Capital gains on annuity

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
4nursebee
Posts: 1259
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Capital gains on annuity

Post by 4nursebee » Tue Jun 11, 2019 8:07 am

When talking to the rep with Fidelity, we were surprised to learn something about our annuity. We had been planning on doing one of two things with it, taking payments as joint life or 5 years guarantee. We had been leaning towards the 5 yr plan to minimize needing to pull much from our retirement accounts right at the start of retirement. It would take >21 years for the joint life payout was more in todays dollars than the 5 yr plan.
The rep told us we could also just pull it all out right now. Basis 55K, 275K gain. I think our state has 5% capital gains, federal rate 15%? If we pulled all the money out now, we could pay off all of our rental properties, have 100K leftover, and have extra rental income in excess of what the joint life payout would be. This seems like a no brainer, gotta do it? We have 40-50K of carryover losses.
Do we get all the money now and have to pay tax at end of year?
Would Fido pull taxes out before paying us?
Can you confirm this would not count as ordinary income, just capital gains?
Am I missing anything in this?
What would you do?
Age 51/62, have >25X otherwise.
4nursebee

fabdog
Posts: 583
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Capital gains on annuity

Post by fabdog » Tue Jun 11, 2019 8:51 am

All earnings in an annuity are ordinary income. That's one of the drawbacks of annuity (if you can find a good low fee one) vs a taxable account

Fidelity will withhold income taxes for you, for both federal and state, and you should be able to tell them what % you want held back

Depending on whose name the annuity is in, you may have an additional 10% penalty for early withdrawal if under 59.5 years

I would hesitate to pull all $275K in earnings in one go, it will likely shift your tax bracket. If you do pull it out, you can look at your other taxes withheld vs what you paid last year to make sure you are in the safe harbor, depending on income, and then settle up next year on your taxes. If not in safe harbor, make enough estimates or additional withholding to get there

So it's not a no brainer for me, you should model this based on your rental income (will lose the mortgage interest, but you have losses) your other income, and the delta in taxes. Not clear why you wouldn't wait to pull this money till you stopped working as you had originally planned as a bridge in your early retirement years

Mike

User avatar
Topic Author
4nursebee
Posts: 1259
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Capital gains on annuity

Post by 4nursebee » Tue Jun 11, 2019 10:16 am

Thank you fabdog, I really had no clue this would be taxed as ordinary income. It does indeed change things.
4nursebee

User avatar
HueyLD
Posts: 6885
Joined: Mon Jan 14, 2008 10:30 am

Re: Capital gains on annuity

Post by HueyLD » Tue Jun 11, 2019 10:57 am

Based on what the OP posted, I think what he owns is a non-qualified variable annuity. Please confirm this understanding, OP.

Additional bad news for non-qualified VA is that unless you annuitize the VA, any withdrawal (partial or total) will be taxable until all earnings are withdrawn. In other words, earnings are taxed first as ordinary income before you can withdraw the basis. In addition, the 10% early withdrawal penalty will apply for those under the age of 59 1/2.

With the above knowledge in mind, the OP can decide how much tax he wants to pay every year on VA withdrawals.

User avatar
Topic Author
4nursebee
Posts: 1259
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Capital gains on annuity

Post by 4nursebee » Tue Jun 11, 2019 11:20 am

One of the nice things about saving a lot early on is that a lot of these changes do not really change the overall outcomes for us.
I just ran numbers 10 years out assuming 7% SP500 growth and taking the annuity out over 5 years and I still like how well it can work.
4nursebee

Post Reply