inherited annuity question?

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westrichj312
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inherited annuity question?

Post by westrichj312 » Thu Sep 07, 2017 7:35 am

Mother in law passed few weeks ago 5 children. her only assets were small house taken care of and a Hartford fixed qualified annuity she purchased 5 years ago from her local bank guy. Her husband died 30 years ago she was 86 at time of her death. Total annuity was 60K therefore my 5th was 12K. went to take the money out lump sum option and the girl at hartford told me the 12K is fully taxable to each individual at their individual tax rates in the year you take out. other siblings are shocked its taxable as they did not think she ever had an ira or any sort of pension plan as she never had a job in her life. Her hubby died 30 years ago and was a self employed truck driver who the siblings said also never would have received any sort of pension or ira from any employer. I asked hartford how its possible that this money is in an ira at her age and they said they have no idea as the money came to them titled as qualified from the other annuity called (riversource annuities) approximately 5 years ago. Sister said their have been about 6 different people working with her over the years at local bank as the investment guys there changes all the time. Yes I relize the annuities are terrible products and she was probably hosed by different guys at bank over the years questions are is it possible this money or annuity could have been wrongly characterized as qualified as the sisters are almost 100% sure this money was after tax money. Nobody would take after tax money and put it into a IRA annuity would they?? Thanks in advance.

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David Jay
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Re: inherited annuity question?

Post by David Jay » Thu Sep 07, 2017 8:53 am

westrichj312 wrote:
Thu Sep 07, 2017 7:35 am
Nobody would take after tax money and put it into a IRA annuity would they??
Unfortunately, there are plenty of annuity salespeople who are pleased to sell an annuity into a tax-advantaged or tax-free account. It is financial mal-practice in virtually every case, but it makes the boat payments.

Your dad (FIL) probably had an IRA to which he was contributing in his later working years (they were created in 1974). Someone sold either your dad or your mom an annuity ("Are you scared that your portfolio will go down if the market drops? You'll never lose a penny if you put it in an annuity...") for the IRA money.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Pajamas
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Re: inherited annuity question?

Post by Pajamas » Thu Sep 07, 2017 9:04 am

Yes, it is certainly is possible that someone was sold an annuity inside an IRA. It happened to someone I knew who went to a national bank (Citi?) to open an IRA, years ago. It's puzzling to me, but I suppose it's better than not investing for retirement at all. The commission received for selling the annuity is probably the reason it happens.

RiverSource's website almost looks like a parody with the stock photos and typical "first we scare you and then we save you" copy.

https://www.riversource.com/annuities/

westrichj312
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Re: inherited annuity question?

Post by westrichj312 » Thu Sep 07, 2017 9:14 am

sounds crazy that someone with after tax money would be sold into an fixed qualified annuity!!! Now I will have to pay 30% of the 12 thousand inherited back in taxes as it is reported to me as ordinary income. Oh boy!

cadreamer2015
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Re: inherited annuity question?

Post by cadreamer2015 » Thu Sep 07, 2017 9:44 am

Are you sure that the annuity was in an IRA? Even it was in a taxable account it could be that much of the value is gain, which will be taxed at ordinary income rates. Only the return of principal, which could be small, is tax free.
De gustibus non est disputandum

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Pajamas
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Re: inherited annuity question?

Post by Pajamas » Thu Sep 07, 2017 9:45 am

Now you can see why so many financial firms are fighting against fiduciary requirements.

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CAsage
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Re: inherited annuity question?

Post by CAsage » Thu Sep 07, 2017 10:16 am

Can you find the original paperwork on the annuity purchase? Only 5 years ago, your MIL probably kept that paperwork as it was valuable to her. I don't think your MIL would be allowed to put $60K into an IRA in one purchase! Check her tax return from that year. Maybe you can find more info on the amount that is purchase vs interest vs what she already took out.... (I am guessing here). Otherwise, if it's a pre-tax IRA type thing, then see if you can treat it as an inherited IRA and take the money out very slowly over your lifetime to minimize the tax hit. Or take it out in a low income year.
The more (briefly) I think about this, it sounds like there are a few details missing. It it's not IRA-like, then you should be able to get back something, possibly pay taxes on increase, but your MIL did get 5 years worth of income... If it is IRA-like, then I don't really think it's possible/legal to change it from after-tax money to pretax money. Trace the paperwork!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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sometimesinvestor
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Re: inherited annuity question?

Post by sometimesinvestor » Thu Sep 07, 2017 12:28 pm

I believecadreamer is correct. Annuities do not result in a step up basis so whether or not it is an ira taxes will be owed. the issue is how much of the annuity is taxable

itstoomuch
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Re: inherited annuity question?

Post by itstoomuch » Thu Sep 07, 2017 12:45 pm

Pajamas wrote:
Thu Sep 07, 2017 9:04 am
Yes, it is certainly is possible that someone was sold an annuity inside an IRA. It happened to someone I knew who went to a national bank (Citi?) to open an IRA, years ago. It's puzzling to me, but I suppose it's better than not investing for retirement at all. The commission received for selling the annuity is probably the reason it happens.

RiverSource's website almost looks like a parody with the stock photos and typical "first we scare you and then we save you" copy.

https://www.riversource.com/annuities/
We have 7 of 8 annuities in IRA/ROTH. Given the conditions then, I would do it again today. Given the conditions today, I need to analyze further if I would do it then or today. :mrgreen: :greedy :moneybag
yMILmv
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

westrichj312
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Re: inherited annuity question?

Post by westrichj312 » Fri Sep 08, 2017 7:27 am

I would never consider one in a million years.

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David Jay
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Re: inherited annuity question?

Post by David Jay » Fri Sep 08, 2017 8:38 am

Pajamas wrote:
Thu Sep 07, 2017 9:45 am
Now you can see why so many financial firms are fighting against fiduciary requirements.
I read an article by an insurance industry analyst who thought that the fiduciary rule would reduce the total sales volume of annuities by one third.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Pajamas
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Re: inherited annuity question?

Post by Pajamas » Fri Sep 08, 2017 9:00 am

David Jay wrote:
Fri Sep 08, 2017 8:38 am
I read an article by an insurance industry analyst who thought that the fiduciary rule would reduce the total sales volume of annuities by one third.
Now if they would only regulate the nutritional supplement industry. . . .

Jillian
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Re: inherited annuity question?

Post by Jillian » Fri Sep 08, 2017 11:32 am

[OT comment removed by admin LadyGeek] I inherited one from my grandmother, had a big tax bill. It was a good investment for her as she had locked it in when interest rates were high, but otherwise I think annuities are usually a terrible investment from just about every angle possible.

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David Jay
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Re: inherited annuity question?

Post by David Jay » Fri Sep 08, 2017 11:53 am

Jillian wrote:
Fri Sep 08, 2017 11:32 am
[OT comment removed by admin LadyGeek] I inherited one from my grandmother, had a big tax bill. It was a good investment for her as she had locked it in when interest rates were high, but otherwise I think annuities are usually a terrible investment from just about every angle possible.
Be careful about lumping all annuities together. An SPIA can be an effective tool for assuring an income stream in late retirement (of course there is no inheritance value from an SPIA).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

NAD83
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Re: inherited annuity question?

Post by NAD83 » Fri Sep 08, 2017 12:02 pm

I read an article by an insurance industry analyst who thought that the fiduciary rule would reduce the total sales volume of annuities by one third.
They are. Do a quick Google search and you'll see that annuity sales, particularly variable annuities, are way down this year. I'd say this proves that, in light of the proposed DOL fiduciary rule, these products are not appropriate for a majority of people and the salesmen are shying away from them.

Jillian
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Re: inherited annuity question?

Post by Jillian » Fri Sep 08, 2017 12:06 pm

David Jay wrote:
Fri Sep 08, 2017 11:53 am
Jillian wrote:
Fri Sep 08, 2017 11:32 am
You get raped on taxes if you inherit an annuity. I inherited one from my grandmother, had a big tax bill. It was a good investment for her as she had locked it in when interest rates were high, but otherwise I think annuities are usually a terrible investment from just about every angle possible.
Be careful about lumping all annuities together. An SPIA can be an effective tool for assuring an income stream in late retirement (of course there is no inheritance value from an SPIA).
Well I never said all, but the overwhelming majority are poor investments that are more about earning a big commission than in an investor's best interest.

And I would also say a SPIA is also a poor investment for a variety of reasons.

But that's just my opinion, some people think the negatives are worth the security, I'm just not one of them.

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David Jay
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Re: inherited annuity question?

Post by David Jay » Fri Sep 08, 2017 3:11 pm

Jillian wrote:
Fri Sep 08, 2017 12:06 pm
David Jay wrote:
Fri Sep 08, 2017 11:53 am
Jillian wrote:
Fri Sep 08, 2017 11:32 am
You get raped on taxes if you inherit an annuity. I inherited one from my grandmother, had a big tax bill. It was a good investment for her as she had locked it in when interest rates were high, but otherwise I think annuities are usually a terrible investment from just about every angle possible.
Be careful about lumping all annuities together. An SPIA can be an effective tool for assuring an income stream in late retirement (of course there is no inheritance value from an SPIA).
Well I never said all, but the overwhelming majority are poor investments that are more about earning a big commission than in an investor's best interest.

And I would also say a SPIA is also a poor investment for a variety of reasons.

But that's just my opinion, some people think the negatives are worth the security, I'm just not one of them.
An SPIA is worse than a poor investment, it is not really an investment at all. It is longevity insurance.

That being said, late in life (say purchased at age 80) the size of the mortality credits make it very attractive for someone with an "iffy" retirement portfolio.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

itstoomuch
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Re: inherited annuity question?

Post by itstoomuch » Fri Sep 08, 2017 4:58 pm

OP wrote:Nobody would take after tax money and put it into a IRA annuity would they?? Thanks in advance.
No, they wouldn't. The better answer is that they probably couldn't.
The penalty for defrauding the IRS and the federal/state regulations could be severe at all levels.
You need to know the regulations and conditions to fund an IRA. Start here and then work your self forward to why or why not an annuity. And since this is primarily a INDEX fund forum, ask what possibilities exists Today, for an 81yo (mil's age)to purchase an annuity VS a bond fund , stock fund, or the Bank's CD. :idea:
Money is everyone's first and last job :oops:
Ymmv :wink:
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Zott
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Re: inherited annuity question?

Post by Zott » Fri Sep 08, 2017 10:04 pm

OP--can you find her income tax returns for the last few years? If so, you can tell whether each year's distribution was reported as fully taxable or not. That might give you a clue as to what's going on. Typically an insurance company, or a bank, would want solid documentary proof that an investment is tax-qualified before opening such an account with it.

itstoomuch
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Re: inherited annuity question?

Post by itstoomuch » Fri Sep 08, 2017 10:55 pm

^ Unless the annuity is within a Roth, looking at the tax returns will mean little. The annuity company will tell you if the proceeds is an IRA remainder or just an annuity remainder from a non IRA.

Even if it is an IRA, the proceeds will be taxable to heirs. How much tax is another question.
Ex. my mother had $1000 remaining CD on her death At 97. Divided 4 ways. I paid virtually no tax. Older bro paid perhaps ~$500 in tax :?: How does a person pay more 2x in tax as the benefit :?: He didn't claim the $250 for 3 tax years and he is at the highest tax bracket. Personally I don't think he cared to bother with the paper work, because he has a monitored portfolio at the Bank and he sees numbers at are 10^9 to 10^13.

If it is not an IRA, the proceeds are reported as taxable. How much tax is dependent on your marginal tax or if the immediate heir wish to roll the inherited annuity proceeds into a rollover annuity and thus defer and mitigate taxes at a much later date. {you will need to check this, its been a while since I looked into this and this quirk in the tax regulation is no longer a big concern for us and to our heir}
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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