Filed Under:Annuities, Fixed Indexed

Annuitant-driven vs. owner-driven annuity contracts: Which is best?

Social Security worries are increasing, Medicare myths are multiplying and creative ways to help our clients navigate through their retirement and end-of-life years can be difficult if not challenging for advisors and our clients’ families.

In previous articles we have discussed the senior market, dominant buying motives, reasons seniors buy and what the right annuity can do for the right client.

What are the tax consequences if your client takes a withdrawal of $95,000? What are the tax consequences if your client surrenders the annuity contract?

When determining the taxable portion of an annuity withdrawal, the investment from the contract is subtracted from the accumulated value to determine the amount of the gain. Distributions of gain are made first, and after all gain has been distributed the investment in the contract is distributed. In this example the difference between the accumulated value and the investment in the contract is $70,000. Consequently, a distribution of $95,000 will result in $70,000 of ordinary income and $25,000 represents a return of the investment in the contract.

When property in addition to the exchanged-for property is received as part of a 1035 exchange, the additional property received will be taxable to the extent of the gain in the contract not to exceed the amount received. In this example, $40,000 in cash is received in addition to the new annuity contract. There is a $115,000 gain in the contract being exchanged so the entire $40,000 received in cash will be taxable. The remaining gain will not be taxed until there is a distribution and the basis in the old contract is carried over to the new contract.

Tax-Free Exchanges

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Nichole Morford

Nichole Morford
Managing Editor

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