2 Annuity Questions

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sdvan
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2 Annuity Questions

Post by sdvan » Thu Feb 14, 2013 8:47 pm

I am helping my 84 year old mother after my dad recently passed away. I just discovered that they have two annuities and I'm not sure what to do with them. I haven't bothered studying up on annuities because I was always turned off by the fees. Anyway, I'd appreciate any insights into these two annuities and recommendations for what to do with them. Both annuities were first purchased in 1988.

1. Dad's Flexible Annuity in rollover IRA: This appears to have a 4% floor of some kind (I seem to recall my dad saying something about that too). They are sending me the paperwork to rollover this IRA to my Mom. If there really is a 4% floor, in this environment that would be amazing. Can I keep the annuity and put it in an IRA for my Mom? If there really is a 4% floor, should I add more money to it? The annuity does have a "contract fee" from Ameriprise, but it is only $24/year. I suspect there are underlying fees that I can't see.

2. Mom's Fixed Annuity: My mom has a fixed annuity that appears to have a 3.5% interest rate guarantee. I can't see any fees on the statement. But, as an annuity novice, it seems strange to me that the annuity doesn't seem to have paid anything to my Mom in 2012. Of course, the balance went up at about 3.5%. Could that be right? Should I keep the annuity? If it is 3.5%, should I add money to it? Can I? Should I cash out? Any money cashed out would go to CD's. This annuity is in an aftertax account.

Thank you for any insights for an annuity novice.

Alan S.
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Re: 2 Annuity Questions

Post by Alan S. » Thu Feb 14, 2013 11:09 pm

Sorry to hear of your loss.

1) Assuming your father was over 70.5 when he passed, this IRA has an RMD requirement, which could be satisfied from this or another IRA if he had one. It should be rolled over to your mother's IRA, which would reduce the RMDs she will have to take, and make it possible for her beneficiary to stretch RMDs after she passes. Funds can only be added to this account if there are other IRA accounts your mother has to transfer into it, whether these were also inherited from your Dad or were hers all along. I'll assume there are no employer plans left that could be rolled over either. Meanwhile, Ameriprise must provide your mother with the 2013 RMD information, which depends on whether your father passed in 2013 or 2012. You might also find out if Amerprise requires this annuity to be annuitized due to her age or not. Either way, some sizeable taxable distributions will have to be distributed each year from here. This IRA annuity should not be cashed out or she will be hit with a large tax bill unless there is offsetting deductions. She cannot file jointly after the year your father passed, and that will increase her taxes.

2) Her NQ annuity is also subject to annuitization due to age depending on state law and/or insuror requirements, but it has not been annuitized yet if there is no 1099R for 2012. Find out from Ameriprise when this has to occur. Hard to say if she should consider adding to this annuity, as it depends on all kinds of variables with respect to her overall financial assets, need for LT care funding etc. If this is annuitized, part of each payment will be tax free as a return of her investment, if not annuitized any distributions come first from earnings and are fully taxable until the earnings are paid out.

By all means, she needs to update her beneficiaries on both these accounts ASAP.

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Dale_G
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Re: 2 Annuity Questions

Post by Dale_G » Thu Feb 14, 2013 11:38 pm

svdan, you have some digging to do to find out what these annuities are. The place to start is with the original contracts. If you can't find them the insurance company will provide copies.

If the contracts are 15 or 20 pages you should be able to figure them out. If they are 100 pages that is another problem.
sdvan wrote: 1. Dad's Flexible Annuity in rollover IRA: This appears to have a 4% floor of some kind (I seem to recall my dad saying something about that too). They are sending me the paperwork to rollover this IRA to my Mom. If there really is a 4% floor, in this environment that would be amazing. Can I keep the annuity and put it in an IRA for my Mom? If there really is a 4% floor, should I add more money to it? The annuity does have a "contract fee" from Ameriprise, but it is only $24/year. I suspect there are underlying fees that I can't see.
Only a partial response here: It appears that your mother is the beneficiary of this IRA. I am not an expert here, but since this is an IRA it can be rolled over to any provider. Your dad was undoubtedly taking distributions. You need to find out whether these distributions were based on some investment performance or whether he selected some fixed basis - and it could be a fixed 4% internal rate of return.

You need more info before doing anything, but do not let anyone do a "roll-over" into a different annuity.
2. Mom's Fixed Annuity: My mom has a fixed annuity that appears to have a 3.5% interest rate guarantee. I can't see any fees on the statement. But, as an annuity novice, it seems strange to me that the annuity doesn't seem to have paid anything to my Mom in 2012. Of course, the balance went up at about 3.5%. Could that be right? Should I keep the annuity? If it is 3.5%, should I add money to it? Can I? Should I cash out? Any money cashed out would go to CD's. This annuity is in an aftertax account.
Mom's annuity is probably easier. The guaranteed interest rate was set at the time the contract was issued, so it could very well be 3-1/2%. Since your mom did not receive any payments, it appears that she has not "annuitized" - that is she has not selected any payment option. She probably has a lot of choices. The choices will be listed in the contract.

Do some investigating and come back when you have more info.

Dale
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MN Finance
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Re: 2 Annuity Questions

Post by MN Finance » Thu Feb 14, 2013 11:47 pm

Likely dad's "floor" is only meaningful to annuitization or a death benefit, not a return number that you can just "get" but mom's is probably what it sounds like, a fixed return product.

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mephistophles
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Re: 2 Annuity Questions

Post by mephistophles » Fri Feb 15, 2013 12:01 am

Looks like you "might" be dealing with fixed, deferred annuities. Guaranteed interest rates of 4% were not at all unusual for older investments of this type. The earnings should be added to the investment each year. This would be real interest and not any sort of internal calculation. In an IRA annual required minimum distributions would have been required.

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sdvan
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Re: 2 Annuity Questions

Post by sdvan » Fri Feb 15, 2013 3:10 pm

Thanks everyone. I have requested the contracts for both annuities. They are looking . . .

My father passed in 2013 so we have this year as married filing jointly. But, I have been rolling over all of my dad's IRA's into IRA's for my mom--either newly created at the same financial instituation or in her existing IRA at the same financial institution. She doesn't need the money in these IRAs now and I don't think it makes sense to take the tax hit. She is the beneficiary of all of my dad's IRA's and we are updating the beneficiary information on her IRA's. My dad was taking RMD's out of this annuity IRA at Ameriprise. But, that was the only distribution that I can find. It doesn't look like my Mom has taken any distributions.

As an annuity novice, I did not understand that you could have an "annuity" and not receive regular payouts. Learn something new every day. Once I have the contracts, I'll obviously have a much better idea regarding the options available for both annuities.

DickBenson
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Re: 2 Annuity Questions

Post by DickBenson » Fri Feb 15, 2013 8:25 pm

sdvan wrote:She doesn't need the money in these IRAs now and I don't think it makes sense to take the tax hit. She is the beneficiary of all of my dad's IRA's and we are updating the beneficiary information on her IRA's.
Don't wish to add to your concerns, but there are some reasons why, even at this late date, she might want to take the tax hit on your father's IRA now by starting to convert it into a Roth, especially if she does not need the RMDs for living expenses. Some of the reasons many of us have done so is to avoid the taxation of social security benefits, provide a better inheritance, keep a growing tax-free investment account rather than a decreasing tax-deferred account, etc.

She might be able to do some conversion at a lower 10 to 15 percent rate this year while filing a joint return. The tax rate is likely to go much higher when filing a single return. And perhaps an even more important concern is that the rate likely will be much higher for any beneficially of that IRA.

It might be wise for you to seek some advice from a fee-only financial advisor who deals with the issues and accounts of elderly clients.

Dick

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Re: 2 Annuity Questions

Post by bsteiner » Sat Feb 16, 2013 6:36 pm

She might also discuss the Roth conversion with the attorney handling her husband's estate. The attorney should have already raised the issue with her.

The original poster didn't provide any specific information, but in general the Roth conversion makes sense to the extent the tax rate on the conversion is less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions.

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sdvan
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Re: 2 Annuity Questions

Post by sdvan » Sat Feb 16, 2013 8:25 pm

I hadn't thought about the Roth conversion. She has a few IRA's so the issue could cover more than one account. Obviously, she is at the stage where she can take out as much of the IRA that she wants without a penalty. So, the only question is whether it is worth taking the tax hit now for tax free appreciation later. I'm not sure how to quantify that balance. Obviously, I'd rather not use assets now to pay the taxes. That would effectively advance a liability that could be deferred for many years until her death (or later if I understand the rollover to beneficiary laws). So, my instincts are to avoid advancing the time to pay the taxes. Can you help me understand the benefits to my Mom of making the switch now? thanks.

bsteiner
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Re: 2 Annuity Questions

Post by bsteiner » Sat Feb 16, 2013 8:38 pm

It's difficult to quantify the benefits. You would have to make some assumptions as to investment returns in the IRA, after-tax investment returns in the taxable account, income tax rates, estate tax rates.

To take a simple example, assuming a constant 30% tax rate. You have a $100 traditional IRA and $30 of cash in your taxable account. You convert and use the $30 cash to pay the tax on the conversion. You now have a $100 Roth IRA. Over some period of time it grows to $200, which you or your beneficiaries withdraw tax-free. Your twin brother doesn't convert. His $100 traditional IRA grows to $200. He or his beneficiaries withdraw the $200, pay $60 income tax, and have $140 left. He also has his taxable account. However, his taxable account grew to something less than $60, since he paid tax each year on the income and gains.

Other benefits of the Roth conversion include (i) no required distributions during lifetime, (ii) avoiding the double tax in a state having a state estate tax since the income tax deduction for the estate tax only covers the Federal, estate tax, (iii) better asset protection since more value is in the IRA, (iv) a Roth IRA is a more valuable asset to fund a GST exempt disposition, and (v) if you're providing for your children in trust rather than outright (which our clients do, to keep the inheritance out of the children's estates, and to protect against the children's creditors, including spouses), the tradeoff is that trusts reach the 43.4% bracket at $11,950 of taxable income. By converting to a Roth IRA, you avoid that issue as to the IRA benefits.

If you convert a large IRA all at once, the tradeoff is that it bunches the income. Unless you expect to remain in a high tax bracket forever, an alternative is to convert some each year, so as not to be in too high a bracket in any one year.

The lawyer handling your father's estate should be proactive on this. That's what you're paying him for, not merely to prepare the probate papers and the estate tax return.

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norookie
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Re: 2 Annuity Questions

Post by norookie » Sat Feb 16, 2013 9:41 pm

Good luck deciphering this.. :|
" Wealth usually leads to excess " Cicero 55 b.c

DickBenson
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Re: 2 Annuity Questions

Post by DickBenson » Sun Feb 17, 2013 8:59 pm

sdvan wrote:So, my instincts are to avoid advancing the time to pay the taxes.
This is a natural instinct, but it can have a negative influence. Perhaps the following interpretation may be of some help.

A Traditional IRA (TIRA) can be thought of as a partnership with the government in a profit making business (the government's share is the tax bracket you are in when you withdraw funds). Believe it or not, calculations can show that it also behaves as if both your share and the government's share are growing in a tax-free manner. Thus a conversion to a Roth can be looked upon as "buying out" the government's share and thus investing your funds (those used to pay the tax) into a tax-free investment, rather than investing or keeping those same funds in a taxable investment. Your net worth doesn't decrease as you now own "all" of the Roth account.

However, the main feature of this "partnership" is that your share of the TIRA will vary over time with your tax bracket. Thus you would want to "buy out" your partner when the tax bracket (cost) is as low as possible. For many of us this occurred in the period between retirement and the beginning of RMDs. For others it can occur while still filing joint returns, before willing it to a heir in a high tax bracket, etc.

Hope this hasn't added to any confusion about Roth conversions. There is some info in the WIKI on this topic and http://www.fairmark.com is another source (the latter also has a forum).

Dick

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Re: 2 Annuity Questions

Post by bsteiner » Sun Feb 17, 2013 10:52 pm

Thanks, Dick. You were able to explain the principal benefit of the Roth conversion better than I did.

Topic Author
sdvan
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Update With Contract Information

Post by sdvan » Wed Mar 13, 2013 6:54 pm

I finally received copies of the annuity contracts from Riversource. I don't totally follow the annuity tables. But, here are some details:

1. Dad's Deferred Variable Annuity in rollover IRA (now rolled over into Mom's name in a new IRA with Ameriprise):
Bought in 1988 with lump premium
Fixed Interest rate of 4% with option to invest in stock mutual funds at variable rate. Dad appears to have stuck with fixed interest rate throughout.
"Retirement date" was March 2023, not sure if that changes with rollover to Mom. Annuities start on the retirement date which can be changed with 30 days notice. I don't totally follow the annuity chart which doesn't have a row for an 85 year old. But, there are many options, including payments for life, for a set number of years, for joint life, etc. The Fixed annuity payment table goes up to age 75 and says that it is based on the 1983 mortality table with a 4% interest rate. The life income rate for a 75 year old female would be $8.14 per thousand per month. Rates go down from there based on certain years, etc.

2. Mom's Deferred Annuity
Bought in 1988 with lump premium
Fixed interest rate of 4% for first 20 years and 3.5% thereafter (now at 3.5%)
Retirement date is Feb. 2023. Annuities start on the retirement date which can be changed with 30 days notice. Again, I don't totally follow the annuity chart, but it has similar fixed options to my dad's annuity. The life income rate for a 79 year old female would be $9.66/per thousand/ per month. Rates go down from there based on certain years, etc.

My conclusion is that I can treat these accounts as savings accounts with fixed interest rates for the next 10 years. Then, I either withdraw all of the money or I start an annuity. I can also start an annuity now with either account. Once again, I'm not a big fan of annuities because at age 85, my Mom would be simply getting a return of principal for the first 8-10 years. Yes, she would get guaranteed income. But, she doesn't "need" the guaranteed income and it seems like a waste when she can guarantee 3.5% and 4% per year for the next 10 years and save her principal. I don't know if any annuity experts can tell whether the annuity rates in these two contracts are better or worse than the going rate? But, my simple math still tells me that my Mom wouldn't get any return for nearly 9 years on her annuity. Therefore, because she doesn't need the security or safety of the annuity payment, it seems like she is better off to treat both of these as savings accounts with fixed interest rates for the next 10 years.

For the IRA, I am thinking about using required distributions from my Mom's other IRA accounts (earning 1.85%) to pay the Ameriprise minimum distribution simply because of the difference between 1.85% and 4%. Of course, that means that in 10 years there will be more IRA to withdraw all at the same time. But, we can use that payment to offset the other IRA's for that year.

Anyway, thoughts and advice welcome! Thanks.

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sdvan
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Roth Response

Post by sdvan » Wed Mar 13, 2013 6:57 pm

I've been noodling the Roth issue. I now understand the tax savings. My Mom is on the edge of making this worth the effort. However, my siblings are VERY resistant to the idea. They keep asking why we would make Mom pay the tax now when we can pay it later if there is anything left when she passes. So, the most I can probably do is see if there is any room this year when my Mom is still paying as a joint, married filer, to move some to Roth at zero percent tax, or maybe at 10% tax if I can persuade my siblings. Can I move as little as $3K to a Roth? Can I move only a portion of an IRA to a Roth?

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mephistophles
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Re: Update With Contract Information

Post by mephistophles » Wed Mar 13, 2013 8:22 pm

sdvan wrote:My conclusion is that I can treat these accounts as savings accounts with fixed interest rates for the next 10 years. Then, I either withdraw all of the money or I start an annuity. I can also start an annuity now with either account. Once again, I'm not a big fan of annuities because at age 85, my Mom would be simply getting a return of principal for the first 8-10 years. Yes, she would get guaranteed income. But, she doesn't "need" the guaranteed income and it seems like a waste when she can guarantee 3.5% and 4% per year for the next 10 years and save her principal. I don't know if any annuity experts can tell whether the annuity rates in these two contracts are better or worse than the going rate? But, my simple math still tells me that my Mom wouldn't get any return for nearly 9 years on her annuity. Therefore, because she doesn't need the security or safety of the annuity payment, it seems like she is better off to treat both of these as savings accounts with fixed interest rates for the next 10 years.

For the IRA, I am thinking about using required distributions from my Mom's other IRA accounts (earning 1.85%) to pay the Ameriprise minimum distribution simply because of the difference between 1.85% and 4%. Of course, that means that in 10 years there will be more IRA to withdraw all at the same time. But, we can use that payment to offset the other IRA's for that year.

Anyway, thoughts and advice welcome! Thanks.
I think you have it figured out. Just use the fixed account of the deferred annuity as a savings account for as long as possible. Talk to the company and they may provide a choice of keeping it as a deferred annuity indefinitely, or for a longer time than the contract says. No need to ever enter the annuity pay-down phase.
ole meph

DickBenson
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Re: Roth Response

Post by DickBenson » Thu Mar 14, 2013 3:50 am

sdvan wrote:However, my siblings are VERY resistant to the idea. They keep asking why we would make Mom pay the tax now when we can pay it later if there is anything left when she passes.
A simplistic answer is that she can pay the tax at a lower rate (without decreasing her net worth) than they could on any inherited TIRA.

Your siblings reaction to paying tax now is not an uncommon reaction to a Roth conversion. However, it probably also is in your Mom's best interests to make her do the conversion (a no brainer at 0%, and almost a no brainer at 10% or even 15%). She could use her other taxable investments (or savings) for living expenses and watch her Roth investments grow at a tax free rate. And it certainly would be beneficial to you and your siblings to inherit a large Roth, as opposed to a TIRA diminished by RMDs.

If your siblings do not agree with my analogy of a TIRA as an investment "partnership" with the government, or that your Mom would not lose any net worth by paying the tax (she would "own" all of the Roth while she now only "owns" part of the IRA), then I would suggest that they talk with some financial advisors, or even talk to some mutual fund reps, about this issue of conversion.

Dick

bsteiner
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Re: 2 Annuity Questions

Post by bsteiner » Thu Mar 14, 2013 8:37 am

I'm not sure how many financial advisors understand the benefits of the Roth conversion. However, you should be able to find some articles on it. I've written on it for the Journal of Retirement Planning, and others have written on it for various journals. Or you could give them Dick Benson's and my explanations of it in this thread.

I would propose that she do the Roth conversion, but that after she's not around, when her assets are divided, that all of the benefit of the Roth conversion should go to you, and that they shouldn't share in it.

Topic Author
sdvan
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Re: 2 Annuity Questions

Post by sdvan » Thu Mar 14, 2013 1:49 pm

bsteiner wrote:I'm not sure how many financial advisors understand the benefits of the Roth conversion. However, you should be able to find some articles on it. I've written on it for the Journal of Retirement Planning, and others have written on it for various journals. Or you could give them Dick Benson's and my explanations of it in this thread.

I would propose that she do the Roth conversion, but that after she's not around, when her assets are divided, that all of the benefit of the Roth conversion should go to you, and that they shouldn't share in it.
I like the way you think! :-)

I did some rough calculations and if my Mom donates some of her IRA RMD to charity (she would otherwise donate cash) she could have $1,400.00 of IRA distribution left in the 0% tax bracket for this year only. I'm not sure if that is worth worrying about. But, I don't know if it is even possible to convert a portion of an IRA into a Roth IRA, particularly as little as $1400. Without the charitable contribution she doesn't have any 0% space left.

Thoughts on if this is worth the effort (assuming my siblings continue to oppose something bigger)?

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