variable to immediate

Submitted by rod ramos on Sun, 2010-08-22 22:45

If you have a variable annuity for many years is it allowed to transfer portions of the variable to laddered immediate annuities without creating a taxable event?



Submitted by Alan Spross on Mon, 2010-08-23 02:53

Yes, if done via a 1035 exchange. If you simply annuitize your variable annuity contract with the same company, I don’t know if that requires a formal 1035, but it will be tax deferred. However, you might be hit with surrender charges in certain cases, particularly if you change companies.



Submitted by rod ramos on Mon, 2010-08-23 20:42

Thank you for the answer. This would be very long term so I hope the surender fees would not apply. I have also heard that it is ususally paid out based on the earliest contributions so the surrender fees can be avoided but admit I am no absolutely certain how this works. I think a varable has the greatest potential for long term growth but once you need your annuity for a form of pension you have to shift most of it to something more guaranteed.



Submitted by Alan Spross on Mon, 2010-08-23 21:14

You could start with the current insuror to get an annuitization quote, and compare that to other companies that would probably require the funds be moved to them via 1035 prior to annuitization. Of course, with interest rates very close to the bottom right now, it would be better to wait until they increase before annuitizing, which is a permanent decision.



Submitted by rod ramos on Tue, 2010-08-24 20:42

Thanks Alan for your advice. This annuity is actually for my 11 year old daughter. I started this for her several years ago for her because I do not believe pensions will exist 50 or so years from now. I would love to start a Roth for her but have been unable to do because I do not have an employer number and my accountant has advised me to definitely not try. When she is a little older I hope she gets a job, even at McDonalds, and I will then start and fund her Roth. It is funny because I know an annuity salesman who started a Roth for his daughter but he has said employer number. He also has an annuity for her because he can invest more in the annuity. I have been told by experts that you have to be realistic about your contributions into a child’s Roth. The IRS will question someting like $500 or more a month for a kid who dumps the trashcans at the office. Hell I would do that for $500 a month!!!



Submitted by Alan Spross on Tue, 2010-08-24 21:05

You can start a Roth IRA with household chore income as long as the allowance paid per hour is not excessive considering child’s age and the work performed. You should keep some basic records in the unlikely event the IRS inquires. You do not need to have an EIN or issue a W-2 in these situations or to report the Roth contributions on a tax return. The IRS pays little attention to small Roth contributions for minors, but many IRA custodians do not like to open them. You might have to check around to find one.



Submitted by rod ramos on Wed, 2010-08-25 20:58

Thanks again Alan. I may just stick to the annuity for now because the Roth may not be work the hassle. I can almost guarantee that there will be a Roth in her future. I know an annuity will be taxed when she takes it out but this will be a pension source and I pay taxes on my pension so I guess there is no getting around it.



Submitted by Bruce Steiner on Wed, 2010-08-25 21:50

If you’re dealing with nonretirement assets, investing without the annuity may “get around” some or all of the tax. Dividends are (at least for now) taxed at favorable rates, capital gains are taxed at favorable rates (and not until you sell the asset, and, except for persons dying in 2010, not at all if you hold the asset until death), and tax-exempt bonds yield about as much as taxable bonds.

Also, most annuities have very high expenses.



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