Tax treatment of Variable Annuity

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tc101
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Tax treatment of Variable Annuity

Post by tc101 » Sat Apr 13, 2019 12:25 pm

I am 69, retired, in a low tax bracket. I have a variable annuity at Vanguard. It is $27K invested in a short term bond fund. This is something my father set up for me when I was a child, and that I transferred to Vanguard 25 years ago. It is a small part of my fixed income investments. Most other fixed income is in an IRA.

I don't need the money. Should I just let it sit in the annuity? I read somewhere here that variable annuities, even at vanguard, are not a good deal because of higher expenses. But I wonder about the taxes..
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Mel Lindauer
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Re: Tax treatment of Variable Annuity

Post by Mel Lindauer » Sat Apr 13, 2019 12:56 pm

tc101 wrote:
Sat Apr 13, 2019 12:25 pm
I am 69, retired, in a low tax bracket. I have a variable annuity at Vanguard. It is $27K invested in a short term bond fund. This is something my father set up for me when I was a child, and that I transferred to Vanguard 25 years ago. It is a small part of my fixed income investments. Most other fixed income is in an IRA.

I don't need the money. Should I just let it sit in the annuity? I read somewhere here that variable annuities, even at vanguard, are not a good deal because of higher expenses. But I wonder about the taxes..
All gains withdrawn from your VA would be taxed at your ordinary tax bracket rate, not as cap gains. Partial withdrawals are fully taxed until all gains have been removed and taxed. After that, withdrawing the original investment is tax-free.

On the other hand, if you annuitize, the gains and return of principle are pro-rated for each payment, so only part of each payment is taxable.
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FiveK
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Re: Tax treatment of Variable Annuity

Post by FiveK » Sat Apr 13, 2019 8:05 pm

How much of the $27K is gains, vs. how much was contributed?

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Re: Tax treatment of Variable Annuity

Post by Gill » Sat Apr 13, 2019 8:33 pm

Mel Lindauer wrote:
Sat Apr 13, 2019 12:56 pm
tc101 wrote:
Sat Apr 13, 2019 12:25 pm
I am 69, retired, in a low tax bracket. I have a variable annuity at Vanguard. It is $27K invested in a short term bond fund. This is something my father set up for me when I was a child, and that I transferred to Vanguard 25 years ago. It is a small part of my fixed income investments. Most other fixed income is in an IRA.

I don't need the money. Should I just let it sit in the annuity? I read somewhere here that variable annuities, even at vanguard, are not a good deal because of higher expenses. But I wonder about the taxes..
All gains withdrawn from your VA would be taxed at your ordinary tax bracket rate, not as cap gains. Partial withdrawals are fully taxed until all gains have been removed and taxed. After that, withdrawing the original investment is tax-free.

On the other hand, if you annuitize, the gains and return of principle are pro-rated for each payment, so only part of each payment is taxable.
If the contract was purchased before 8/14/82 principal comes out first on withdrawals. It sounds as if this might apply here.
Gill
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Re: Tax treatment of Variable Annuity

Post by tc101 » Sat Apr 13, 2019 10:06 pm

How much of the $27K is gains, vs. how much was contributed?
Almost all of it would be gains, since it is about 60 years old.
Last edited by tc101 on Sat Apr 13, 2019 11:15 pm, edited 1 time in total.
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Re: Tax treatment of Variable Annuity

Post by tc101 » Sat Apr 13, 2019 10:08 pm

If the contract was purchased before 8/14/82 principal comes out first on withdrawals. It sounds as if this might apply here.
The original contract was probably purchased in the 60's, but I have no record of that. It was transferred to Vanguard sometime after 1982, probably about 1995. Vanguard should have a record of that.
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Re: Tax treatment of Variable Annuity

Post by tc101 » Sat Apr 13, 2019 10:10 pm

From what you have told me so far it sounds like I should look at my tax situation each year and withdraw just enough to avoid going into the next higher tax bracket.
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Re: Tax treatment of Variable Annuity

Post by Mel Lindauer » Sat Apr 13, 2019 11:12 pm

Gill wrote:
Sat Apr 13, 2019 8:33 pm
Mel Lindauer wrote:
Sat Apr 13, 2019 12:56 pm
tc101 wrote:
Sat Apr 13, 2019 12:25 pm
I am 69, retired, in a low tax bracket. I have a variable annuity at Vanguard. It is $27K invested in a short term bond fund. This is something my father set up for me when I was a child, and that I transferred to Vanguard 25 years ago. It is a small part of my fixed income investments. Most other fixed income is in an IRA.

I don't need the money. Should I just let it sit in the annuity? I read somewhere here that variable annuities, even at vanguard, are not a good deal because of higher expenses. But I wonder about the taxes..
All gains withdrawn from your VA would be taxed at your ordinary tax bracket rate, not as cap gains. Partial withdrawals are fully taxed until all gains have been removed and taxed. After that, withdrawing the original investment is tax-free.

On the other hand, if you annuitize, the gains and return of principle are pro-rated for each payment, so only part of each payment is taxable.
If the contract was purchased before 8/14/82 principal comes out first on withdrawals. It sounds as if this might apply here.
Gill
Good point, Gill.
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Re: Tax treatment of Variable Annuity

Post by Dale_G » Sat Apr 13, 2019 11:19 pm

Another thing to do is to look at the original contract and find out what the "guaranteed" rate is for annuitization. If the contract was moved to Vanguard about 1995, the guaranteed rate is probably 4% or higher.

Since the guaranteed rate is likely to be higher than the current yield on your short term investment grade bond fund, it may make sense to annuitize. There are a lot of options for annuitizing.

My guaranteed rate was 4% (find this info near the annuitization tables). About 6 years ago I annuitized my contract for a 10 year period and my wife's for 23 years. The guaranteed rate was significantly higher than the ST investment grade fund at the time, so it made sense to annuitize rather than do "partial surrenders". Choosing to annuitize was similar to buying long term CDs with annual return of capital. Any remaining money will be available to heirs with the ability to choose their own annuity schedule.

If you do not have a copy of the contract, you can request a copy.

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Re: Tax treatment of Variable Annuity

Post by kaneohe » Sun Apr 14, 2019 7:57 am

If you annuitize a variable annuity, what happens when you die?
Last edited by kaneohe on Sun Apr 14, 2019 11:18 am, edited 3 times in total.

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Re: Tax treatment of Variable Annuity

Post by Stinky » Sun Apr 14, 2019 8:17 am

tc101 wrote:
Sat Apr 13, 2019 10:10 pm
From what you have told me so far it sounds like I should look at my tax situation each year and withdraw just enough to avoid going into the next higher tax bracket.
This makes sense to me.
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Re: Tax treatment of Variable Annuity

Post by Corgitodd » Sun Apr 14, 2019 9:18 am

I have a Vanguard Variable Annuity i bought in the mid 1990s. Currently invested in its versions of S&P 500 Index and Total Bond Index. I was advised by a Vanguard CFP to change those investments to International Funds. Not sure why, other than VG likes International funds.

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Re: Tax treatment of Variable Annuity

Post by tc101 » Sun Apr 14, 2019 9:41 am

If you annuities a variable annuity, what happens when you die?
I don't know. I'll let my heirs figure that out.
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Re: Tax treatment of Variable Annuity

Post by Mel Lindauer » Sun Apr 14, 2019 1:42 pm

kaneohe wrote:
Sun Apr 14, 2019 7:57 am
If you annuitize a variable annuity, what happens when you die?
Unless you chose a term certain option or a joint survivor option, the money goes to the insurance company.
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Re: Tax treatment of Variable Annuity

Post by kaneohe » Sun Apr 14, 2019 4:04 pm

Mel Lindauer wrote:
Sun Apr 14, 2019 1:42 pm
kaneohe wrote:
Sun Apr 14, 2019 7:57 am
If you annuitize a variable annuity, what happens when you die?
Unless you chose a term certain option or a joint survivor option, the money goes to the insurance company.
Mel, thanks for the confirmation.

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