Variable annuity
I have a variable annuity with Fidelity that has no surrender charges. It was worth $375,000 ten years ago when I put the money in the account. It is now worth 309,000. I am in a very low tax bracket now and I would like to take maybe 100,000 out. I am 51. Can I deduct my losses? Can I take only a 100,000 out or must I completely close the account and take the 309,000 out? Joe
Permalink Submitted by Alan Spross on Thu, 2009-04-02 18:10
You would have to completely distribute the balance in order to qualify for a misc itemized deduction for your loss of $66,000. This deduction, along with some other misc deductions would be reduced by 2% of your AGI. If you take out 100,000 now, it will not be taxable, but there is no deduction available either. I am assuming this this is not in an IRA, but is a non qualified annuity.
Permalink Submitted by Joe Williams on Thu, 2009-04-02 18:21
Thank you Alan. Yes, this is not an IRA. If I took out the $100,000 would I eventually be able to take the loss when I close the annuity years later? Also, if I close the annuity and take the loss, can I only deduct $3,000 of losses per year?
Permalink Submitted by Alan Spross on Thu, 2009-04-02 18:45
If you took out 100,000, your cost of the investment would be reduced to 275,000. In whatever later year you chose to fully distribute the balance, you could still qualify for the itemized deduction.
This is not treated as a capital loss, so the 3,000 limit against ordinary income does not apply. However, with a loss of around 60,000 or so, you may not be able to use all of it, and there would be no carryover of the unused loss. In the year you fully distribute the annuity, it may be a good idea to attempt to increase income in that year so that you can use the entire amount of your itemized deductions. If you have a traditional IRA, it might be a good year to convert enough of it to a Roth IRA, and then apply your itemized deductions to the higher taxable income for that year.
If you trigger the AMT for that year, you would lose the benefit of misc itemized deductions, so you better crunch some numbers prior to distributing the annuity. You do have flexibility here, however because a Roth conversion can be reversed if things do not work out as expected.
Permalink Submitted by mk foss on Thu, 2009-04-02 20:20
As Alan mentioned this is a very tricky situation to plan around. The loss from the annuity is subject to the 2% of AGI limitation (along with other misc deduction items) and is used in just one year. If you increase income so that you won’t lose the deduction, you also increase AGI and lose some fo the loss because of the 2% factor.
As Alan said, if this occurs in an AMT year none of the loss is deductible. When income is high so that the tax bracket is greater than the AMT rate, you may avoid AMT this year.
Good luck.
Permalink Submitted by Joe Williams on Thu, 2009-04-02 20:50
Wow. You all are good! Thanks. I have NO income this year, but substantial savings. The AMT is pretty high, so I don’t think I’ll trigger that. I’m thinking I could roll over 50,000 of my rollover IRA into a Roth. I should still be well below the AMT level. My dividends and interest per year are only about 15,000 in addition to NO income.
Permalink Submitted by Joe Williams on Mon, 2009-04-06 19:18
Alan,
I was looking at my portfolio. I’m thinking that I would only lose about 40,000 on my variable annuity. I am single ( no kids) with about 225,000 in traditional IRA that I could convert to a Roth IRA. I started a small business which only gives me about 3,500 a year in deductions for the year. Because my income was so low last year,my effective rate in taxes was about 8.72%. I expect it to be low this year. I’m wondering if I could just convert all of the 225,000 to a Roth?