Variable annuity - mandatory annuitization

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OMYx3
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Variable annuity - mandatory annuitization

Post by OMYx3 »

We are helping my wife's father determine what to do with a variable annuity. He is the sole beneficiary of the annuity, which was owned by his wife before she passed away earlier this year. The annuity was an Equitable Accumulator Elite (non-qualified) contract. It has a value of about $135k, including capital gains of approximately $87k. They have owned it long enough there should be no surrender fees. Their financial advisor is saying it has a mandatory annuitization at age 85 (and he is currently age 82). :(

One option would be to cash out the annuity and pay taxes on the $87k of gains. Another option would be to keep it with Equitable and annuitize it before he turns 85. The financial advisor mentioned a Lincoln Financial product (ChoicePlus variable annuity), which doesn't require annuitization until age 99, and that it could be transferred from Equitable to Lincoln without any taxable event.

We want to help him get the highest after-tax value out of this annuity and would prefer not to annuitize it (unless there is a way to do this where we can still get the full value of the annuity, or something close to it).

Has anyone found any good solutions to this dilemma? Thanks so much for any thoughts / ideas! :beer
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Stinky
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Re: Variable annuity - mandatory annuitization

Post by Stinky »

OMYx3 wrote: Wed Jun 22, 2022 3:44 pm We are helping my wife's father determine what to do with a variable annuity. He is the sole beneficiary of the annuity, which was owned by his wife before she passed away earlier this year. The annuity was an Equitable Accumulator Elite (non-qualified) contract. It has a value of about $135k, including capital gains of approximately $87k. They have owned it long enough there should be no surrender fees. Their financial advisor is saying it has a mandatory annuitization at age 85 (and he is currently age 82). :(

One option would be to cash out the annuity and pay taxes on the $87k of gains. Another option would be to keep it with Equitable and annuitize it before he turns 85. The financial advisor mentioned a Lincoln Financial product (ChoicePlus variable annuity), which doesn't require annuitization until age 99, and that it could be transferred from Equitable to Lincoln without any taxable event.

We want to help him get the highest after-tax value out of this annuity and would prefer not to annuitize it (unless there is a way to do this where we can still get the full value of the annuity, or something close to it).

Has anyone found any good solutions to this dilemma? Thanks so much for any thoughts / ideas! :beer
I absolutely would not buy yet another annuity. He’d almost certainly restart with a fat surrender charge, and the agent would make a handsome commission.

You will maximize the value if you get out of the annuity as soon as is reasonably possible, since the annuity fees (at least 1% per year, likely around 2%) are cutting into the return every year.

The trick will be to minimize taxes. There’s no way to avoid taxes, and since this is an annuity, the taxable income will be at ordinary income rates, not capital gains rates. There is no step up at death.

I’d consider doing partial surrenders up to the top of his tax bracket each year until he drains the annuity. Hopefully, he can draw out all earnings over the next three years.

Post back with questions.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
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OMYx3
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Re: Variable annuity - mandatory annuitization

Post by OMYx3 »

Thanks so much!!
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Mel Lindauer
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Re: Variable annuity - mandatory annuitization

Post by Mel Lindauer »

Stinky wrote: Wed Jun 22, 2022 3:54 pm
OMYx3 wrote: Wed Jun 22, 2022 3:44 pm We are helping my wife's father determine what to do with a variable annuity. He is the sole beneficiary of the annuity, which was owned by his wife before she passed away earlier this year. The annuity was an Equitable Accumulator Elite (non-qualified) contract. It has a value of about $135k, including capital gains of approximately $87k. They have owned it long enough there should be no surrender fees. Their financial advisor is saying it has a mandatory annuitization at age 85 (and he is currently age 82). :(

One option would be to cash out the annuity and pay taxes on the $87k of gains. Another option would be to keep it with Equitable and annuitize it before he turns 85. The financial advisor mentioned a Lincoln Financial product (ChoicePlus variable annuity), which doesn't require annuitization until age 99, and that it could be transferred from Equitable to Lincoln without any taxable event.

We want to help him get the highest after-tax value out of this annuity and would prefer not to annuitize it (unless there is a way to do this where we can still get the full value of the annuity, or something close to it).

Has anyone found any good solutions to this dilemma? Thanks so much for any thoughts / ideas! :beer
I absolutely would not buy yet another annuity. He’d almost certainly restart with a fat surrender charge, and the agent would make a handsome commission.

You will maximize the value if you get out of the annuity as soon as is reasonably possible, since the annuity fees (at least 1% per year, likely around 2%) are cutting into the return every year.

The trick will be to minimize taxes. There’s no way to avoid taxes, and since this is an annuity, the taxable income will be at ordinary income rates, not capital gains rates. There is no step up at death.

I’d consider doing partial surrenders up to the top of his tax bracket each year until he drains the annuity. Hopefully, he can draw out all earnings over the next three years.

Post back with questions.
Unless he can get the mandatory annuity age changed (it can be done), this is probably your best bet.
Best Regards - Mel | | Semper Fi
Rex66
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Re: Variable annuity - mandatory annuitization

Post by Rex66 »

not sure why he would want to change the annuitization age. He would just continue to pay the fees within the annuity until whatever age is was set to. Since there is no step up at death, thats not an awesome option unless he then dies and the recipient of the annuity is in a very low tax bracket. I would ask what payout options currently exist in the current contract. Definitely do not buy another annuity. If there was like a 5 year or 10 year payout period i might chose that to lessen the tax bite per year. Id consider annuitization possibly now IF he is in excellent health and this old annuity had better annuitization rates (bc of interest rates and presumed lifespan at that time).
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Stinky
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Re: Variable annuity - mandatory annuitization

Post by Stinky »

Mel Lindauer wrote: Wed Jun 22, 2022 5:06 pm
Stinky wrote: Wed Jun 22, 2022 3:54 pm
OMYx3 wrote: Wed Jun 22, 2022 3:44 pm We are helping my wife's father determine what to do with a variable annuity. He is the sole beneficiary of the annuity, which was owned by his wife before she passed away earlier this year. The annuity was an Equitable Accumulator Elite (non-qualified) contract. It has a value of about $135k, including capital gains of approximately $87k. They have owned it long enough there should be no surrender fees. Their financial advisor is saying it has a mandatory annuitization at age 85 (and he is currently age 82). :(

One option would be to cash out the annuity and pay taxes on the $87k of gains. Another option would be to keep it with Equitable and annuitize it before he turns 85. The financial advisor mentioned a Lincoln Financial product (ChoicePlus variable annuity), which doesn't require annuitization until age 99, and that it could be transferred from Equitable to Lincoln without any taxable event.

We want to help him get the highest after-tax value out of this annuity and would prefer not to annuitize it (unless there is a way to do this where we can still get the full value of the annuity, or something close to it).

Has anyone found any good solutions to this dilemma? Thanks so much for any thoughts / ideas! :beer
I absolutely would not buy yet another annuity. He’d almost certainly restart with a fat surrender charge, and the agent would make a handsome commission.

You will maximize the value if you get out of the annuity as soon as is reasonably possible, since the annuity fees (at least 1% per year, likely around 2%) are cutting into the return every year.

The trick will be to minimize taxes. There’s no way to avoid taxes, and since this is an annuity, the taxable income will be at ordinary income rates, not capital gains rates. There is no step up at death.

I’d consider doing partial surrenders up to the top of his tax bracket each year until he drains the annuity. Hopefully, he can draw out all earnings over the next three years.

Post back with questions.
Unless he can get the mandatory annuity age changed (it can be done), this is probably your best bet.
Even if he can extend the annuitization age, he’s likely incurring about $2,500 per year in excess fees beyond those he’d have if the cash value was invested in mutual funds outside the annuity.

I’d still try to drain as soon as is reasonably possible.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
Wrench
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Re: Variable annuity - mandatory annuitization

Post by Wrench »

Stinky - Would it be possible to do a 1035 exchange into a MYGA? If it were possible, that would minimize annual fees, maintain tax deferral and allow limited withdrawals every year without fees (assuming the MYGA allows it). That could spread the tax pain over a number of years, though probably only until about 90 as most companies limit the maximum age for a MYGA to 90.

Wrench
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Re: Variable annuity - mandatory annuitization

Post by Stinky »

Wrench wrote: Wed Jun 22, 2022 6:19 pm Stinky - Would it be possible to do a 1035 exchange into a MYGA? If it were possible, that would minimize annual fees, maintain tax deferral and allow limited withdrawals every year without fees (assuming the MYGA allows it). That could spread the tax pain over a number of years, though probably only until about 90 as most companies limit the maximum age for a MYGA to 90.

Wrench
Yes, that would work.

And the $135k size of the annuity is below the guaranty fund limit for most states.
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Rex66
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Re: Variable annuity - mandatory annuitization

Post by Rex66 »

U can but you need a plan at age 90 or whatever

Currently you would just be aggravating the tax problem by pushing it down the road a few years

Also most likely the annuity has a 5-10 year payout option
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Re: Variable annuity - mandatory annuitization

Post by Wrench »

Stinky wrote: Wed Jun 22, 2022 6:21 pm
Wrench wrote: Wed Jun 22, 2022 6:19 pm Stinky - Would it be possible to do a 1035 exchange into a MYGA? If it were possible, that would minimize annual fees, maintain tax deferral and allow limited withdrawals every year without fees (assuming the MYGA allows it). That could spread the tax pain over a number of years, though probably only until about 90 as most companies limit the maximum age for a MYGA to 90.

Wrench
Yes, that would work.

And the $135k size of the annuity is below the guaranty fund limit for most states.
OP - so this is what i would strongly recommend. Do a 1035 exchange to a multi year guaranteed annuity (MYGA). If you do not know this product see Stinky's excellent thread about them:
viewtopic.php?t=334589
You can get quotes from https://www.blueprintincome.com/fixed-annuities.
Interest rates from an A-rated insurance company are now about 4%, and all interest (not withdrawn) is tax deferred. Terms of up to 10 years are available. This approach gets you out of the variable annuity into a product with low fees, reasonable return and continued tax deferral. As Stinky points out, the amount should be below the guaranty fund limit (varies by state but most are on the order of $250K) so risk is relatively low. Further questions, post back - Stinky is the BH MYGA expert. If he cannot answer your questions, chances are no one can!

Wrench
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Re: Variable annuity - mandatory annuitization

Post by exodusNH »

Wrench wrote: Wed Jun 22, 2022 6:35 pm
Stinky wrote: Wed Jun 22, 2022 6:21 pm
Wrench wrote: Wed Jun 22, 2022 6:19 pm Stinky - Would it be possible to do a 1035 exchange into a MYGA? If it were possible, that would minimize annual fees, maintain tax deferral and allow limited withdrawals every year without fees (assuming the MYGA allows it). That could spread the tax pain over a number of years, though probably only until about 90 as most companies limit the maximum age for a MYGA to 90.

Wrench
Yes, that would work.

And the $135k size of the annuity is below the guaranty fund limit for most states.
OP - so this is what i would strongly recommend. Do a 1035 exchange to a multi year guaranteed annuity (MYGA). If you do not know this product see Stinky's excellent thread about them:
viewtopic.php?t=334589
You can get quotes from https://www.blueprintincome.com/fixed-annuities.
Interest rates from an A-rated insurance company are now about 4%, and all interest (not withdrawn) is tax deferred. Terms of up to 10 years are available. This approach gets you out of the variable annuity into a product with low fees, reasonable return and continued tax deferral. As Stinky points out, the amount should be below the guaranty fund limit (varies by state but most are on the order of $250K) so risk is relatively low. Further questions, post back - Stinky is the BH MYGA expert. If he cannot answer your questions, chances are no one can!

Wrench
And if you find one that allows something like 10% penalty-free withdrawals per year, you can start draining it while controlling the taxes.
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Re: Variable annuity - mandatory annuitization

Post by Mel Lindauer »

Stinky wrote: Wed Jun 22, 2022 5:53 pm
Mel Lindauer wrote: Wed Jun 22, 2022 5:06 pm
Stinky wrote: Wed Jun 22, 2022 3:54 pm
OMYx3 wrote: Wed Jun 22, 2022 3:44 pm We are helping my wife's father determine what to do with a variable annuity. He is the sole beneficiary of the annuity, which was owned by his wife before she passed away earlier this year. The annuity was an Equitable Accumulator Elite (non-qualified) contract. It has a value of about $135k, including capital gains of approximately $87k. They have owned it long enough there should be no surrender fees. Their financial advisor is saying it has a mandatory annuitization at age 85 (and he is currently age 82). :(

One option would be to cash out the annuity and pay taxes on the $87k of gains. Another option would be to keep it with Equitable and annuitize it before he turns 85. The financial advisor mentioned a Lincoln Financial product (ChoicePlus variable annuity), which doesn't require annuitization until age 99, and that it could be transferred from Equitable to Lincoln without any taxable event.

We want to help him get the highest after-tax value out of this annuity and would prefer not to annuitize it (unless there is a way to do this where we can still get the full value of the annuity, or something close to it).

Has anyone found any good solutions to this dilemma? Thanks so much for any thoughts / ideas! :beer
I absolutely would not buy yet another annuity. He’d almost certainly restart with a fat surrender charge, and the agent would make a handsome commission.

You will maximize the value if you get out of the annuity as soon as is reasonably possible, since the annuity fees (at least 1% per year, likely around 2%) are cutting into the return every year.

The trick will be to minimize taxes. There’s no way to avoid taxes, and since this is an annuity, the taxable income will be at ordinary income rates, not capital gains rates. There is no step up at death.

I’d consider doing partial surrenders up to the top of his tax bracket each year until he drains the annuity. Hopefully, he can draw out all earnings over the next three years.

Post back with questions.
Unless he can get the mandatory annuity age changed (it can be done), this is probably your best bet.
Even if he can extend the annuitization age, he’s likely incurring about $2,500 per year in excess fees beyond those he’d have if the cash value was invested in mutual funds outside the annuity.

I’d still try to drain as soon as is reasonably possible.
I wasn't disagreeing with your recommendations at all, Stinky. Just wanted him to know that it was possible to change the mandatory annuitization date if there was some benefit to doing so, like spreading out the withdrawal period for tax optimization purposes.
Best Regards - Mel | | Semper Fi
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Stinky
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Re: Variable annuity - mandatory annuitization

Post by Stinky »

One thing that OP hasn’t told us is whether the desired future allocation of the funds currently in the annuity is tilted toward equities or fixed income.

My recommendation to get the funds out of the VA relatively quickly would line up with a future equity allocation. All earnings in an annuity, including those arising from equities, are taxed as ordinary income. So a variable annuity is a very tax-inefficient place to hold equities. A much better place to hold equities is in a taxable account.

However, if OP’s relative wants fixed income exposure going forward, the MYGA or 10 year annuity option makes a lot of sense.
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Rex66
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Re: Variable annuity - mandatory annuitization

Post by Rex66 »

I guess we need to know current income/tax situation and what he will do with the money to better game this as well as health.

If very healthy might want to withdrawal some and actually annuitize remaining with current contract
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OMYx3
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Re: Variable annuity - mandatory annuitization

Post by OMYx3 »

OP here. Thanks so much for all the great thoughts and feedback!

If I understand correctly, if he bought a MYGA and passed away before the end of the term, the beneficiaries (his children) would still be entitled to the remaining account value plus any accrued interest. Is that right?

My wife's father is in decent health, other than some issues with back and hip pain (likely to have a hip replacement in the next couple months). Not sure this is a scenario to bet on longevity though.

Income situation is primarily social security and a $20k / year pension payments. There are a few taxable payments related to the passing of his wife in 2022; however, he will also be able to file MFJ for one more year in 2022. So, this could provide some opportunity to liquidate at least part of the VA. He has flexibility with this money, to be either fixed income or equities.

It sounds like we should find out what options are available with the current annuity (e.g., 5 year or 10 year guaranteed payouts), and also explore the MYGA (assuming I understand the death benefits correctly).

Thanks again!! A LOT of value that comes from this group!!
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Re: Variable annuity - mandatory annuitization

Post by Stinky »

OMYx3 wrote: Wed Jun 22, 2022 7:50 pm OP here. Thanks so much for all the great thoughts and feedback!

If I understand correctly, if he bought a MYGA and passed away before the end of the term, the beneficiaries (his children) would still be entitled to the remaining account value plus any accrued interest. Is that right?

My wife's father is in decent health, other than some issues with back and hip pain (likely to have a hip replacement in the next couple months). Not sure this is a scenario to bet on longevity though.

Income situation is primarily social security and a $20k / year pension payments. There are a few taxable payments related to the passing of his wife in 2022; however, he will also be able to file MFJ for one more year in 2022. So, this could provide some opportunity to liquidate at least part of the VA. He has flexibility with this money, to be either fixed income or equities.

It sounds like we should find out what options are available with the current annuity (e.g., 5 year or 10 year guaranteed payouts), and also explore the MYGA (assuming I understand the death benefits correctly).

Thanks again!! A LOT of value that comes from this group!!
On the MYGA - the majority of products have a death benefit equal to full accrued account value, including accrued interest. However, some of the lower rated companies have lesser death benefits, such as offsetting the account value with remaining surrender charges. The Blueprint Income website does a good job of explaining the death benefit for each MYGA product that they sell.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
Rex66
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Re: Variable annuity - mandatory annuitization

Post by Rex66 »

Yep and I wouldn’t bet on this new agent to give good info or advice

The original contract would have the details but might be hard to find so you would have to rely on the original insurance company for info
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OMYx3
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Re: Variable annuity - mandatory annuitization

Post by OMYx3 »

Yes, we've already experienced this with the existing agent / broker. Thanks again for all the helpful thoughts and feedback!! Hope to meet some of you in Chicago in a few months!
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Re: Variable annuity - mandatory annuitization

Post by Stinky »

OMYx3 wrote: Thu Jun 23, 2022 9:00 am Yes, we've already experienced this with the existing agent / broker. Thanks again for all the helpful thoughts and feedback!! Hope to meet some of you in Chicago in a few months!
Yes, I’ll be at the conference. See you there!
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
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