Best option for maturing annuities

[ZenFire23]

Hi,
My 90 year old mother (widow) received a notice of three separate non-qualified annuities that mature in 2023. All annuities were purchased in 1993 or later.

The first is a "Flexible Annuity" that matures in April and pays 3.5%. Value $48,237, cost basis $11,833
Second is a Variable Annuity that matures in May. Value $158,077, cost basis $83,500
Third is a "Flexible Annuity" that matures in June and pays 3.5%. Value $194,571, cost basis $83,500
Total taxable gain is over $184,000, which would put her into the 35% marginal tax bracket this year.

The annuity firm offers three options:
1) Extend annuity date for five years (with warning that IRS may question tax status)
2) Begin scheduled payments (annuitize)
3) Receive lump-sum distributions, taxable gain reported as ordinary income

My mother has sufficient income from other sources as well as a substantial after-tax Vanguard account and home equity sufficient for long term or in-home care when needed. In all likelihood, these funds will be untouched at her death, go into her estate to be split equally between my sister and me.

Any advice on the best method for handling this issue tax efficiently?
Thanks in advance!

[Stinky]

Hi,
My 90 year old mother (widow) received a notice of three separate non-qualified annuities that mature in 2023. All annuities were purchased in 1993 or later.

The first is a "Flexible Annuity" that matures in April and pays 3.5%. Value $48,237, cost basis $11,833
Second is a Variable Annuity that matures in May. Value $158,077, cost basis $83,500
Third is a "Flexible Annuity" that matures in June and pays 3.5%. Value $194,571, cost basis $83,500
Total taxable gain is over $184,000, which would put her into the 35% marginal tax bracket this year.

The annuity firm offers three options:
1) Extend annuity date for five years (with warning that IRS may question tax status)
2) Begin scheduled payments (annuitize)
3) Receive lump-sum distributions, taxable gain reported as ordinary income

My mother has sufficient income from other sources as well as a substantial after-tax Vanguard account and home equity sufficient for long term or in-home care when needed. In all likelihood, these funds will be untouched at her death, go into her estate to be split equally between my sister and me.

Any advice on the best method for handling this issue tax efficiently?
Thanks in advance!

Specifically what annuitization options have been offered to her?

If one of the options is “five year certain”, that would allow her to stretch out the payments over five years, and would pay out to her beneficiaries if she died before the five year period is over. That would stretch out the income reported over the five years and likely reduce the tax bill.

You could use any “certain period” offered by the company. The concept is the same.

[ZenFire23]

For sure we could annuitize over five years. Once elected we are locked in.

[Stinky]

For sure we could annuitize over five years. Once elected we are locked in.

Another option would be to 1035 exchange one or more of the annuities into another annuity. That will roll over the basis in the annuities and defer taxes.

If you went that route, probably the best annuity would be a multi year guaranteed annuity (MYGA). That type of annuity pays a fixed, guaranteed rate of interest for a fixed number of years.

Go to blueprintincome.com for a large selection of products and features. Many companies won’t issue at older ages, but some do. One company in particular, Guaranty Income, issues to age 100. They issue duestions as short as 3 years.

If you go that route, make sure the product pays out the full accumulated value at death. And look at the “free partial withdrawal” provision of the product, which would allow her to strip out some cash (maybe 5% or 10% of account value) every year after the first.

Post back with questions.

[Varsh]

Try a 1035 exchange into a brokerage IRA and then decide as to how to take either RMDs or periodic disbursement. I don’t think you need to create a immediate large tax impact.

[Stinky]

Try a 1035 exchange into a brokerage IRA and then decide as to how to take either RMDs or periodic disbursement. I don’t think you need to create a immediate large tax impact.

These are non qualified annuities.

So they can’t be exchanged into an IRA.

[IDpilot]

You can do a 1035 exchange to another non qualified annuity with a later mandatory distribution age such as 99 instead of 90.

[ZenFire23]

For sure we could annuitize over five years. Once elected we are locked in.

Another option would be to 1035 exchange one or more of the annuities into another annuity. That will roll over the basis in the annuities and defer taxes.

If you went that route, probably the best annuity would be a multi year guaranteed annuity (MYGA). That type of annuity pays a fixed, guaranteed rate of interest for a fixed number of years.

Go to blueprintincome.com for a large selection of products and features. Many companies won’t issue at older ages, but some do. One company in particular, Guaranty Income, issues to age 100. They issue duestions as short as 3 years.

If you go that route, make sure the product pays out the full accumulated value at death. And look at the “free partial withdrawal” provision of the product, which would allow her to strip out some cash (maybe 5% or 10% of account value) every year after the first.

Post back with questions.

Thanks Stinky! The 1035 Exchange looks promising, especially if we can combine all three annuities into a new fixed annuity with a better interest rate. I'll look into specific options. Appreciate the help!

[Stinky]

For sure we could annuitize over five years. Once elected we are locked in.

Another option would be to 1035 exchange one or more of the annuities into another annuity. That will roll over the basis in the annuities and defer taxes.

If you went that route, probably the best annuity would be a multi year guaranteed annuity (MYGA). That type of annuity pays a fixed, guaranteed rate of interest for a fixed number of years.

Go to blueprintincome.com for a large selection of products and features. Many companies won’t issue at older ages, but some do. One company in particular, Guaranty Income, issues to age 100. They issue duestions as short as 3 years.

If you go that route, make sure the product pays out the full accumulated value at death. And look at the “free partial withdrawal” provision of the product, which would allow her to strip out some cash (maybe 5% or 10% of account value) every year after the first.

Post back with questions.

Thanks Stinky! The 1035 Exchange looks promising, especially if we can combine all three annuities into a new fixed annuity with a better interest rate. I'll look into specific options. Appreciate the help!

You can put them all into one annuity. Or, to further improve financial flexibility, you could build a little 3 annuity ladder, rolling into (say) each of a 3, 4, and 5 year MYGA. You could do all annuities with the same company or multiple companies.

You’ll definitely improve on the current interest rates. You might give up a little interest rate if you go with 3 contracts instead of one, due to the smaller size of the three annuities.

Post back with questions.