Fund picks for inherited non-qualified stretch annuity?

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Cecily
Posts: 3
Joined: Wed Feb 21, 2018 2:55 pm

Fund picks for inherited non-qualified stretch annuity?

Post by Cecily » Fri May 18, 2018 9:01 am

The good news is that I've inherited $95k from a family member! The bad news is that it's in the form of a New York Life variable annuity, with about 3/4 of it consisting of stock market gains that are fully taxable as income. (Ugh.) Said family member wasn't too financially sophisticated, and listened to her very nice insurance rep...

Anyway, I'm in the process of doing a 1035 transfer over to Vanguard and setting up a non-qualified stretch annuity account in order to spread the payments out, avoid a big tax hit, and save some money on the annuity fees. This will represent about 8% of my total assets, which are invested at roughly 70/30 following the allocation of the Vanguard Retirement 2030 fund (my estimated retirement date), but using individual funds so I can keep the less tax-efficient investments in my tax-deferred accounts.

Given that all the current and future gains in this stretch annuity are going to be taxable income as I pull them out, I'm looking at bond funds. (I've got room to rearrange things in my other accounts to maintain my desired asset allocation.) I'm toying with the idea of investing the stretch annuity 50/50 between a Total Bond Market fund and a High Yield Bond fund (I currently don't have exposure to lower-grade bonds), and adjust my asset allocation slightly to take into account the higher volatility of the latter. My plan is to just take the mandatory annual withdrawals for now, but I'll likely use the money to help bridge the gap between my actual retirement date and age 70 when I start drawing social security - using this before my other tax-deferred accounts so I don't pass this gains-taxable-as-income horror onto future generations.

Does this make sense? Or should I just forget about the high-yield option and just stick 100% with my trusty TBM? Or should I spend it all on producing and broadcasting a public service announcement urging people to not get financial planning advice from insurance salesmen? (Not that I'm bitter. (I'm a little bitter.))

bsteiner
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Location: NYC/NJ/FL

Re: Fund picks for inherited non-qualified stretch annuity?

Post by bsteiner » Fri May 18, 2018 9:05 am

There's often no good solution to an investment-type annuity. If you keep it, you'll continue to incur the expenses of the annuity (though at a much reduced level if you move it to Vanguard), and you'll turn the future investment income and gains into ordinary income. If you cash it in, you'll accelerate the income tax on the investment income and gains to date, and if you cash it in all at once, you'll bunch the income into a single year.

You might want to create a spreadsheet, making some reasonable assumptions, comparing keeping it, cashing it in all at once, or cashing it in over a number of years to avoid bunching the income.

Cecily
Posts: 3
Joined: Wed Feb 21, 2018 2:55 pm

Re: Fund picks for inherited non-qualified stretch annuity?

Post by Cecily » Fri May 18, 2018 10:13 am

Good idea - I'll do that. The (sole?) advantage of the stretch is the flexibility - if I change my mind down the road (or have a lower-income year - I'm a freelancer) and want to pull it out as a lump sum, there's no penalty beyond that hit of taxable income...

not4me
Posts: 395
Joined: Thu May 25, 2017 3:08 pm

Re: Fund picks for inherited non-qualified stretch annuity?

Post by not4me » Fri May 18, 2018 12:16 pm

First, know that you can take your time with this & change allocations later. I'd suggest being sure you are clear on how you view this. I've known some that will take the annual distribution & spend in such a way as to remember the source. Others as just an unexpected addition to their "pool". You mention using it as a bridge on retirement & that is fine.

Another question -- really separate and apart from it being an annuity -- is what allocation works for you. If this is extra/play $, then maybe you are ok taking extra risk. But if an extension of retirement, why change your allocation? Once you nail the allocation, then you can place the funds. There have been multiple threads recently on high yield & specifically the Vanguard fund -- lots of opinions on their viability.

In case you didn't know, the "earnings" within the va are what is distributed first, but you'll still have (sounds like) about $20-$25K of money that will come out tax free at some point. If you split it into more than one, I believe the basis is split accordingly though. But verify that with the holder before making such a move if you decide to.

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