At crossroads with Annuity

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calliecake47
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At crossroads with Annuity

Post by calliecake47 » Thu May 18, 2017 10:54 am

Trying to figure out what to do with a variable annuity that we purchased. To make a long story short, we believe it was a mistake to do this, but we were convinced by FA that it was essential to our plan. So here we are now…

Background
Husband age 62, I am 55
Current state NY
Anticipate taking SS at 70/64, annual SS income at that time 63k
Retiring within next 2 years and moving to state with no state income tax
401k eligible for roth conversion will be about 950K, starting in 2 years
Taxable accounts about 3000M
Roth accounts about 150K

Annuity – Variable, after tax
In husbands name
Current annuity value is 216k, with a 186k basis
Sales charge for early withdrawal $11k now, zero by the end of 2017
We are taking it out of where it is after penalty period is over, what to do with after that is what we’re trying to decide on.

Choices:
• Do a 1035 exchange to a lower cost fixed deferred annuity at Vanguard after sales charge period and leave it to annuitize later or sell it after
sales charge period (5 years?) is over at lower tax rate.
o Will lower fees by moving it to Vanguard
o Payout at husband’s age 70 of approximately 22k/year, when annuitized
o Could affect roth conversions
o Annuity income added to our SS income. When getting disbursements from annuity, total of SS and annuity would be 85k, plus
whatever RMDs we have from IRAs that didn’t get converted to Roth
• Cash out the annuity at the end of the year and take the hit on taxes now
o We will have to pay about 11K in taxes on the gain. However, the upside is that we can invest it as regular after tax and use tax loss harvesting,
etc.

We definitely know that we have to get it out of where it is now, but are torn between cashing it out and transferring it. How would you evaluate the tax issues of keeping an annuity that can affect future taxes? Are there any other options that I’m missing that should be considered?

Any assistance in helping to determine what would be the best scenario for us would be appreciated.

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nedsaid
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Re: At crossroads with Annuity

Post by nedsaid » Thu May 18, 2017 11:08 am

I think I would just do the rollover to a Vanguard Annuity.
A fool and his money are good for business.

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dodecahedron
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Re: At crossroads with Annuity

Post by dodecahedron » Thu May 18, 2017 11:24 am

calliecake47 wrote: Choices:
• Do a 1035 exchange to a lower cost fixed deferred annuity at Vanguard after sales charge period and leave it to annuitize later or sell it after
sales charge period (5 years?) is over at lower tax rate.
I am puzzled by this statement. Do Vanguard annuities have sales charges? I thought their lack of sales charges was one of their virtues.

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friar1610
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Re: At crossroads with Annuity

Post by friar1610 » Thu May 18, 2017 11:25 am

I have a few things in common with your situation. Exceptions are:
- spouse and I are older than you two
- annuity value is slightly higher
- basis is significantly lower
- it has always been a "low cost" VA, first with Fido and now with VG

If I could walk the dog back, I wouldn't have bought it. But I have it and am trying to make the most out of the situation.

Two thoughts for your consideration:
- How will your financial situation be if he predeceases you? If you do a 1035 to a cheaper annuity, it might be a good thing to have in your hip pocket if your income would otherwise drop significantly if you are the survivor. (I assume you are the beneficiary on the annuity.) I've justified holding onto mine because the SBP on my pension is only about 1/3 of what we get now. If I leave this earth first, she can annuitize to make up some of the shortfall.
- If you don't want to keep the annuity long-term, you could still do a 1035 to a better annuity and then draw it down over a several year period if that's more tax-advantageous; you don't need to take it all at once. And I would think you might want to wait until you move out from under NY's taxes.

As regards the first point, if she predeceases me, I won't need the income. So I will use the proceeds to make charitable donations (currently provided for in our estate plan) while I'm still alive. The non-annuitized withdrawals will be cancelled out by the tax deductions. If I give away enough to get back to the basis, I can then withdraw that with no taxes.

No perfect answers, but a few things to think about. Good luck.
Friar1610

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friar1610
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Re: At crossroads with Annuity

Post by friar1610 » Thu May 18, 2017 11:27 am

dodecahedron wrote:
calliecake47 wrote: Choices:
• Do a 1035 exchange to a lower cost fixed deferred annuity at Vanguard after sales charge period and leave it to annuitize later or sell it after
sales charge period (5 years?) is over at lower tax rate.
I am puzzled by this statement. Do Vanguard annuities have sales charges? I thought their lack of sales charges was one of their virtues.
Not on VAs, as I understand it. But for the SPIAs they sell, there is a 2% sales charge. I gather that this is standard for SPIAs.
Friar1610

informal guide
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Re: At crossroads with Annuity

Post by informal guide » Thu May 18, 2017 11:59 am

One clarification on Friar's good response regarding withdrawals from annuities- -I believe withdrawals from variable annuities are taxed as income first. so the only way you could spread today's $30,000 gain (unless you annuitize) is to take, say, $10,000 per year for the first two years . Then the third year you could withdraw the entire remainder, spreading the $30,000 gain - -ordinary income - over three years. As long as the owner is over 59.5, there are no tax penalties.

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friar1610
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Re: At crossroads with Annuity

Post by friar1610 » Thu May 18, 2017 3:33 pm

informal guide wrote:One clarification on Friar's good response regarding withdrawals from annuities- -I believe withdrawals from variable annuities are taxed as income first. so the only way you could spread today's $30,000 gain (unless you annuitize) is to take, say, $10,000 per year for the first two years . Then the third year you could withdraw the entire remainder, spreading the $30,000 gain - -ordinary income - over three years. As long as the owner is over 59.5, there are no tax penalties.
Good point.
Friar1610

bsteiner
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Re: At crossroads with Annuity

Post by bsteiner » Thu May 18, 2017 3:45 pm

The problem with continuing to hold it is that you continue to incur the fees, and you continue to convert the future qualified dividends, long-term capital gains and tax-exempt income to ordinary income.

Since the sales charge drops by 5% at the end of this year, you may want to keep it at least until then. At that point, you may want to compare cashing it in at that point, or waiting until you retire and move to the state with no state income tax.

Note that New York allows a $20,000 exclusion for retirement benefits after age 59 1/2, which will allow a small amount of Roth conversions free of state income tax.
Last edited by bsteiner on Thu May 18, 2017 8:37 pm, edited 1 time in total.

Johio
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Re: At crossroads with Annuity

Post by Johio » Thu May 18, 2017 5:58 pm

The annual fees are the killer. I had two variable annuities - a stupid decision. I got out of both after the surrender penalty timeframe was over. I was paying somewhere around 3.5% annually.

calliecake47
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Re: At crossroads with Annuity

Post by calliecake47 » Fri May 19, 2017 3:19 pm

friar1610 wrote:I have a few things in common with your situation. Exceptions are:
- spouse and I are older than you two
- annuity value is slightly higher
- basis is significantly lower
- it has always been a "low cost" VA, first with Fido and now with VG

If I could walk the dog back, I wouldn't have bought it. But I have it and am trying to make the most out of the situation.

Two thoughts for your consideration:
- How will your financial situation be if he predeceases you? If you do a 1035 to a cheaper annuity, it might be a good thing to have in your hip pocket if your income would otherwise drop significantly if you are the survivor. (I assume you are the beneficiary on the annuity.) I've justified holding onto mine because the SBP on my pension is only about 1/3 of what we get now. If I leave this earth first, she can annuitize to make up some of the shortfall.
- If you don't want to keep the annuity long-term, you could still do a 1035 to a better annuity and then draw it down over a several year period if that's more tax-advantageous; you don't need to take it all at once. And I would think you might want to wait until you move out from under NY's taxes.

As regards the first point, if she predeceases me, I won't need the income. So I will use the proceeds to make charitable donations (currently provided for in our estate plan) while I'm still alive. The non-annuitized withdrawals will be cancelled out by the tax deductions. If I give away enough to get back to the basis, I can then withdraw that with no taxes.

No perfect answers, but a few things to think about. Good luck.
I'm pretty sure I will be fine if he predeceases me whether it's in an annuity or not. We don't have any pensions except for SS. We would want to convert as much of our tIRAs as possible, so I wouldn't want to screw that up in lieu of keeping this as an annuity. Part of me wants to just bite the bullet and get rid of it as soon as possible at the end of the year and pay the tax, but I'm not sure that's the smartest thing to do.

calliecake47
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Re: At crossroads with Annuity

Post by calliecake47 » Fri May 19, 2017 3:22 pm

bsteiner wrote:The problem with continuing to hold it is that you continue to incur the fees, and you continue to convert the future qualified dividends, long-term capital gains and tax-exempt income to ordinary income.

Since the sales charge drops by 5% at the end of this year, you may want to keep it at least until then. At that point, you may want to compare cashing it in at that point, or waiting until you retire and move to the state with no state income tax.

Note that New York allows a $20,000 exclusion for retirement benefits after age 59 1/2, which will allow a small amount of Roth conversions free of state income tax.
That is what I'm trying to figure out. How would you go about figuring out the difference? Like what assumptions would you make to compare both scenarios?

itstoomuch
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Re: At crossroads with Annuity

Post by itstoomuch » Fri May 19, 2017 3:49 pm

Not enough info.
Why/reason for the purchase?
Do those reasons exsit today?
Do you believe that their are good chances that condition could exist again?
We have about 16 months before have to make your decision.
See notes below.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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powermega
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Re: At crossroads with Annuity

Post by powermega » Fri May 19, 2017 4:41 pm

I think the "easiest" decision would be to exchange the annuity to a low-cost annuity provider like Vanguard (there are others too). This has the effect of putting off your decision. I believe that this annuity could be best used to buy a SPIA/DIA to act as an additional pension with your SS income. That would allow you to convert more of your tax-deferred investments to Roth and not have to rely on them for living expenses as much.

If you do want to surrender the annuity, there should be a "free out" amount that you could withdrawal right now without any surrender charge. Withdrawals from an annuity come from gain (taxed as ordinary income) first, then basis.
Even a stopped clock is right twice a day.

itstoomuch
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Re: At crossroads with Annuity

Post by itstoomuch » Fri May 19, 2017 5:05 pm

Comment:
This type of income annuity has a strategy for either buying near low points of the Market or/and near the high points of the Market.
This annuities are generally a pension like program/plan and such should be viewed as Income and not investments.
ymmv

we no longer need the income from the deferred annuities.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

calliecake47
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Re: At crossroads with Annuity

Post by calliecake47 » Sat May 20, 2017 1:52 pm

itstoomuch wrote:Not enough info.
Why/reason for the purchase?
Do those reasons exsit today?
Do you believe that their are good chances that condition could exist again?
We have about 16 months before have to make your decision.
See notes below.
We purchased it because the FA said it was essential to our plan to have this additional income stream. We will never be with an FA again so I don't ever see this happening again. W'e're taking it out at the end of the year, trying to figure out whether to roll it to another one or just cash it out.

calliecake47
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Re: At crossroads with Annuity

Post by calliecake47 » Sat May 20, 2017 1:58 pm

powermega wrote:I think the "easiest" decision would be to exchange the annuity to a low-cost annuity provider like Vanguard (there are others too). This has the effect of putting off your decision. I believe that this annuity could be best used to buy a SPIA/DIA to act as an additional pension with your SS income. That would allow you to convert more of your tax-deferred investments to Roth and not have to rely on them for living expenses as much.

If you do want to surrender the annuity, there should be a "free out" amount that you could withdrawal right now without any surrender charge. Withdrawals from an annuity come from gain (taxed as ordinary income) first, then basis.
How would having the annuity income with the SS income allow us to do more Roth conversions, I thought it would be just the opposite? We don't have to draw on tIRAs while we're converting because we will have about 3MM in taxable accounts of which right now has a basis of about 126k.

What is a "free out" amount?

itstoomuch
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Re: At crossroads with Annuity

Post by itstoomuch » Sat May 20, 2017 2:12 pm

informal guide wrote:One clarification on Friar's good response regarding withdrawals from annuities- -I believe withdrawals from variable annuities are taxed as income first. so the only way you could spread today's $30,000 gain (unless you annuitize) is to take, say, $10,000 per year for the first two years . Then the third year you could withdraw the entire remainder, spreading the $30,000 gain - -ordinary income - over three years. As long as the owner is over 59.5, there are no tax penalties.
In our case, it wouldn'tt matter because the VA is inside IRA. Only those VAs purchased from taxable funds will this make a difference.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Mel Lindauer
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Re: At crossroads with Annuity

Post by Mel Lindauer » Sat May 20, 2017 2:44 pm

itstoomuch wrote:
informal guide wrote:One clarification on Friar's good response regarding withdrawals from annuities- -I believe withdrawals from variable annuities are taxed as income first. so the only way you could spread today's $30,000 gain (unless you annuitize) is to take, say, $10,000 per year for the first two years . Then the third year you could withdraw the entire remainder, spreading the $30,000 gain - -ordinary income - over three years. As long as the owner is over 59.5, there are no tax penalties.
In our case, it wouldn'tt matter because the VA is inside IRA. Only those VAs purchased from taxable funds will this make a difference.
For those who haven't already done so, if you can avoid it, putting a high-cost, already tax-deferred VA inside an IRA is a no-no. Here's a column I did for Forbes which explains the reasons why.

Variable Annuities Don't Belong In Retirement Plans

https://www.forbes.com/2010/07/02/varia ... dauer.html
Best Regards - Mel | | Semper Fi

itstoomuch
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Re: At crossroads with Annuity

Post by itstoomuch » Sat May 20, 2017 3:48 pm

I also trade within IRA/Roths. :oops: :annoyed :greedy
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: At crossroads with Annuity

Post by powermega » Mon May 22, 2017 12:08 pm

calliecake47 wrote:
powermega wrote:I think the "easiest" decision would be to exchange the annuity to a low-cost annuity provider like Vanguard (there are others too). This has the effect of putting off your decision. I believe that this annuity could be best used to buy a SPIA/DIA to act as an additional pension with your SS income. That would allow you to convert more of your tax-deferred investments to Roth and not have to rely on them for living expenses as much.

If you do want to surrender the annuity, there should be a "free out" amount that you could withdrawal right now without any surrender charge. Withdrawals from an annuity come from gain (taxed as ordinary income) first, then basis.
How would having the annuity income with the SS income allow us to do more Roth conversions, I thought it would be just the opposite? We don't have to draw on tIRAs while we're converting because we will have about 3MM in taxable accounts of which right now has a basis of about 126k.

What is a "free out" amount?
Ahh... OK. I didn't realize you guys had such a big stash in taxable accounts. My original thinking was that you would need the tax-deferred money for basic expenses and the income annuity would displace some of that need, leaving more for eventual conversion.

The "free out" amount is an annual amount (policy year, not calendar year) that you can withdrawal without incurring surrender charges. If you surrender the annuity, you will incur the full surrender charge. Taking smaller withdrawals from the annuity may or may not be subject to surrender charges. Amounts that are less than or equal to the "free out" amount have no surrender charge. This is a very common feature of deferred variable annuities, so it's worth looking into it since this could be a way for you to spread out the tax liability over several years before you do a full surrender. By then you won't have a surrender charge and you won''t have much taxable gain left at the time of the surrender.
Even a stopped clock is right twice a day.

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Re: At crossroads with Annuity

Post by Bogle_Feet » Mon May 22, 2017 2:53 pm

calliecake47 wrote:Do a 1035 exchange to a lower cost fixed deferred annuity at Vanguard after sales charge period and leave it to annuitize later or sell it after sales charge period (5 years?) is over at lower tax rate.
Why would you make yet another mistake by doing a 1035 exchange to yet another annuity???? You're over the age of 59 1/2. You don't have to worry about the pre-59 1/2 Federal and state penalty. Just get out of annuities period once the insurance company surrender period ends!

Even Vanguard's so called "low cost" annuity is going to make Vanguard wealthy -- although at least there are no commissions to be paid to any advisor. And insurance companies are not playing Santa Claus with SPIA's either! SPIA's tease you with higher income initially. But when you dump money into an immediate annuity you kiss your principal goodbye, you guarantee a diminished if not impoverished lifestyle for yourself later in life just when you are likely to be most in need of increased income, the growth of your money stops once you start taking income payments, and therefore your heirs will receive zero ROI (return on investment) no matter how long you live. Once you reach your life expectancy your heirs will literally receive NOTHING! That's a SPIA! They are great for insurance companies and terrible for annuitants. You need to invest in a couple of bond and stock index funds. http://investingadvicewatchdog.com/imme ... ities.html

itstoomuch
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Re: At crossroads with Annuity

Post by itstoomuch » Mon May 22, 2017 3:34 pm

Even Vanguard's so called "low cost" annuity is going to make Vanguard wealthy -- although at least there are no commissions to be paid to any advisor. And insurance companies are not playing Santa Claus with SPIA's either! SPIA's tease you with higher income initially. But when you dump money into an immediate annuity you kiss your principal goodbye, you guarantee a diminished if not impoverished lifestyle for yourself later in life just when you are likely to be most in need of increased income, the growth of your money stops once you start taking income payments, and therefore your heirs will receive zero ROI (return on investment) no matter how long you live. Once you reach your life expectancy your heirs will literally receive NOTHING! That's a SPIA! They are great for insurance companies and terrible for annuitants. I agree with BF on this You need to invest in a couple of bond and stock index funds.I don't necessarily agree to this part http://investingadvicewatchdog.com/imme ... ities.html
Sometimes there are not good choices for the risk one wish to take.
disclaimer below. No regrets. Would do it again the same way.
YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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