purchase two SPIA's around 14 years ago totalling $350,000 with after tax dollars. I've been receiving monthly payments from those insurance companies with both totalling about $25,000 per year. I've been taxed on only a little over $9,000 of those payments each year. I assume the difference is considered a return of principal. I'm 77. Based on the exclusion ratio, when will those payments become fully taxable.

It is based on when all of your original purchase price has been returned through the monthly payments. It is usually in the 16-17 year range, but a call to your annuity provider would answer the question.

 

[Tracer]

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'.

It is based on when all of your original purchase price has been returned through the monthly payments. It is usually in the 16-17 year range, but a call to your annuity provider would answer the question.

How do they figure the "expected return" on these annuity contracts? The actual return would depend on how long I live as these contracts guaranty payments for the rest of my life, no matter how long that is. The real return on my initial investment increases every month I live and another payment is made to me.

 

[skyking1]

we have a non qualified one annuitizing now for a fixed period of XX months, and the exclusion ratio is applied evenly across the payments. They are withholding for us.

 

[TickTock]

I purchase two SPIA's around 14 years ago totalling $350,000 with after tax dollars. I've been receiving monthly payments from those insurance companies with both totalling about $25,000 per year. I've been taxed on only a little over $9,000 of those payments each year. I assume the difference is considered a return of principal. I'm 77. Based on the exclusion ratio, when will those payments become fully taxable.

This won't be exact, but it should be close:

$350k SPIA purchases
14 years * ($25k/yr - $9k/yr) = $224 principal already returned
$350 - $224 = $126
$126/ ($16k/yr) = 7.875 years remaining.

So, roughly 8 years.

 

[TickTock]

How do they figure the "expected return" on these annuity contracts? The actual return would depend on how long I live as these contracts guaranty payments for the rest of my life, no matter how long that is. The real return on my initial investment increases every month I live and another payment is made to me.

The insurance companies use actuarial age-of-death estimates as the major input in figuring out what rates to offer.

You're correct that actual return depends on actual date of death. Right now, with 14 years of $25 payments (which total your original outlay of $350), you're at 0% (ignoring time value of money) return.

 

[Tracer]

This won't be exact, but it should be close:

$350k SPIA purchases
14 years * ($25k/yr - $9k/yr) = $224 principal already returned
$350 - $224 = $126
$126/ ($16k/yr) = 7.875 years remaining.

So, roughly 8 years.

Thank you!

 

[Gonzo26]

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, shows you what part is taxable. I have a large amount of MYGA with after tax money. Do not believe I will be able to avoid issues in future with taxes. I may dump a few all in one year. Take the hit and not turn in any for a few years. Could have worse problems.

 

[Henry Lili]

One could also roll the maturing MYGA (principle and accrued interest)into a new one via a 1035 exchange. No tax is due. May help spread out the tax hit to a lower income year etc.