Annuity Taxation Question
Client bought the following annuities:
Year 1995
$100,000 Phoenix Company Variable Annuity
Today is worth $125,000
Year 2000
$300,000 AllState Variable Annuity
Now worth 400,000
Both in his name.
Both are now out of surrender.
For simplicity sake and competitive interest rates we 1035 to a 3 year Allianz Fixed Annuity. Contracts remain separate. $125K and $400K.
After one year, and within the 30 day penalty free window, client decides to cash out of the $125K annuity and invest in a short term muni fund yielding much higher than the Allianz fixed annuity.
Our question is….what is the tax consequence of cashing out that annuity for $125k? Everyone (including advanced tax planning desks at various VA firms and several CPA’s) are saying it’s $25K on the gain as taxable income. Just want to make sure.
Permalink Submitted by Alan Spross on Thu, 2011-04-14 21:52
I agree. Since there was no mixing or matching changes done during the 1035, you would have a simple case of transfer of the investment cost of 100k to the contract for 125k. Gain is 25k.