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IRS Issues Favorable Ruling for Advisors and Annuities

Nationwide received a favorable private letter ruling on the taxation of advisory fees from nonqualified annuities.

Nationwide received a favorable private letter ruling (PLR) from the Internal Revenue Service on the tax treatment of advisory fees paid from nonqualified annuities. The new ruling concludes that the payment of an advisory fee from a variable, fixed indexed or hybrid nonqualified annuity can now be structured to not give rise to a taxable distribution.

Previously, the rules were fairly punitive toward fee-based advisors, as paying their fee from a nonqualified annuity policy sold outside a retirement account not only created a taxable event but could also potentially subject the client to penalties based on their age. Workarounds existed, such as simply pulling the fee from a different account; however, they had other drawbacks. Ultimately, the sum total effect was to make things more expensive for the end-client for no particular reason.

The PLR essentially conforms the tax treatment of properly structured advisory fees from nonqualified annuities with those from qualified accounts, such as 401(k)s, 403(b)s and IRAs. This ruling eliminates a key friction point, allowing RIAs and fee-based advisors to more easily incorporate insurance and annuities into the holistic planning process.

Among important guidelines cited in the ruling, the advisory fees for the nonqualified annuity cannot exceed 1.5% of its cash value. The ruling applies only to fee-based nonqualified annuities, where the advisor does not receive a commission related to the sale. The fee is paid with respect to the investment advice received by the contract owner specifically related to the nonqualified annuity.

“Nationwide has been committed to achieving this favorable ruling on behalf of RIAs, fee-based advisors and their clients, and now can provide them with an important benefit that they have been seeking for years,” said Craig Hawley, Head of Nationwide Advisory Solutions. "… this favorable ruling on the tax-treatment of advisory fees is another milestone in our mission to truly meet the unique needs of RIAs, fee-based advisors and the clients they serve.”


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