taxes related to annuity account

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dory_SF
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Joined: Sat Nov 30, 2019 11:34 am

taxes related to annuity account

Post by dory_SF » Sat Nov 30, 2019 12:10 pm

Hi all,

This is my first post on this forum. I have Learned a lot from Bogleheads. I appreciate it.

In 2018, I transferred part of my pre-tax 401K to an annuity account. The annuity account is an IRA, also pre-tax.
This year, my employer allows me to make after-tax contribution beyond the annual limit of $19,000 and then converted it to Roth IRA.
Since I have money left after maxing out the regular 401K and other expenses, I think this is a good option for me.
However, does my annuity account have any impact on the Roth IRA conversion due to the pro-rata rule?

For example, I have $70,000 in the annuity account. In 2019, I made $20,000 after-tax contribution and earned $1500 before converting to Roth IRA. How much money is taxable if I convert all $21,500 to Roth IRA? Is it just $1500, not considering the annuity account or $1500 + $20,000x(7/9)?

Also, if I keep the annuity account, how does it impact each year in the future?

Thanks.

ivk5
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Joined: Thu Sep 22, 2016 9:05 am

Re: taxes related to annuity account

Post by ivk5 » Sat Nov 30, 2019 3:59 pm

If the annuity is in an IRA, it is likely going to affect taxability of Roth conversions due to the pro rata rule. (You must report all IRA balances on Form 8606.)

Separately- you didn’t ask but would be remiss not to point out that you are likely paying significant unnecessary fees, for no change in tax treatment, to hold an annuity in an IRA.

Broken Man 1999
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Re: taxes related to annuity account

Post by Broken Man 1999 » Sat Nov 30, 2019 4:09 pm

dory_SF wrote:
Sat Nov 30, 2019 12:10 pm
Hi all,

This is my first post on this forum. I have Learned a lot from Bogleheads. I appreciate it.

In 2018, I transferred part of my pre-tax 401K to an annuity account. The annuity account is an IRA, also pre-tax.
This year, my employer allows me to make after-tax contribution beyond the annual limit of $19,000 and then converted it to Roth IRA.
Since I have money left after maxing out the regular 401K and other expenses, I think this is a good option for me.
However, does my annuity account have any impact on the Roth IRA conversion due to the pro-rata rule?

For example, I have $70,000 in the annuity account. In 2019, I made $20,000 after-tax contribution and earned $1500 before converting to Roth IRA. How much money is taxable if I convert all $21,500 to Roth IRA? Is it just $1500, not considering the annuity account or $1500 + $20,000x(7/9)?

Also, if I keep the annuity account, how does it impact each year in the future?

Thanks.
Is the annuity a QLAC? If so you might have less $$$ subject to RMDs. I have no idea of the interplay of a QLAC in conversions to Roths. Maybe someone more knowledgeable might expound on the subject.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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FiveK
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Re: taxes related to annuity account

Post by FiveK » Sun Dec 01, 2019 3:52 pm

dory_SF wrote:
Sat Nov 30, 2019 12:10 pm
In 2018, I transferred part of my pre-tax 401K to an annuity account. The annuity account is an IRA, also pre-tax.
As others have indicated "annuity account" could refer to many different things and, unfortunately, most of those things are bad for you and good for the person who sold you on the idea. But some could be ok. Can you provide more specifics?

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Stinky
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Re: taxes related to annuity account

Post by Stinky » Sun Dec 01, 2019 4:21 pm

ivk5 wrote:
Sat Nov 30, 2019 3:59 pm
Separately- you didn’t ask but would be remiss not to point out that you are likely paying significant unnecessary fees, for no change in tax treatment, to hold an annuity in an IRA.
I wanted to emphasize this point. Accumulation annuities are often sold based on their "tax sheltering" properties. Since the IRA is already tax-sheltered, you are effectively paying annuity fees for double-tax-sheltering, which is of no value to you.

The agent who sold you an annuity inside an IRA made a nice commission. And you may be stuck with a surrender charge if you want to get out of the annuity now. The agent wins, you lose.
It's a GREAT day to be alive - Travis Tritt

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ThePrune
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Re: taxes related to annuity account

Post by ThePrune » Mon Dec 02, 2019 12:30 pm

dory_SF wrote:
Sat Nov 30, 2019 12:10 pm
However, does my annuity account have any impact on the Roth IRA conversion due to the pro-rata rule?

For example, I have $70,000 in the annuity account. In 2019, I made $20,000 after-tax contribution and earned $1500 before converting to Roth IRA. How much money is taxable if I convert all $21,500 to Roth IRA? Is it just $1500, not considering the annuity account or $1500 + $20,000x(7/9)?

Also, if I keep the annuity account, how does it impact each year in the future?
Any IRA accounts you have, such as the IRA annuity, have no impact on the Roth conversion from a qualified employer retirement plan, such as your 401(k). IRA's are aggregated with IRAs only for pro-rata / tax purposes. Keep in mind that an "IRA" includes SARSEP, SEP and SIMPLE IRAs, not just traditional IRAs.

You mentioned that your employer allowed you to make what is termed an "in-service" distribution to create your annuity IRA. Readers of this posting stream should note that employer retirement savings plans are allowed but not required to offer such distributions. It's nice that your employer plan allowed this!

IRS Notice 2014-54 gives you another option which you might not be aware of. Specifically, as long as your qualified retirement plan distributions are "essentially at the same time", you have the power to split up those funds and direct them into various types of accounts. For example, you could direct your distribution of after-tax contributions into a Roth IRA, while directing distributions of pre-tax earnings or pre-tax salary deferrals into a traditional IRA. Read through the "Guidance" and "Examples" in this IRS Notice to better understand your options.
Investment skill is often just luck in sheep's clothing.

Topic Author
dory_SF
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Joined: Sat Nov 30, 2019 11:34 am

Re: taxes related to annuity account

Post by dory_SF » Mon Dec 09, 2019 2:39 pm

Thank you all for your responses.

I have 2 questions:

1. I contacted the agent who sold me the annuity.
He says pro-rata rule applies to conversion from non-deductible IRA to roth IRA, not 401K in-plan conversion from after-tax contribution to roth IRA. Is it true?

2. I would like to increase roth IRA in my retirement portfolio. My current employer allows in-plan conversion from after-tax contribution to roth IRA. However, I may change jobs. My future employer may not allow this. So I may need to do conversion from non-deductible IRA to roth IRA in future years.

Should I consider rolling over the annuity to my current pre-tax 401K plan for the following reasons?

(1) The annuity account makes the taxes complicated.
(2) I don't really need a fixed income if my retirement portfolio is robust enough.
(3) I don't like not being able to control my own money.

Here are the details about my annuity account:
1) It was transferred from my previous pre-tax 401K.
2) It accounts for <5% of my portfolio.
3) the surrender charge is about $5000 (7%) if I cancel the account.
4) It has 3.5% cap interest rate with guaranteed rollup interest rate 4%.
5) Annual charge is about 1%.

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Stinky
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Location: Sweet Home Alabama

Re: taxes related to annuity account

Post by Stinky » Mon Dec 09, 2019 5:25 pm

dory_SF wrote:
Mon Dec 09, 2019 2:39 pm
Should I consider rolling over the annuity to my current pre-tax 401K plan for the following reasons?

(1) The annuity account makes the taxes complicated.
(2) I don't really need a fixed income if my retirement portfolio is robust enough.
(3) I don't like not being able to control my own money.

Here are the details about my annuity account:
1) It was transferred from my previous pre-tax 401K.
2) It accounts for <5% of my portfolio.
3) the surrender charge is about $5000 (7%) if I cancel the account.
4) It has 3.5% cap interest rate with guaranteed rollup interest rate 4%.
5) Annual charge is about 1%.
Those are all valid reasons for canceling the annuity. However, I’d hate to see you get hosed on the surrender charge. Meanwhile, the annuity expenses are chewing out about 1% per year vs what you could pay on low cost funds.

How many years remain on the surrender charge? If it’s seven or more, I’d probably bite the bullet and surrender now. If it’s less than seven years, I’d likely keep the annuity under surrender charge drops off.

I’m sorry for you that you were sold this turkey. I wouldn’t seek any more advice from the advisor salesman who pushed it on you.
It's a GREAT day to be alive - Travis Tritt

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