Annuitization and Direct Transfer Taxable?

Submitted by Michael Andrzejewski on Sun, 2008-12-21 19:15

Trying to get out of 5 year old annuity, with 10 years of surrender left. Can I annuitize for 5 annual payments, and transfer directly into a 5 or 6 year annuity? Is this taxable? Anyone know where this is discussed in the IRS Code?

Thanks



Submitted by Alan Spross on Sun, 2008-12-21 19:29

Taxation rules depend on whether this annuity is in an IRA or not.

This annuity had surrender charges for 15 YEARS??? With respect to surrender charges, they typically do not apply if you annuitize the contract, and taxes are not incurred until distributions are taken out of the annuity or out of the IRA if it is an IRA annuity.



Submitted by Michael Andrzejewski on Sun, 2008-12-21 20:01

Yes, it was a 15% term annuity, with a 5% premium bonus. It IS in an
IRA. If I do annuitize, I would intend to transfer the annual payments into a new IRA, with the 5 or 6 year surrender. My thinking is that the surrender charges are lower, if I need to take anything out, over my 10% free withdrawals.

Is this feasible, and would you know where this is discussed in the Code?

Thanks.



Submitted by Alan Spross on Mon, 2008-12-22 02:55

I do not know where this particular issue would be covered in the tax code because most of what you propose is not tax related, rather it is whether an insurer will waive surrender charges for annuitizing a contract.

If the annuitization continues in an IRA, there is no current tax due because nothing is being distributed out of the IRA to you. If you need funds in excess of the 10% withdrawal option, then you will also have to distribute them from the IRA which is taxable and subject to penalty if you are under 59.5.

When you refer to needing more than the 10%, I assume that means you need the money for other uses, which means an IRA distribution. Are you just trying to set this up so that the regular tax only would be due without an insurance contract surrender charge in addition?

Or are you just trying to get funds out of the annuity earlier so you can make other investments in an IRA?



Submitted by Michael Andrzejewski on Mon, 2008-12-22 03:30

Yes, I am just trying to get the funds out of this annuity earlier. I do not wish to receive any distributions from this IRA now. I want to annuitize
my current annuity, per the contract, and if the payments are acceptable
to me, transfer them to another IRA, in the form of a 5 or 6 year annuity, with lower surrender charges and better overall benefits.



Submitted by Alan Spross on Mon, 2008-12-22 04:03

If the insurer will agree to the annuitization, then the only concern would be the mechanics of how to structure the rollovers because you are only allowed one rollover per IRA account over a 12 month period. Therefore, these payments will have to move by direct trustee transfer. It is possible the insurance company may provide broader options for this if you keep the new IRA with them, although that may not provide you with the investment options you want.

With direct transfer, there is no 1099R issued and you do not have to report any rollovers on your return.

Al Fry works with annuities, and I do not, so he would know better whether you can expect problems getting this done. He may chime in on this.



Submitted by Al Fry on Mon, 2008-12-22 14:30

If the current annuity is in an IRA custodial Account, then the payments will be made to the custodian. Then another annuity could be purchased within the CA, or the payments can be transferred to another stand-alone annuity or within another CA. If it is already a stand-alone IRA annuity, you may have trouble convincing the carier to transfer each payment to another carrier.



Submitted by Alan Spross on Mon, 2008-12-22 19:11

Al,
Would a typical insurer customarily annuitize contracts at any time, or are there situations where they usually refuse?



Submitted by Al Fry on Mon, 2008-12-22 19:21

I don’t think so. If the agent selected a front-end commission (v. levelized), the agent might get a charge-back if annuitized in first year. Plus NY will not allow a deferred contract to be annuitized prior to the 13th month. They apparently misunderstand IRC Sec. 72(u).



Submitted by Michael Andrzejewski on Mon, 2008-12-22 19:59

Thanks for your replies. The contract states that one of the settlement
options is to annuitze the full contract value, in 5-30 annual payments. If
5 years is chosen, then each payment could be directly transferred to the new IRA annuity, with a 5 or 6 year life, without taxes, right?



Submitted by Al Fry on Mon, 2008-12-22 20:09

Correct.



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