annuity beneficiary

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MandoAnne
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Joined: Thu Oct 12, 2017 3:51 pm

annuity beneficiary

Post by MandoAnne » Thu Oct 12, 2017 3:57 pm

Hello,

I just received notification that I inherited an annuity from a non-relative (because I was nice to her :D ). The financial company said that I can (Option 1) take a lump sum but the taxes will be high; or I could (Option 2) "continue in an annuity format and keep it sheltered from taxes," and receive minimum required withdrawals every year based on my age and life expectancy. The remainder will grow tax-free. I can't roll it over into an IRA or 401(k). I am leaning towards Option 2 to avoid paying Uncle Sam as much, but do I have other options, or is Option 2 my best course? Thank you!

Dottie57
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Re: annuity beneficiary

Post by Dottie57 » Thu Oct 12, 2017 9:06 pm

It depends.

What are the fees involved?
How much is actually taxable -get this in writing.
What is it invested in? Are there better options.

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David Jay
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Re: annuity beneficiary

Post by David Jay » Thu Oct 12, 2017 9:08 pm

Welcome to Bogleheads.

The choice is not simple, it depends on a lot of things but mostly on your tax bracket and the amount of the lump sum. Investing the money yourself will be much lower cost than keeping the money at the insurance company. So it is necessary to weigh the cost of taking it out now versus paying high costs on the balance for decades.

I also would be very surprised if this is the only choice forever. I suspect (don't know for sure) that you can take Option 1 at any time, so you could take the annual amount for 5 or 10 years and then take a lump sum.
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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David Jay
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Re: annuity beneficiary

Post by David Jay » Thu Oct 12, 2017 9:10 pm

I would ask for a prospectus for the annuity. Typical expenses for a variable annuity are 2.5% per year.
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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Mel Lindauer
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Re: annuity beneficiary

Post by Mel Lindauer » Thu Oct 12, 2017 9:32 pm

If it's a typical high-cost annuity (almost all are), you might consider doing a tax-free 1035 transfer to a low-cost annuity at Vanguard.
Best Regards - Mel | | Semper Fi

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Peter Foley
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Re: annuity beneficiary

Post by Peter Foley » Thu Oct 12, 2017 9:47 pm

First off - do you know if it is a "qualified" annuity, i.e., an IRA being paid out as an annuity? If that is the case, and, from your description it sounds like it is, all the payments you receive will be taxable. You will need to decide whether to stretch out the payments or take it a a lump sum.
As suggested, get a copy of the prospectus. Some annuities have some flexibility - you might need to take a an minimal amount each year - the equivalent of an RMD, but that does not restrict you from taking more.

Mel's suggestion is a good one and may give you some additional flexibility with respect to withdrawals. Perhaps Mel knows if Vanguard's qualified annuities have more flexible payment options than the ones you described.

If you are lucky this is a non qualified annuity (after taxes). If that is the case you will owe taxes on the earnings when you withdraw but not the original investment. These types of annuities have their own IRS rules regarding payouts.

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