I do realize in Roth's you are putting in after tax dollars so those wouldn't be subjected to the penalty but beyond that it seems to get a bit muddled in my brain for some reason.

Thanks,

scrim

That money has never been taxed before. Therefore, it is all subject to the penalty.

529’s, roth and NQ annuitties it is just the gains.

the penaty applies to the amount withdrawn. there are exceptions for

victims of hurricanes.

Skee are you really advising people about their finances that is incorrect.  Roth withdrawls taken early 10% applies only to the gain, the same is true with NQ annuity & 529’s proceeds not used for school expenses (59 1/2 doesn’t apply).

The others are right, the after tax dollars (e.g. ROTH contributions, etc.) are not penalized.

Also, if you have a client that needs to get money out of an IRA or an annuity, you can set up 72t or 72q distributions.  You can't get all of it right now, and they have to continue to take out the money each year, so it isn't a perfect solution, though.

annuity, you can set up 72t or 72q distributions

Isn't that for a qualified annuity only?  Also unless the client acutally annuitized there could still be CDSC from the annuity company over and above any IRS early withdrawal penalties if they didn't 72t.

Also be careful of early (before 2 years) transfers from a Simple IRA to another qualifed acount.  Big problems for your client if you do that.

I have a client who just transferred in a NON-qualified annuity. She invested about 110K a few years ago and its worth about 140K.

1. If she cashes out the 110K in principal and reinvests in funds, is she subject to the 10% penalty?

2. Is the 30K in gains subject to both gains and 10%?

[quote=blarmston]

I have a client who just transferred in a NON-qualified annuity. She invested about 110K a few years ago and its worth about 140K.

1. If she cashes out the 110K in principal and reinvests in funds, is she subject to the 10% penalty?

2. Is the 30K in gains subject to both gains and 10%?

[/quote]

The first dollars to come out will be the profit. If she takes $110,000, $30,000 of that will be taxed. I like your thinking, though.

[quote=blarmston]

I have a client who just transferred in a NON-qualified annuity. She invested about 110K a few years ago and its worth about 140K.

1. If she cashes out the 110K in principal and reinvests in funds, is she subject to the 10% penalty?

2. Is the 30K in gains subject to both gains and 10%?

[/quote]

1.  Who knows....call the company and ask about their surrender schedule. 

2. The gain on an annuity is taxed as ordinary income..not capital gains.  Every penny withdrawn until you reach the basis is taxed, (unless you annuitize, which I don't recommend)

If she is not beyond her surrender penalty yet and wants to get into funds you can probably take the minimum free amount annually and invest that.  Given that she will have to pay income taxes on the gain for the first 30K... is this worth it to her to do this and reinvest elsewhere?  Will the potential gains in an equity based fund be better than where she is now after taxes?  You have to crunch the numbers and help her figure out what she needs.

72T/Q is for non qualified or qualified.

With the annuitty at 140K why not just 1035 it?

Thats what I thought. Only the growth is taxable. I know about the surrender schedule- its about 2% over the free corridor. As for whether she may be better off with investing at least the principal in our strategy- absolutely… If a client has a VA and we can B/D change it we do that. If they have reasonably decent fund options, then we may reallocate to those funds based on their straegies. If they have crap funds, we blow them out and put them in suitable investments…

Thats what I thought. Only the growth is taxable. I know about the surrender schedule- its about 2% over the free corridor. As for whether she may be better off with investing at least the principal in our strategy- absolutely

You must have a nicer compliance department than I do.  If I tried to take some one out of a VA (which does have some liquidity) and incur a penalty and tax consequences only to reposition them into other mutual funds with (I assume) loads they would pin me to the wall.  Even if you were changing her into a no load/wrap account the transaction would still be questionable. 

My compliance would likely say that there is so little difference in mutual funds that it is not enough to forfit a large chunk of change in the annuity, create a tax liability, lose the death benefit, that may have been important to the client and then charge her for the new funds.

If she takes anything AT ALL from her annuity the first amount that comes out is taxable up to her gain.  Since she still has a surrender penalty it is probably not a pre 84 annuity, but you might want to check on the original source of the funds to see that she hasn't been rolling and rolling this annuity.

Look at it from the customer's point of view.  I know that can be hard    But lets say she liquidates the annuity  at 2%, she has fees of 2,800. Plus even if she is in a low tax bracket, say 15% there is a tax liablity of 4,500.  So far you have cost her 7,300 dollars.  Now if you put her into those funds in your "strategy" and you have given her a breakpoint, assuming 3.5 she is out another 4,900.  I did't assume you are not going to use C shares (maybe you are) or a no load wrap account (in that case she is only out another 1,400. 

So 2,800 + 4,500 + 4,900 = 12,000 from the client or best case scenario 2,800 +4,500 =7,300 she lost.

Those better be some damn fine funds and a smokin' stragegy because you have just cost her at least one years return for what gain to her?  I don't think this passes the "Mom Test"

Edit.... I mean I didn't think you were going to use C shares.

Plus another item to consider, when you throw an additional 30K of income at someone you are likely to place them into a higher tax bracket, costing them even more money.  How would this sudden additional income, that she doesn't actually recieve, affect all other aspects of her financial picture? 

BL- I appreicate the thoughts on this situation, though not necessairly the condescending remarks laced in there.... 

Its a good point you make about the taxes due since the 30K would be withdrawn and taxed first. That consideration is something I had yet to seriously consider.

The tax liabiltiy would have been somewhat offest by her contributing and maxing out her 403B for this year.

SImply making a real life example for discussion- this is why I check out this board.... To get an idea of how to GET BETTER.....

If she doesn’t have surrender charge you might get her into a no-load VA in a wrap account at your firm.  Then you can add bells and whistles (and funds), keep the tax deferral, and get paid.

[quote=PowPow]If she doesn't have surrender charge you might get her into a no-load VA in a wrap account at your firm.  Then you can add bells and whistles (and funds), keep the tax deferral, and get paid.[/quote]

Or he can put her into a VA with a big upfront commish!

BL- I appreicate the thoughts on this situation, though not necessairly the condescending remarks laced in there.... 

I wasn't trying to be condescending at all. Just frustrated that you didn't seem to get the concept of "last in first out".  I understand that you are fairly new and being so it is easy to get caught up in the prospect of a big trade.  After all that IS how we make a living and that excitement never goes away.  Its just that we need to be thinking of all the ramifications of making a trade and not only how it will affect our pockets but how it will affect the client.  Please don't think I'm trying to hammer you... it is just that this is the stuff that makes our profession look bad and drives me crazy.   (a short trip )

Its a good point you make about the taxes due since the 30K would be withdrawn and taxed first. That consideration is something I had yet to seriously consider.

Here is another hypothetical example for you to consider.  If you have a prospect who comes to you with a large chunk of money in a losing (non qualified not IRA) mutual fund at the ABC fund family...It is obvious that they are not happy there and you think they would be better off in the XYZ fund family or even transfering into a SMA or wrap program.  Maybe you would even decide that they could stay in the ABC fund family but they should change into a different allocation of funds.  Would your first thought be to ask the client when they bought the original fund and how much their cost basis is and then advise them about capital gains?  Probably not.  

REAL LIFE EXAMPLE: In a previous firm, I saw a rep take a client who owned a Putnam fund since the 1960's and put her into an annuity.  The annuity was appropriate given her age and risk tolerance....but the client had over a 100K capital gain liability (when cap gains were much higher btw) The rep never asked and never advised the client of the problems with this.  Her CPA hit the ceiling when he found out and the crap hit the fan.  Fortunately, she was still in her free look period and the trade could be unraveled.  If you don't think that she didn't tell all her friends about this and that the CPA didn't also blacklist that rep and the firm and tell all of the other CPAs and Lawyers that he knew, you are deluded.  This was a routine practice for that rep, however most people didn't file formal complaints and as long as he was making big commish for the firm no one cared.  The clients took their lumps and moved on.  So did I.  I couldn't stand that type of business. 

The tax liabiltiy would have been somewhat offest by her contributing and maxing out her 403B for this year.

Really.  That is cold comfort for the client. "Well, Mrs Client.  This trade has just cost you about $10,000, which you may be able to recover in about a year or so.  Oh and about that tax liablity, here is the good news.  If you defer $15,000 of your salary this year we can offset that amount you now owe the IRS."  How many 403B participants actually max their contributions.  I have some, but they are doctors and can afford to.

SImply making a real life example for discussion- this is why I check out this board.... To get an idea of how to GET BETTER....

Nothing wrong with that....that is how we get better. (and it is much better than talking about Jones)    Most of the time people who have annuities have not been informed about the tax liability if they want to take the money out for themselves and they probably don't know about the liability they may be leaving for their beneficaries. You might want to ask her WHY she has an annuity...future income stream? transfer to heirs?

The suggestions to transfer her into another annuity, after her surrender charge is over, is good. An option that I have sometimes used to get out of an annuity, would  be to begin taking systematic w/d of the free amount, investing in other things like mutual funds, and spread the tax liablity over several years.  If your client feels that you are concerned about all aspects of her financial portolio (including taxes) you will have a client for life.

Sorry to be so long, but I'm sick at home today and have plenty of time...between coughing spells