User Panel
Posted: 12/5/2023 1:58:23 AM EDT
[Last Edit: Morgan321]
My mom died a few months ago and apparently she had an annuity with me and my siblings as beneficiaries. Got a letter today that said I can take the lump sum, do a 1035 exchange, get periodic payments, or do a “non qualified taxable transfer”.
I barely know what an annuity is but just spent an hour reading online so I’m pretty much an expert now! The form they sent for me to fill out is “claim form for non qualified contract”. The “non qualified” part means this annuity was purchased with post tax money, thus only the profit in the annuity is taxable(the purchase cost is not taxable), is that correct? The paperwork had an estimated value of the annuity but nothing about what fraction is taxable or not. 1035 exchange sounds like basically getting a new annuity(or adding to an existing one?) without paying taxes on the money now? Periodic payments apparently last any length of time I pick (5 years or greater) and the annuity continues paying me until the money is gone? The form has space for me to list beneficiaries, so if I die it will continue paying to my beneficiaries? I’m not sure what the “non qualified taxable transfer” option refers to, any tips? Im not interested in a lifetime annuity. I checked fidelity and if me/wife got a joint annuity now it would take 26 years to pay back the purchase price. I can Get way more return than that on my own. I’m leaning towards the lump sum or periodic payments to spread out income taxes and keep financial life simple but I hate the idea of coughing up possibly 29% of the money to fed/state income taxes. Any answers are welcome. Any good idea fairies are also welcome! |
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I would strongly suggest talking with a fee-only financial planner about this.
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If you are already with Fidelity, they will guide you through it with the only sticking point being the current annuity holder…they want to keep
Another PITA: once the original owner is gone, at least in my case, I became the owner and the contract numbers changed…except I didn’t yet know what those new contract numbers were. As a result I was no longer able to enter my online accounts or talk to their CSRs. Another PITA: accessing the new contracts, either online or via a real person required a seemingly random combination of my parent’s and my personal information (i.e. SSN, birthdate, contract # (new contract number vs. old, etc.). for account access…but they never told me which data they wanted where. Just some caveats to look out for (i.e. get new contract number before you need it, make sure you can access your online account if you have one, etc.). The simplest thing, if you don’t need the $ now and especially if you don’t think you’ll ever need it, is a 1035 exchange. It’s essentially the equivalent of rolling an IRA over; ownership goes from your mother to you with no tax consequences. Granted, for most people in most circumstances annuities are not a good choice, but you now (involuntarily) have one and the question is how best to get rid of it. If Fidelity is like Vanguard, they have a suite of their mutual funds and/or ETFs (can’t remember which) that you can invest in. The second best option IMO is to spread payments out over a long enough period that they don’t materially affect your tax situation (i.e. bump you up a bracket or otherwise affect things like scholarships, etc.). Qualified = the annuity is funded with pre-tax $ and non-qualified = after-tax $. In the case of the annuities I inherited, the split between original investment and earnings was available through online account access. Also, in my case the way the beneficiary (me) was designated, I was not eligible for a 1035 and had to empty them within a 5-year period but since they overlapped by two years) I really had 7 years to get rid of two annuities each with 6-figure taxable portions which, as you stated, really hurt tax wise. |
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If the truth makes you uncomfortable, don't blame the truth. Blame the lie that made you comfortable. -James Ng Uni
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It needs to be transferred into an inherited IRA, or you can leave it where it is and just have the entity make an account in your name.
I recently dealt with this. The entity will do their level best to make a mountain of red tape to keep the money. For that situation, you need a guy. My guy has been dealing with this for three months. I also recall that the money needs to be liquidated in either scenario, within 15 years if I am remembering correctly. |
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Preferred pronoun: MARINE
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Originally Posted By KILLERB6: If you are already with Fidelity, they will guide you through it with the only sticking point being the current annuity holder… The simplest thing, if you don’t need the $ now and especially if you don’t think you’ll ever need it, is a 1035 exchange. It’s essentially the equivalent of rolling an IRA over; ownership goes from your mother to you with no tax consequences. The second best option IMO is to spread payments out over a long enough period that they don’t materially affect your tax situation (i.e. bump you up a bracket or otherwise affect things like scholarships, etc.). View Quote View All Quotes View All Quotes Originally Posted By KILLERB6: If you are already with Fidelity, they will guide you through it with the only sticking point being the current annuity holder… The simplest thing, if you don’t need the $ now and especially if you don’t think you’ll ever need it, is a 1035 exchange. It’s essentially the equivalent of rolling an IRA over; ownership goes from your mother to you with no tax consequences. The second best option IMO is to spread payments out over a long enough period that they don’t materially affect your tax situation (i.e. bump you up a bracket or otherwise affect things like scholarships, etc.). The tax difference between the lump sum and 5-year payout isn't as significant as I thought it would be. The value of the annuity is nothing to sneeze at but isn't life-changing - it's about 3/4 of what I make in a year. Lump sum payout would put us well into the 24% tax bracket next year. We could keep the 5-year payout option in the 22% bracket if I up my 401k contribution. I'm not going to spend the money on hookers and blow, will probably pay off the wife's car loan and put the rest into the market. With only a 2% difference in federal rate on the money I'm leaning towards the lump sum because the 5-year option would result in less time in the market. Additionally, any increase in tax rates in the next 5 years would negate the benefit of the 5-year option and could even make the 5-year option a worse choice. Originally Posted By wildearp: It needs to be transferred into an inherited IRA, or you can leave it where it is and just have the entity make an account in your name. I recently dealt with this. The entity will do their level best to make a mountain of red tape to keep the money. For that situation, you need a guy. My guy has been dealing with this for three months. I also recall that the money needs to be liquidated in either scenario, within 15 years if I am remembering correctly. We haven't gotten any details about the IRA yet, I was saving that for another post! Mom was 76 so she should've been getting RMDs already, I'd guesstimate 99.9% chance the IRA is pre-tax. Google says that an annuity payout is tax-free if it goes into an inherited IRA and that you can rollover an inherited IRA just like any other IRA.... So I could have the annuity payout go into the inherited IRA with no taxes on the annuity and then have to take (taxable)RMDs from the IRA beginning next year(1 year after mom died) and deplete the IRA in 10 years or less. Is that correct? This seems like the best option if it pans out - I can get all the money into Fidelity and it would let me change the rate of IRA payout over time to minimize taxes (ie. I could get a larger payout in years where I have less taxable income.) Any input or anything I'm missing? |
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An annuity is not the equivalent of an IRA. You can have an annuity in an IRA however. As you mentioned under the new rules, funds in an inherited IRA must be depleted within 10 years starting the year following the year of death; you are required to take RMD each year, but are not limited to that amount. Another thing to be aware of is that the full RMD amount your mom was required to take this year must be taken out by Dec 31 of this year or your mom will be hit with the 50% penalty on any amount not taken when you file her tax return for this year.
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Originally Posted By jsippel: You can have an annuity in an IRA however. … or your mom will be hit with the 50% penalty on any amount not taken when you file her tax return for this year. View Quote So the annuity doesn’t cash out and that money goes into the IRA? Are you saying the annuity resides inside the IRA and the annuity payouts go into the IRA cash balance? No matter, I talked to a lady at mom’s money place. The annuity is non qualified so it cannot be rolled into her IRA(which the lady confirmed is a pre-tax Ira). She also verified that mom had met the rmd for this year before she died. So I believe that my options are: Annuity: lump sum or spread payments over 5 years. IRA: distributions continue at the pace I choose to meet rmd and be exhausted within 10 years. |
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The annuity and the IRA are two separate entities. You cannot add any funds to the IRA nor can it be rolled into (one of) your existing IRA(s); it remains a separate and distinct inherited IRA and, thanks to the democrats in congress you must empty it within 10 years.
You can withdraw the money however you like, but chances are (by design) you are at or near your peak income (and therefore marginal tax rate) so the libs want you to withdraw your $ and pay taxes on it now (rather than later the way it used to be). Fidelity will walk you through it all. |
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If the truth makes you uncomfortable, don't blame the truth. Blame the lie that made you comfortable. -James Ng Uni
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I’m not sure what you are looking at when calculating the cost of doing the 1035 exchange; basically rolling your mother’s annuity tax free into an annuity in your name.
You might want to talk to Fidelity or Vanguard: I am mostly at Vanguard and when I researched their annuity options you basically transfer the money (no fees) into an annuity in your name and can then invest it in various (not all, but enough) Vanguard ETFs or mutual funds (can’t remember which). IOW not a fixed 3% return but market-type returns (+ or -). |
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If the truth makes you uncomfortable, don't blame the truth. Blame the lie that made you comfortable. -James Ng Uni
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With respect to tax rates: unless congress votes to extend Trump’s tax cuts/rates (as if), tax rates will revert to pre-Trump (or worse) rates next year.
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If the truth makes you uncomfortable, don't blame the truth. Blame the lie that made you comfortable. -James Ng Uni
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Originally Posted By KILLERB6: I’m not sure what you are looking at when calculating the cost of doing the 1035 exchange; basically rolling your mother’s annuity tax free into an annuity in your name. IOW not a fixed 3% return but market-type returns (+ or -). View Quote View All Quotes View All Quotes Originally Posted By KILLERB6: I’m not sure what you are looking at when calculating the cost of doing the 1035 exchange; basically rolling your mother’s annuity tax free into an annuity in your name. IOW not a fixed 3% return but market-type returns (+ or -). Fidelity has calculators on their website, I just did a joint annuity for me and wife that starts paying now. It said it would pay $320 monthly per $100k you bought. That’s where I got the 26 years to repay the annuity purchase price. No inflation, just in today dollars. It surprised me how much of a shitty deal it was! No matter, I’m not interested in an annuity. Some annuities let you control the investments? Moms annuity is one of the guaranteed return - it returns 0% if the markets are negative for the year but positive returns are capped at 4%. Originally Posted By KILLERB6: With respect to tax rates: unless congress votes to extend Trump’s tax cuts/rates (as if), tax rates will revert to pre-Trump (or worse) rates next year. Google shows that the tax cut and jobs act expires at the end of 2025? ”…lowered individual tax rates will expire on Dec. 31, 2025, and will revert to pre-TCJA levels.” Is the top result. Any thoughts on 1 year vs 5 year? Some of the annuity will be into the 24% tax bracket while the 5 year option will keep it all in the 22% bracket. 2% extra tax seems like nothing considering it would mean getting the money into the market years earlier. |
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Great news, the annuity company was easy to deal with and the first guy I talked to was surprisingly knowledgeable(not just a phone answering drone) - only 1/5 of the annuity is taxable.
I expected most(or all) of it to be taxable so that was a pleasant surprise. It would be much better tax-wise for me to get that small amount on my taxes this year so I asked about timeframe and he gave me an email to send the documents to and said it should be no issue getting it done this year if I email the paperwork within a week. |
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Originally Posted By wildearp: I recently dealt with this. The entity will do their level best to make a mountain of red tape to keep the money. For that situation, you need a guy. My guy has been dealing with this for three months. View Quote I submitted the annuity claim paperwork via email 12 days ago and got a paper letter yesterday saying electronic signatures are not authorized. I had filled out their PDF form to ensure it was 100% legible and the signature is a scan of my actual signature I use for PDF documents! I got a letter from the other company, it is indeed a pre-tax IRA. They wouldn't even tell me the balance or if the required minimum distributions were met for this year until I filled out a form and sent it in with the death certificate. So I printed both documents out, signed in ink, scanned them in, and sent them in. I'm halfway expecting them to both get kicked back for some stupid reason. I read reviews online of both companies - one has a 1.08/5 rating and the other 1.15/5 on the BBB website. 99% of complaints are about roadblocks to getting either company to send money. Big takeaway: all these companies accept email form submissions, use that to save a stamp plus a few days of waiting. You can also confirm you sent an email while a paper letter can get "lost" in the mail. One of the two companies I'm dealing with sends an automated "we received your email document submission" confirmation. My mom's "wealth management" people have been helpful. I inquired what they charged and was surprised to find that they charge $zero unless they are actively managing an investment portfolio for you. All these companies pay financial people to set their clients up with their annuities, life insurance, etc. and that is how they get paid. So granny gets setup with the company that is currently paying the best finder's fee. |
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So called to check up today, at 1pm on a Friday, and magically "the payment is going out today".
Assuming I actually get it next week I only got jerked around a bit, not the end of the world. One thing I learned in this is to ensure you have at least two ways to inform people of things after you die! If my brother hadn't lived minutes away from mom and known about things like this I wonder how (or if) we would've found out about this annuity. |
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