Inherited Annuity question(s)

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malujerry
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Inherited Annuity question(s)

Post by malujerry »

My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
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David Jay
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Re: Inherited Annuity question(s)

Post by David Jay »

Welcome to the forum!

Well, taking the cash will add add some $290,000 to your taxable income for the year. That is a high price to pay (perhaps $100,000 - $150,000) to take the money out, but it is a choice.

Doing a 1035 to a lower cost VA is an option. Do your research (including here at BH) thoroughly as a few tenths of a percent per year makes a huge difference over decades. Don’t be in a hurry.

The one thing I would not do is leave it at Lincoln with 3.6% fees/expenses “forever”. That will likely cost you close to a million dollars in gains over a lifetime.

[edit]. Oh, and you are correct, can’t trust a “financial advisor”. Up to half of that 1.5% per year goes to pay advisor commissions. You can get a VA for less than 1% through a low cost brokerage like Vanguard or Fidelity (direct). Again a half of a percent sounds small but over decades it becomes huge - hundreds of thousands of dollars.
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Re: Inherited Annuity question(s)

Post by bsteiner »

There's usually no good solution to an investment-type annuity.

If you keep it and take distributions over your lifetime or life expectancy, in addition to continuing to incur the costs of the annuity (which as others have pointed out you can probably reduce), you'll convert the future qualified dividends and capital gains to ordinary income. If you cash it in all at once you'll bunch the income into a single year.

There may be another choice. Many insurance companies will let you take it over 5 years. That will get you out from under the annuity without bunching all the income into a single year. That's sometimes the least bad of the choices.
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Re: Inherited Annuity question(s)

Post by 123 »

malujerry wrote: Tue Sep 10, 2019 10:06 am ...4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them...
Of course the 3 other financial advisers recommended switching because that's how THEY make their money.
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Re: Inherited Annuity question(s)

Post by not4me »

There are a dizzying array of these products & so anything said may not be right for your specific, but here's what I'd do.

1st, I'd place a call to Vanguard and/or Fidelity & ask them about your specific. Vanguard has recently been shifting their VA business, but I think they still may provide this. They have a broad understanding of the products & can talk you through what you have & what else is available.

I doubt seriously that the one you have is best, so I'd 1035 away. Not thru an FA though.

I'd look at my tax situation to determine how best to get out. So, let's say you 1035 as suggested based on earlier phone call -- making sure you won't have any surrender fees. Then in addition to the required distribution I think you'll be able to take a withdrawal of the amount you choose. Distributions may include mostly taxable amounts, with a sliver of the cost basis for which you wont be taxed. The withdrawal would all be taxed as ordinary income until only cost basis left. Based on your situation, map out how best to draw that down over the next few years. Once you draw down to just the cost basis, close it out (that part won't be taxed then).

Whether you deploy those funds into paying down mortgage or added to your investments in a separate matter really (to me).
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malujerry
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Re: Inherited Annuity question(s)

Post by malujerry »

Thank you for the responses!

Yes, there is a 5 year option. My income is over $400k annually so I figured I’m going to get taxed heavily either way when it comes to all at once versus 5 years. But maybe over 5 years and pay off the house if that is the best option? I haven’t done the hard math yet but thought it wasn’t worth paying the mortgage interest over the next 5 years versus just paying it off compared to the taxes.

But if I’m keeping the annuity...

The lowest fee so far I found is Nationwide and Jackson at 1.5%, I’ll keep looking for something with a lower cost if that’s the better option in the long run. Since mortgage interest is still tax deductible and maybe the long term payout will be much more than cashing it out now...
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Re: Inherited Annuity question(s)

Post by informal guide »

Both Fidelity (direct) and Vanguard offer 1035 exchanges into products at an annualized 0.60% or less, including both annuity and investment fees. If you choose to keep the annuity to cash out over several years, either would be a much better option. If you cash it out over time, the income comes out first, taxable as ordinary income at the Federal and usually the state level. On the other hand, cashing out at once would allow you to invest at an annualized 0.10% or less.

I concur that where you put the proceeds is an independent issue. My personal belief (not necessarily BH philosophy) is that I don't want to have the bulk of my net worth tied up in my residence.

My quick take is to take a look at your 2019 tax situation and withdraw at least the amount to the top of your current tax bracket. Then I'd withdraw the rest in January 2020. That saves the hassle of a 1035 annuity move to Vanguard or Fidelity.
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Re: Inherited Annuity question(s)

Post by Stinky »

informal guide wrote: Tue Sep 10, 2019 12:12 pm
My quick take is to take a look at your 2019 tax situation and withdraw at least the amount to the top of your current tax bracket. Then I'd withdraw the rest in January 2020. That saves the hassle of a 1035 annuity move to Vanguard or Fidelity.
If your income is in the $400k range, and you're married filing jointly, then you're likely near the top of the 32% tax bracket. The 35% tax bracket encompasses just over $200k from the bottom to the top.

If you want to get at the money, I'd rip the bandaid off and do what "informal guide" says. Take up to the break point this year, and then take the rest next year. If you string it over 5 years, your tax bill won't be appreciatively less.
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Re: Inherited Annuity question(s)

Post by David Jay »

Stinky wrote: Tue Sep 10, 2019 2:56 pm
informal guide wrote: Tue Sep 10, 2019 12:12 pm
My quick take is to take a look at your 2019 tax situation and withdraw at least the amount to the top of your current tax bracket. Then I'd withdraw the rest in January 2020. That saves the hassle of a 1035 annuity move to Vanguard or Fidelity.
If your income is in the $400k range, and you're married filing jointly, then you're likely near the top of the 32% tax bracket. The 35% tax bracket encompasses just over $200k from the bottom to the top.

If you want to get at the money, I'd rip the bandaid off and do what "informal guide" says. Take up to the break point this year, and then take the rest next year. If you string it over 5 years, your tax bill won't be appreciatively less.
Cash it out and pay the tax bill. Pay off your mortgage and put the remainder into your portfolio.
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malujerry
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Re: Inherited Annuity question(s)

Post by malujerry »

informal guide wrote: Tue Sep 10, 2019 12:12 pm On the other hand, cashing out at once would allow you to invest at an annualized 0.10% or less.
I’m not sure if I follow, are you stating by taking the money, either lump sum or over the 5 years (to save on taxes) I should reinvest it into another type of fund with much lower expenses and let it grow? What kind of account would have 0.10% or less?
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malujerry
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Re: Inherited Annuity question(s)

Post by malujerry »

[/quote]
Cash it out and pay the tax bill. Pay off your mortgage and put the remainder into your portfolio.
[/quote]

Lump sum or over 5 years?

What’s your train of thought for doing this? Just curious what your thoughts are on trying to let the money outgrow the cost of the mortgage. (Hope that makes sense)
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Re: Inherited Annuity question(s)

Post by David Jay »

malujerry wrote: Tue Sep 10, 2019 9:13 pm
informal guide wrote: Tue Sep 10, 2019 12:12 pm On the other hand, cashing out at once would allow you to invest at an annualized 0.10% or less.
I’m not sure if I follow, are you stating by taking the money, either lump sum or over the 5 years (to save on taxes) I should reinvest it into another type of fund with much lower expenses and let it grow? What kind of account would have 0.10% or less?
I’m not “informal_guide” but you can build a 3-fund portfolio with Fidelity, Vanguard or Schwab funds with an average cost well below 0.1%, here is a link to a list from the Wiki for each of the fund families: https://www.bogleheads.org/wiki/Three-fund_portfolio

[edit] If you type the ticker into Google, an early link will be Morningstar. The summary page on M* will display the expense ratio (ER) of the fund. For instance, in Vanguard here are the ERs: VTSAX 0.04%, VTIAX 0.11%, VBTLX 0.05% so depending on mix of these 3 funds your net ER could be between, say, 0.06 and 0.07

You can do the same with the Schwab or Fidelity (or another family) funds.
Last edited by David Jay on Tue Sep 10, 2019 9:48 pm, edited 1 time in total.
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Re: Inherited Annuity question(s)

Post by David Jay »

malujerry wrote: Tue Sep 10, 2019 9:16 pm
Cash it out and pay the tax bill. Pay off your mortgage and put the remainder into your portfolio.
Lump sum or over 5 years?

What’s your train of thought for doing this? Just curious what your thoughts are on trying to let the money outgrow the cost of the mortgage. (Hope that makes sense)
After hearing your income, I was reinforcing Stinky’s comments that your tax bracket is high enough that you don’t save much in taxes (3%?) by staying in high cost funds for 5 years. Just lump sum it.
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Re: Inherited Annuity question(s)

Post by smectym »

Contra several posters above, Vanguard is exiting the annuity business and is probably no longer accepting new accounts. Check out doing a 1035 to Fidelity, though: Fidelity’s VA lineup has become more competitive, with the addition of several low-cost index funds.

https://www.forbes.com/sites/mattcarey/ ... 17623554e9


https://www.google.com/search?q=vanguar ... efox-b-1-m
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Re: Inherited Annuity question(s)

Post by smectym »

smectym wrote: Tue Sep 10, 2019 10:40 pm Contra several posters above, Vanguard is exiting the annuity business and is probably no longer accepting new accounts. Check out doing a 1035 to Fidelity, though: Fidelity’s VA lineup has become more competitive, with the addition of several low-cost index funds.

https://www.forbes.com/sites/mattcarey/ ... 17623554e9


https://www.google.com/search?q=vanguar ... efox-b-1-m
I would add: carefully vet the benefits of a tax-free 1035 exchange to a lower-cost provider like Fidelity vs. accepting the “cash it out and pay the massive taxes” advice. You’re 37; the VA you’ve inherited is an asset that could grow tax-deferred for decades.

Even if you do the 1035, as an heir to a VA, you’re required make certain distribution options, among which the obvious call is to take RMD’s from the VA based on your own life expectancy. Despite the RMD’s, remaining assets continue to grow tax free indefinitely. It can be a game-changer for you in the long run. I’d think long and hard, and get knowledgeable advice, before cashing out. My advice would be 1035 to Fidelity and take it from there.
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Re: Inherited Annuity question(s)

Post by informal guide »

Stinky wrote: Tue Sep 10, 2019 2:56 pm
informal guide wrote: Tue Sep 10, 2019 12:12 pm
My quick take is to take a look at your 2019 tax situation and withdraw at least the amount to the top of your current tax bracket. Then I'd withdraw the rest in January 2020. That saves the hassle of a 1035 annuity move to Vanguard or Fidelity.
If your income is in the $400k range, and you're married filing jointly, then you're likely near the top of the 32% tax bracket. The 35% tax bracket encompasses just over $200k from the bottom to the top.

If you want to get at the money, I'd rip the bandaid off and do what "informal guide" says. Take up to the break point this year, and then take the rest next year. If you string it over 5 years, your tax bill won't be appreciatively less.

Good view of my sentiments. You can get all the cash by early January 2020. Just decide the tax year where you prefer to take the gain.

For the OP, Yes I am suggesting a 3=4 fund index fund portfolio, which, at Fidelity/Vanguard/Schwab will be at an expense ratio of 0.10% or less. My bias for taxable accounts is Vanguard funds/ETFs, because they, unlike Fidelity, have not paid capital gains on the equity funds (the capital gains would mean tax payments, over and above the taxes on dividends).
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Re: Inherited Annuity question(s)

Post by smectym »

informal guide wrote: Tue Sep 10, 2019 11:23 pm
Stinky wrote: Tue Sep 10, 2019 2:56 pm
informal guide wrote: Tue Sep 10, 2019 12:12 pm
My quick take is to take a look at your 2019 tax situation and withdraw at least the amount to the top of your current tax bracket. Then I'd withdraw the rest in January 2020. That saves the hassle of a 1035 annuity move to Vanguard or Fidelity.
If your income is in the $400k range, and you're married filing jointly, then you're likely near the top of the 32% tax bracket. The 35% tax bracket encompasses just over $200k from the bottom to the top.

If you want to get at the money, I'd rip the bandaid off and do what "informal guide" says. Take up to the break point this year, and then take the rest next year. If you string it over 5 years, your tax bill won't be appreciatively less.

Good view of my sentiments. You can get all the cash by early January 2020. Just decide the tax year where you prefer to take the gain.

For the OP, Yes I am suggesting a 3=4 fund index fund portfolio, which, at Fidelity/Vanguard/Schwab will be at an expense ratio of 0.10% or less. My bias for taxable accounts is Vanguard funds/ETFs, because they, unlike Fidelity, have not paid capital gains on the equity funds (the capital gains would mean tax payments, over and above the taxes on dividends).
OP faces not just fed but, unless I misread, NY state (& city?)? taxes. “Smash and grab” isn’t usually the best or most tax-efficient approach. OP can simply do a 1035 to Fidelity to escape the onerous fee structure of his current annuity, and then take his time figuring out what to do next. But absent compelling arguments based on OP’s personal situation to the contrary, my advice on what to do next would be to keep the VA corpus in place, avoid current tax entirely, and let the corpus grow tax-deferred indefinitely
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Re: Inherited Annuity question(s)

Post by malujerry »

Thank you all again for these great responses. Just to clear up the financial situation further, yes I file jointly/married and no city taxes, just federal and state on $400k W2, an extra $50-$100k in 1099 as a PC.

I haven’t considered the option to withdraw the money and reinvest without the cover of an annuity. Since I’m 37 I wonder if the savings of doing it that way, paying the taxes, will be beneficial in the long run versus switching to a VA with the lowest cost/fee possible.

If I did stay within an annuity, I would like just take the minimum payments and apply it to the mortgage principal and try to allow the annuity grow as long as possible.
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Re: Inherited Annuity question(s)

Post by Stinky »

malujerry wrote: Wed Sep 11, 2019 7:47 am Thank you all again for these great responses. Just to clear up the financial situation further, yes I file jointly/married and no city taxes, just federal and state on $400k W2, an extra $50-$100k in 1099 as a PC.

I haven’t considered the option to withdraw the money and reinvest without the cover of an annuity. Since I’m 37 I wonder if the savings of doing it that way, paying the taxes, will be beneficial in the long run versus switching to a VA with the lowest cost/fee possible.

If I did stay within an annuity, I would like just take the minimum payments and apply it to the mortgage principal and try to allow the annuity grow as long as possible.
In order to determine what makes the most sense for you, you'll need to do some calculations to see how you minimize your tax and expense hits.

Scenario 1 - you roll the annuity to a the lowest cost provider, take minimum payments, apply to mortgage principal
Scenario 2 - you withdraw all funds from the annuity relatively quickly, and apply to mortgage principal and your overall investment program

While it may seem unattractive to close the annuity soon and pay large taxes now (Scenario 2), there are two drags on Scenario 1 that you should factor into your calculation. First is the expenses ratio (mortality and expense, fund management, etc.) compared to what you could get in mutual funds. Second is the fact that all of the income on your investments within the annuity will ultimately come out as ordinary income for tax purposes, rather than at the preferential tax rates allowed for qualified dividends and capital gains. These two factors eat away at any perceived advantage of the annuity over time.

You need to do a spreadsheet to fully model this out. Scenario 1 may end up being more attractive to you, but you can't definitely know that without modeling it out because of expenses and less-favorable tax treatment.
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malujerry
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Re: Inherited Annuity question(s)

Post by malujerry »

Thanks again everyone.

I contacted Fidelity, unfortunately they do not offer a 1035 exchange for a non-spousal but Vanguard still does for now with 19 funds in the 0.4-0.6ish% range. Is there a downside of not having a single financial advisor? Or in other words, is there something positive I’m really giving up by being “cheaper”?

So basically now I have to sit down and do the math between:

1) cashing out, paying taxes, reinvesting that amount entirely with lower overall fees

2) cashing out, paying taxes, pay off mortgage, invest any remainder

3) 1035 exchange to Vanguard

Sound right?
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Re: Inherited Annuity question(s)

Post by Stinky »

malujerry wrote: Thu Sep 12, 2019 12:27 pm Is there a downside of not having a single financial advisor?

.........

So basically now I have to sit down and do the math between:

1) cashing out, paying taxes, reinvesting that amount entirely with lower overall fees

2) cashing out, paying taxes, pay off mortgage, invest any remainder

3) 1035 exchange to Vanguard

Sound right?
While many Bogleheads just have one investment provider, that's certainly not a requirement. I personally have money with both Vanguard and Fidelity, with good reasons for being with each firm. My suggestion is to simplify your financial relationships as much as possible, but not at the expense of paying significantly higher expenses than necessary.

........

On your comparison - I'd focus primarily on your options 1 (surrender annuity and reinvest) and 3 (roll annuity to Vanguard). Those are "apples to apples" situations, where you're remaining fully invested. I don't know which option will look better.

Then, if you decide to surrender the annuity, then you can decide separately on whether to reinvest (option 1) or pay down mortgage (option 2). To the extent that your investments earn more than your mortgage interest rate, reinvesting the entire proceeds should look better financially. However, there can be considerable psychic benefit in paying down your mortgage, and only you can decide what feels best to you.
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Re: Inherited Annuity question(s)

Post by FoolStreet »

malujerry wrote: Thu Sep 12, 2019 12:27 pm Thanks again everyone.

I contacted Fidelity, unfortunately they do not offer a 1035 exchange for a non-spousal but Vanguard still does for now with 19 funds in the 0.4-0.6ish% range. Is there a downside of not having a single financial advisor? Or in other words, is there something positive I’m really giving up by being “cheaper”?

So basically now I have to sit down and do the math between:

1) cashing out, paying taxes, reinvesting that amount entirely with lower overall fees

2) cashing out, paying taxes, pay off mortgage, invest any remainder

3) 1035 exchange to Vanguard

Sound right?
Implied in #3 is modeling the eventual cash out also. 1&2 have gains at cap gains rates, 3 is ordinary income.

98% of us think that using a financial advisor is more difficult and painful. We enjoy making and earning money and find that advisors get in the way of that. How many financial advisors have recommended A mega backdoor Roth or using I bonds? How many advisors recommend low cost index funds. These don’t make money for the advisor.
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Re: Inherited Annuity question(s)

Post by malujerry »

Ok, I did some math, am I doing this correctly?

First scenario - take $750k with cost basis of $461k out of the inherited NQ VA, pay taxes, reinvest.

1) $750k minus $461k leaves $289k to be taxed at 43.85% (37% fed + ny 6.85% of $400k plus the taxable VA) which leaves $162k. So the $461k plus the $162k provides $623k to grow. I picked 4% at 34 years (until I hit age 70) which gives 2.3 million. Over 46 years (RMD run out of money date for 4% if I elected to keep in annuity) is 3.7 million.

Second scenario - do a 1035 exchange into Vanguard, grow at 3.5% (4% minus fees of 0.5%) and continue RMD (which I have to do starting immediately)

2) $750k at 3.5% net, I’ll have taken out $730k in RMD by age 70 (34 years later) , and by age 83 (46 years later) I’ll have taken 1.7 million. That annual payment I guess I would pay off the mortgage or reinvest again.

Does this seem right? It seems it’s better if I take out the money and reinvest in scenario one?
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Re: Inherited Annuity question(s)

Post by Stinky »

malujerry wrote: Fri Sep 13, 2019 12:47 pm Ok, I did some math, am I doing this correctly?

First scenario - take $750k with cost basis of $461k out of the inherited NQ VA, pay taxes, reinvest.

1) $750k minus $461k leaves $289k to be taxed at 43.85% (37% fed + ny 6.85% of $400k plus the taxable VA) which leaves $162k. So the $461k plus the $162k provides $623k to grow. I picked 4% at 34 years (until I hit age 70) which gives 2.3 million. Over 46 years (RMD run out of money date for 4% if I elected to keep in annuity) is 3.7 million.

Second scenario - do a 1035 exchange into Vanguard, grow at 3.5% (4% minus fees of 0.5%) and continue RMD (which I have to do starting immediately)

2) $750k at 3.5% net, I’ll have taken out $730k in RMD by age 70 (34 years later) , and by age 83 (46 years later) I’ll have taken 1.7 million. That annual payment I guess I would pay off the mortgage or reinvest again.

Does this seem right? It seems it’s better if I take out the money and reinvest in scenario one?
A simple question - if the VA is non-qualified, why are you assuming RMDs are necessary?

There’s probably a simple answer, but I don’t understand that.
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Re: Inherited Annuity question(s)

Post by malujerry »

I was told since it already started in distribution mode for my mom, it must stay in RMD according to my life expectancy (even if it passes to my wife or child) and I cannot add to it. This seems the same info no matter what company I received a quote from.
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Re: Inherited Annuity question(s)

Post by FBN2014 »

malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.
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Re: Inherited Annuity question(s)

Post by Dottie57 »

FBN2014 wrote: Thu Oct 10, 2019 8:37 am
malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.
Ireally don’t think income distributions are tax free. Hopefully someone else will chime in.
FBN2014
Posts: 720
Joined: Sat Mar 08, 2014 3:07 pm

Re: Inherited Annuity question(s)

Post by FBN2014 »

Dottie57 wrote: Thu Oct 10, 2019 10:06 am
FBN2014 wrote: Thu Oct 10, 2019 8:37 am
malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.
Ireally don’t think income distributions are tax free. Hopefully someone else will chime in.
I didn't say income distributions are tax free.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain
Katietsu
Posts: 3830
Joined: Sun Sep 22, 2013 1:48 am

Re: Inherited Annuity question(s)

Post by Katietsu »

Annuities are funny things but I think the OP has a pretty good understanding of his options. I hate to comment on annuities because there can be so many quirks.

But my experience has been:

There is no taxable event associated with the OP becoming an owner.

There are RMDs if not “annuitizing”

Some annuities/annuity providers allowed a “stretch” with RMDs as outlined by OP. But not all did.

Vanguard accepts the transfer of an inherited annuity. The ability to transfer an inherited annuity was only established sort of recently, maybe fivish years ago or so when a woman’s family ended up in a court case with the IRS which may explain why some companies still do not allow it.

The decision between taking it out out quickly or stretching it after transfer to a low fee provider, can be a toss up just like traditional 401k vs Roth. In the OPs situation, I think the best choice is unknowable. Therr is no clear cut winner and there are too many unknowns over 40 years.

If the stretch route is chosen, the annuity does not need to be held for life. You would likely want to cash it in when the value gets close to the basis. You might want to cash it in during a low income/high deduction year. Or maybe you will decide to retire at 55 and will have 15 years to cash in annuities and do Roth conversions. Tax laws changes may make the annuity more or less desirable over the years.

I am unaware of a special “annuity rescue move” that would allow for tax free withdrawals above the basis amount.
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Stinky
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Re: Inherited Annuity question(s)

Post by Stinky »

malujerry wrote: Fri Sep 13, 2019 1:41 pm I was told since it already started in distribution mode for my mom, it must stay in RMD according to my life expectancy (even if it passes to my wife or child) and I cannot add to it. This seems the same info no matter what company I received a quote from.
Your original post said it was a non qualified annuity.

If that’s the case, I’m confused by the reference to RMDs, which relate to IRAs and other tax-deferred accounts.

If it’s non qualified, can you find an insurance company that will accept an exchange and put you back into accumulation mode?

Or was your original post a mistake, and it is qualified?
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Topic Author
malujerry
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Re: Inherited Annuity question(s)

Post by malujerry »

Stinky wrote: Thu Oct 10, 2019 11:47 am
malujerry wrote: Fri Sep 13, 2019 1:41 pm I was told since it already started in distribution mode for my mom, it must stay in RMD according to my life expectancy (even if it passes to my wife or child) and I cannot add to it. This seems the same info no matter what company I received a quote from.
Your original post said it was a non qualified annuity.

If that’s the case, I’m confused by the reference to RMDs, which relate to IRAs and other tax-deferred accounts.

If it’s non qualified, can you find an insurance company that will accept an exchange and put you back into accumulation mode?

Or was your original post a mistake, and it is qualified?

The paperwork all states non-qualified. I think the issue is that since it was already in RMD (mom passed away at 72 taking 2-3 years minimum payments) and that I’m “non-spousal” - I have to take the RMD, gains first (except for Lincoln that offers a product that pays part tax-free cost basis, part taxable gains for over 2% annual fee) but the RMD will be over my life expectancy and not hers. It will remain over my life expectancy even if passes to my wife or child. This is the information that has stayed consistent from numerous companies that I have talked to, and I have talked to several companies and salespeople by now.
Topic Author
malujerry
Posts: 15
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Re: Inherited Annuity question(s)

Post by malujerry »

Katietsu wrote: Thu Oct 10, 2019 11:07 am Annuities are funny things but I think the OP has a pretty good understanding of his options. I hate to comment on annuities because there can be so many quirks.

But my experience has been:

There is no taxable event associated with the OP becoming an owner.

There are RMDs if not “annuitizing”

Some annuities/annuity providers allowed a “stretch” with RMDs as outlined by OP. But not all did.

Vanguard accepts the transfer of an inherited annuity. The ability to transfer an inherited annuity was only established sort of recently, maybe fivish years ago or so when a woman’s family ended up in a court case with the IRS which may explain why some companies still do not allow it.

The decision between taking it out out quickly or stretching it after transfer to a low fee provider, can be a toss up just like traditional 401k vs Roth. In the OPs situation, I think the best choice is unknowable. Therr is no clear cut winner and there are too many unknowns over 40 years.

If the stretch route is chosen, the annuity does not need to be held for life. You would likely want to cash it in when the value gets close to the basis. You might want to cash it in during a low income/high deduction year. Or maybe you will decide to retire at 55 and will have 15 years to cash in annuities and do Roth conversions. Tax laws changes may make the annuity more or less desirable over the years.

I am unaware of a special “annuity rescue move” that would allow for tax free withdrawals above the basis amount.

I believe you’re correct, this isn’t an entirely taxable event. Just the gains if I took lump sum and just the RMDs of gains (which gains comes out first except for one specific Lincoln i4life product with an annual fee of over 2%)

I agree with you there are no clear cut winners and I’m deeply conflicted whether betting this grows over the next 30-40 years (with one of the many VA options) would be better versus if I just cashed it out now and reinvest in other business venture (real estate, franchise, etc). I believe the safest bet is to move it to the cheapest VA company (seems Vanguard) and go with a 3-fund model as others have pointed out. Let it grow, take the minimum, should last for several decades. It does add onto my taxable income, but I don’t see another way out of this until the value drops to or the RMD takes me to the cost basis.

(Well, I could quit my W2 job, go straight 1099, make my taxable income significantly cheaper over many years but I haven’t sat with my CPA yet to run those numbers and that’s a whole other separate thread then.)

You’re correct I could try to stretch this until I hit the cost basis and I also do not know of a rescue move to avoid taxes on the gains nor how to avoid the RMDs.
Topic Author
malujerry
Posts: 15
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Re: Inherited Annuity question(s)

Post by malujerry »

FBN2014 wrote: Thu Oct 10, 2019 8:37 am
malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.

Yes, you’re correct, I’m the sole beneficiary and will have the pay taxes on the gains above the cost basis of $461k. Last time I looked at Nationwide, a sales rep offered that product for 1.3%, maybe I can call them direct and obtain a cheaper rate without a FA?

I did confirm with Vanguard that I can do a 1035 exchange for just their fund fees, highest one is 0.6 or so. It would allow the fund to grow. But if I do a straight 1035 exchange without paying taxes on the gains now, I’m just deferring the gains taxes (hopefully lower rate) for later. What you described at the end is new information to me. I thought the gains are taxable? I haven’t seen an annuity product that allows growth without taxation.
FBN2014
Posts: 720
Joined: Sat Mar 08, 2014 3:07 pm

Re: Inherited Annuity question(s)

Post by FBN2014 »

malujerry wrote: Tue Oct 15, 2019 1:18 pm
FBN2014 wrote: Thu Oct 10, 2019 8:37 am
malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.

Yes, you’re correct, I’m the sole beneficiary and will have the pay taxes on the gains above the cost basis of $461k. Last time I looked at Nationwide, a sales rep offered that product for 1.3%, maybe I can call them direct and obtain a cheaper rate without a FA?

I did confirm with Vanguard that I can do a 1035 exchange for just their fund fees, highest one is 0.6 or so. It would allow the fund to grow. But if I do a straight 1035 exchange without paying taxes on the gains now, I’m just deferring the gains taxes (hopefully lower rate) for later. What you described at the end is new information to me. I thought the gains are taxable? I haven’t seen an annuity product that allows growth without taxation.
Yes, if you go through an advisor they will charge you a management fee, 1.3% in your case. You can call Nationwide and go direct and pay no fee at
https://www.nationwideadvisory.com/
An annuity rescue plan involves the use of a single premium immediate annuity and a life insurance policy. You will pay taxes on distributions from the SPIA but what is left over after paying the taxes is used to purchase insurance . It effectively converts taxable ordinary income into tax free insurance proceeds at your death and recovers all the taxes that you paid. This has to be structured properly with a fee only insurance advisor. You can message me if you want and I can give you more details on the particulars.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain
FoolStreet
Posts: 1048
Joined: Fri Sep 07, 2012 12:18 am

Re: Inherited Annuity question(s)

Post by FoolStreet »

Question: How do I get my money out of this annuity?

Answer: Buy another annuity!
Topic Author
malujerry
Posts: 15
Joined: Tue Sep 10, 2019 9:55 am

Re: Inherited Annuity question(s)

Post by malujerry »

FBN2014 wrote: Tue Oct 15, 2019 5:56 pm
malujerry wrote: Tue Oct 15, 2019 1:18 pm
FBN2014 wrote: Thu Oct 10, 2019 8:37 am
malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.

Yes, you’re correct, I’m the sole beneficiary and will have the pay taxes on the gains above the cost basis of $461k. Last time I looked at Nationwide, a sales rep offered that product for 1.3%, maybe I can call them direct and obtain a cheaper rate without a FA?

I did confirm with Vanguard that I can do a 1035 exchange for just their fund fees, highest one is 0.6 or so. It would allow the fund to grow. But if I do a straight 1035 exchange without paying taxes on the gains now, I’m just deferring the gains taxes (hopefully lower rate) for later. What you described at the end is new information to me. I thought the gains are taxable? I haven’t seen an annuity product that allows growth without taxation.
Yes, if you go through an advisor they will charge you a management fee, 1.3% in your case. You can call Nationwide and go direct and pay no fee at
https://www.nationwideadvisory.com/
An annuity rescue plan involves the use of a single premium immediate annuity and a life insurance policy. You will pay taxes on distributions from the SPIA but what is left over after paying the taxes is used to purchase insurance . It effectively converts taxable ordinary income into tax free insurance proceeds at your death and recovers all the taxes that you paid. This has to be structured properly with a fee only insurance advisor. You can message me if you want and I can give you more details on the particulars.
I contacted Nationwide and you’re correct about being able to go through them directly. And the $20/month charge is lower than the percentage charge that Vanguard offers in my case. I’ll investigate further, thank you!
FoolStreet
Posts: 1048
Joined: Fri Sep 07, 2012 12:18 am

Re: Inherited Annuity question(s)

Post by FoolStreet »

FBN2014 wrote: Tue Oct 15, 2019 5:56 pm
malujerry wrote: Tue Oct 15, 2019 1:18 pm
FBN2014 wrote: Thu Oct 10, 2019 8:37 am
malujerry wrote: Tue Sep 10, 2019 10:06 am My mother passed away and left me an annuity with Lincoln. Non-qualified, variable, already in distribution mode. Value is $750k, cash/cost basis/non taxable amount is $461k.

1) Should I cash out and be subject to NY and federal taxes to pay off my house, $520k left, 26 years at 4.2%?

2) Should I cash out and place the money into other investments?

3) Leave it in Lincoln with i4life rider (3.61% fees) that gives me guaranteed income, with part of that income non-taxed for life? This was recommended from my mom’s financial advisor, not sure if I can trust him.

4) do a 1035 exchange to a cheaper annuity company like Nationwide or Jackson? I spoke to 3 other financial advisors and they recommended switching to those companies because of lower fees, around 1.5%. Not sure if I can trust them.

I’m 37, no other debts, do not need the money, have one child. I’d like to make the best long term decision.
Your getting some really bad advice on this thread that will cost you big time. I imagine you were the beneficiary on the annuity so you now own it. This is a taxable event so there is no way around it you have to pay the taxes. That being said you can probably mitigate the taxes owed by doing a 1035 exchange to a Nationwide VA called Monument Advisor. The fees are almost zero in this VA. There are no mortality and expense fees. You pay $20/month administrative fee plus any expense ratio fees for the sub accounts. It has very low fee index funds from Vanguard and DFA. This VA is the only one I know of that allows you to take the distributions as if this was a stretch IRA. So you can take the distributions over your life expectancy according to the IRS tables. This will greatly lower the tax burden and allow the account to keep on growing tax deferred. You don't need an advisor to do this. After you let it grow for the next 30 years then you can do an annuity rescue move that will pass the entire account value tax free to your heirs. I know this because my family had the exact same scenario but we were able to inherit the entire value of a $1 million annuity with 600K in gains entirely tax free. In 30 years your annuity will be in the millions, all tax free.

Yes, you’re correct, I’m the sole beneficiary and will have the pay taxes on the gains above the cost basis of $461k. Last time I looked at Nationwide, a sales rep offered that product for 1.3%, maybe I can call them direct and obtain a cheaper rate without a FA?

I did confirm with Vanguard that I can do a 1035 exchange for just their fund fees, highest one is 0.6 or so. It would allow the fund to grow. But if I do a straight 1035 exchange without paying taxes on the gains now, I’m just deferring the gains taxes (hopefully lower rate) for later. What you described at the end is new information to me. I thought the gains are taxable? I haven’t seen an annuity product that allows growth without taxation.
Yes, if you go through an advisor they will charge you a management fee, 1.3% in your case. You can call Nationwide and go direct and pay no fee at
https://www.nationwideadvisory.com/
An annuity rescue plan involves the use of a single premium immediate annuity and a life insurance policy. You will pay taxes on distributions from the SPIA but what is left over after paying the taxes is used to purchase insurance . It effectively converts taxable ordinary income into tax free insurance proceeds at your death and recovers all the taxes that you paid. This has to be structured properly with a fee only insurance advisor. You can message me if you want and I can give you more details on the particulars.
Jokes aside, thanks for your detailed response to OP.
Topic Author
malujerry
Posts: 15
Joined: Tue Sep 10, 2019 9:55 am

Re: Inherited Annuity question(s)

Post by malujerry »

Update: The Nationwide account for $20/month isn’t available for NY if I stick with the low cost 3 funds from Vanguard. They charge 0.25% plus fund fees which would be slightly higher in fees over the long run. So looks like going direct via Vanguard is the lowest cost option to stay in a 3 fund portfolio.
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