Non-customer has an annuity

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Mar 22, 2007 11:32 am

I meeting for the first time with a prospect whom I understand has an annuity she is not happy with.


Assuming she is not 59 1/2 I have two questions:


If it's a non qualified annuity she will have to pay ordinary income taxes on only any gains I presume?


If it's a non qualified annuity she will have to pay a  10% federal income tax penalty on the entire amount surrendered?   (e.g) If she surrenders a $100,000 contract the federal tax penalty is $10,000


Since I hardly deal with insurance contracts like this I just wanted to confirm.


I also realize there could be a substantial surrender charge depending on the date of purchase.


Thanks in advance.


Scrim


Mar 22, 2007 11:48 am

ordinary taxes on gain + penalty on gain   + (possible) surrender charges on entire amount

Mar 22, 2007 12:07 pm

ah ok....


so the 10% federal tax penalty would only apply to any earnings in a non-qualified contract.....


thanks for clarification


Mar 22, 2007 12:10 pm

Questions to know the answers to  (in no particular order) before you can make any recommendation.


1. What is she unhappy about


2. VA or Fixed or EIA annuity


3. How close is she to 59 1/2


4. What is the amount of gain in the contract


5. What was her purpose in doing an annuity in the first place.


6. What are the surrender charges and time to end of surrender charges.


7. What is her tax bracket, income level


(Withdrawing, even without a penalty, might bump her into a higher tax bracket and cause some real problems depending on how much gain there is)

Mar 22, 2007 12:10 pm

It appears what early withdrawal from a NQ annuity contract is treated similarly from a penalty standpoint as an IRA.


Logic should've told me that.


Thanks for the help.


scrim

Mar 22, 2007 12:20 pm

Scrim, your logic is not necessarily correct.  If the IRA is deductable, the penalty is on the entire amount, not just the gain.

Mar 22, 2007 12:23 pm

BL,


I am going to keep your list of inquiries in front of me when I meet with her tomorrow.


Thank you!


I know you are not an accountant but with the whole "pushing into a higher tax bracket" issue isn't that mostly mitigaged since it's a marginal tax system?


scrim

Mar 22, 2007 12:25 pm

Thanks anon.


Very true!


I'm glad I'm not an accountant!

Mar 22, 2007 4:44 pm

Scrim,


Consider a 1035 exchange into a better annuity product.  This way she can avoid the early withdrawl penalty (although she may still have a surrender charge).


Mar 22, 2007 10:56 pm
babbling looney:

Questions to know the answers to  (in no particular order) before you can make any recommendation.


1. What is she unhappy about


2. VA or Fixed or EIA annuity


3. How close is she to 59 1/2


4. What is the amount of gain in the contract


5. What was her purpose in doing an annuity in the first place.


6. What are the surrender charges and time to end of surrender charges.


7. What is her tax bracket, income level


(Withdrawing, even without a penalty, might bump her into a higher tax bracket and cause some real problems depending on how much gain there is)



Leave it to a woman to have the naivety to think that all dollars are taxed at the "higher tax bracket" rate. I hope you don't advise people on how to handle money.

Mar 22, 2007 11:01 pm
scrim67:

BL,


I am going to keep your list of inquiries in front of me when I meet with her tomorrow.


Thank you!


I know you are not an accountant but with the whole "pushing into a higher tax bracket" issue isn't that mostly mitigaged since it's a marginal tax system?


scrim



Isn't it the height of arrogance for you to give advice on something you know absolutely nothing about? Are you going to disclose to her that you sought counsel, yesterday, from a bunch of idiots on the internet?


Don't listen to BL. She just proved what I've been thinking all along. She doesn't know what she thinks she knows and doesn't even know it. Very dangerous.

Mar 22, 2007 11:25 pm
Bobby Hull:
babbling looney:

Questions to know the answers to  (in no particular order) before you can make any recommendation.


1. What is she unhappy about


2. VA or Fixed or EIA annuity


3. How close is she to 59 1/2


4. What is the amount of gain in the contract


5. What was her purpose in doing an annuity in the first place.


6. What are the surrender charges and time to end of surrender charges.


7. What is her tax bracket, income level


(Withdrawing, even without a penalty, might bump her into a higher tax bracket and cause some real problems depending on how much gain there is)



Leave it to a woman to have the naivety to think that all dollars are taxed at the "higher tax bracket" rate. I hope you don't advise people on how to handle money.



Who said that "all dollars" are taxed at the higher tax bracket rate?  I just observed that if the amount of deferred ordinary income is significant and it is all withdrawn from an annuity in one year it might bump the client into another tax bracket.  You find something erroneous with that? 


Isn't one of the purposes of an annuity to defer taxes? Why would you put a client into a position of incurring a larger tax hit if it wasn't necessary?  The same thing goes for doing switches, from mutual funds  in the same fund family that have large defered capital gains growth.  If the client is aware of the tax ramifications of doing a switch fine, but quite often they are not and get a nasty surprise come next years visit with the CPA because they didn't set the funds aside to cover the taxes. Is this too hard to understand?


The answers to the questions that I proposed will determine whether the client should stay in the annuity, 1035 exchange to another annuity, partially withdraw the free amounts from the annuity or cancel the contract entirely.

Mar 23, 2007 8:14 am

Isn't one of the purposes of an annuity to defer taxes?


It could be, but this typically is a pretty poor reason especially if we are talking about a VA since much of what is happening is the exchange of capital gains taxes for income taxes.


This whole thread is missing something very important.  Scrim knows absolutely nothing about the client.  Start by taking a fact finder and go from there.  It's very possible, for example, that the client is unhappy simply because the broker never calls.  Maybe, the client simply isn't happy with the chosen sub-accounts, etc.  Experience has taught me that is very seldom appropriate to move money from an annuity when surrender charges are involved.

Mar 23, 2007 8:35 am
babbling looney:
Bobby Hull:
babbling looney:

Questions to know the answers to  (in no particular order) before you can make any recommendation.


1. What is she unhappy about


2. VA or Fixed or EIA annuity


3. How close is she to 59 1/2


4. What is the amount of gain in the contract


5. What was her purpose in doing an annuity in the first place.


6. What are the surrender charges and time to end of surrender charges.


7. What is her tax bracket, income level


(Withdrawing, even without a penalty, might bump her into a higher tax bracket and cause some real problems depending on how much gain there is)



Leave it to a woman to have the naivety to think that all dollars are taxed at the "higher tax bracket" rate. I hope you don't advise people on how to handle money.



Who said that "all dollars" are taxed at the higher tax bracket rate?  I just observed that if the amount of deferred ordinary income is significant and it is all withdrawn from an annuity in one year it might bump the client into another tax bracket.  You find something erroneous with that? 


Isn't one of the purposes of an annuity to defer taxes? Why would you put a client into a position of incurring a larger tax hit if it wasn't necessary?  The same thing goes for doing switches, from mutual funds  in the same fund family that have large defered capital gains growth.  If the client is aware of the tax ramifications of doing a switch fine, but quite often they are not and get a nasty surprise come next years visit with the CPA because they didn't set the funds aside to cover the taxes. Is this too hard to understand?


The answers to the questions that I proposed will determine whether the client should stay in the annuity, 1035 exchange to another annuity, partially withdraw the free amounts from the annuity or cancel the contract entirely.



No, but I find something irrelevant about it.

Mar 23, 2007 10:20 am

No, but I find something irrelevant about it.


You would.

Mar 23, 2007 11:15 am
babbling looney:

No, but I find something irrelevant about it.


You would.



Little Lady, anyone with at least marginal business acumen would find your comment to be irrelevant. If you want to do well in a man's world, learn to only speak when called upon. Have a nice weekend.

Mar 23, 2007 12:49 pm

Hey Bobby - take the towel off of your head.  We don't think like that in this country.  You've been here for what, a week, and you're bashing someone who has been here for years?  BTW if you think that BL said anything about all dollars being taxed at the highest tax bracket you need to take a reading comprehension class.  Do youself a favor and don't speak until spoken to.  Maybe someday you'll be as good as BL.

Mar 23, 2007 1:02 pm

Leave it to a woman to have the naivety to think that all dollars are taxed at the "higher tax bracket" rate.


Leave it to a woman to have the naivety to think that all dollars are taxed at the "higher tax bracket" rate.


Emporer marches down The Street, naked. Relating these comments to your desire to just sell people " what they want ", what you want, and you have a case for Calvin, philosophy, ethics. Guess you missed that in biz school.


Mar 23, 2007 1:49 pm

"Little Lady, anyone with at least marginal business acumen would find your comment to be irrelevant. If you want to do well in a man's world, learn to only speak when called upon. Have a nice weekend."


Bobby Hull- you're a joke... It's pathetic that you make comments purely to incite others.

Mar 23, 2007 2:01 pm
Spaceman Spiff:

Hey Bobby - take the towel off of your head.  We don't think like that in this country.  You've been here for what, a week, and you're bashing someone who has been here for years?  BTW if you think that BL said anything about all dollars being taxed at the highest tax bracket you need to take a reading comprehension class.  Do youself a favor and don't speak until spoken to.  Maybe someday you'll be as good as BL.



This is only his most recent incarnation Spiffy.....