Variable Annuity

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Driver
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Joined: Wed May 27, 2009 3:18 pm

Variable Annuity

Post by Driver »

I have a question regarding a MetLife VA that a friend purchased. The VA was purchased with after tax dollars. My friend is wanting the cash out the VA. The current value of the VA is less than the inital cost. Will my friend need to pay any taxes on this? I tried doing an search and read the wiki. I don't think any taxes would be due. There is a 6% penalty unfortunately, but I figure this worth paying for peace of mind and the reduction in ER. The plan would be to deposit the money into a CD/bank account and then have the friend open up a TIRA and do a Roth conversion. Any thoughts, comments or questions are welcome. Thank you for reading this.
patrick
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Re: Variable Annuity

Post by patrick »

You can't roll over from an annuity into an IRA, only to another annuity, so in this case you'd only be able to contribute from your earned income, up to the IRA limit, into the IRA.

The withdrawal should be tax free if the value is less than the basis (which is basically the amount contributed minus the amount already withdrawn). There is a 10% tax penalty for withdrawing before the year you reach age 59.5 but this only applies to the income, of which there is none if the annuity lost money. However, there are a few reasons you might not want to withdraw:

1. If the annuity provides a guarantee that currently benefits you, it may be best to keep the annuity with MetLife for a long time. This is more likely if the value has decreased significantly. For instance, it might guarantee that you can annuitize at a certain income level no matter what happens to the cash value, which may be a good guarantee to keep if the guaranteed level is significantly higher than you could otherwise obtain from the amount of cash value it has. It may require very careful analysis to figure out how useful the guarantees actually are.

2. If the penalty charged by MetLife is going to disappear or decline soon, it may be better to wait until this happens. You should compare the extra costs inside the annuity with the penalties to see when is the best time to leave.

3. Otherwise, it might be best to roll it over to a low cost annuity instead of withdrawing outright, because the value in the annuity can grow all the way back up to the original basis without being subject to any taxes at all.
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Mel Lindauer
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Re: Variable Annuity

Post by Mel Lindauer »

Driver wrote:I have a question regarding a MetLife VA that a friend purchased. The VA was purchased with after tax dollars. My friend is wanting the cash out the VA. The current value of the VA is less than the inital cost. Will my friend need to pay any taxes on this? I tried doing an search and read the wiki. I don't think any taxes would be due. There is a 6% penalty unfortunately, but I figure this worth paying for peace of mind and the reduction in ER. The plan would be to deposit the money into a CD/bank account and then have the friend open up a TIRA and do a Roth conversion. Any thoughts, comments or questions are welcome. Thank you for reading this.
No taxes would be due. Often, when you're looking at the longer-term, paying a surrender fee makes economic sense to escape the high costs.
Best Regards - Mel | | Semper Fi
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Driver
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Re: Variable Annuity

Post by Driver »

Patrick/Mel, thank you both for taking the time to answer. He's not comfortable with the volatility of the VA and it looks like the amount in the VA is above the state limits for insurance. I suggested that he cash out the VA. Put whatever he wants into cash/cd for now and use a portion to fund a TIRA (6k) and then do a Roth conversion.
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