Types of Annuities for Asset Protection
ImmediateAnnuities.com is the website of Hersh Stern, founder of one of the nation's leading #1 online annuity brokerage firms
ImmediateAnnuities.com is the website of Hersh Stern, founder of one of the nation's leading #1 online annuity brokerage firms
An annuity is a contract between an individual or entity and an insurance company. Premiums are deposited into the annuity contract and, unless it is an immediate annuity, those funds will grow on a tax-deferred basis. With the complex selection of options available, consumers can find it difficult to decide rationally on the right type of annuity product for their circumstances. One can set up annuities and life insurance as another form of asset protection. Permanent Life Insurance policies typically return 4-5% annually tax-free (be sure to have a rider [beneficiary] to protect principal).
Annuities that make payments in fixed amounts or in amounts that increase by a fixed percentage are called fixed annuities. Variable annuities, by contrast, pay amounts that vary according to the investment performance of a specified set of investments, typically bond and equity mutual funds.
Variable annuities are used for many different objectives. One common objective is deferral of the recognition of taxable gains. Money deposited in a variable annuity grows on a tax-deferred basis, so that taxes on investment gains are not due until a withdrawal is made. Variable annuities offer a variety of funds ("subaccounts") from various money managers. This gives investors the ability to move between sub-accounts without incurring additional fees or sales charges.
With a "pure" life annuity, annuitants may die before recovering the value of their original investment in it. If the possibility of this situation, called a "forfeiture," is not desired, it can be ameliorated by the addition of an added clause, forming a type of guaranteed annuity, under which the annuity issuer is required to make annuity payments for at least a certain number of years (the "period certain"); if the annuitant outlives the specified period certain, annuity payments then continue until the annuitant's death, and if the annuitant dies before the expiration of the period certain, the annuitant's estate or beneficiary is entitled to collect the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is that in exchange for the reduced risk of loss, the annuity payments for the latter will be smaller.
A type of insurance company investment that combines the benefits of both a fixed annuity and a variable annuity. Most hybrid annuities allow the investor to choose the amount of assets to allocate to the more conservative, fixed return investments, which offer a lower but guaranteed rate of return, and what amount to allocate toward more volatile variable annuity investments, which offer the potential for higher returns. Hybrid annuities can be useful for those who have longer time horizons and wish to participate in the stock and bond markets. Careful consideration must be taken as to how much risk an investor wishes to take; variable investments can fall just as quickly as equity mutual funds and no guarantees are offered. Also, investors should make themselves aware of the fees for both the fixed and variable portions of a hybrid annuity.
Immediate Annuities involve a single premium deposit and are referred to as single premium immediate annuities (SPIA). These annuities are designed to provide a guaranteed income stream to the annuity owner for a specified period of time, or for the duration of their lifetime. The income stream is determined by the amount deposited, the age of the annuity owner, the annuity owner’s life expectancy and prevailing interest rates. Here is an immediate annuity calculator. http://www.immediateannuities.com/immediate-annuities/ It calculates the amount of monthly income you will receive in return for a specific "Investment". Investment (aka Premium) is the purchase amount you pay to the insurance company. With this calculator you can also find what Investment would be necessary in order to receive a specific monthly income amount. To use the annuity calculator, simply highlight your age, state, and gender. Then enter a dollar amount in only one of the two boxes labeled "Investment" or "Monthly Income." Click "Calculate" and you will see a table with annuity quotes.
Immediate vs. Deferred Annuities
The income benefit offered by an annuity can be either immediate or deferred; starting immediately upon placing premium into the contract or at either a pre-determined or flexible future date. However, deferred annuity contracts do not require the annuity owner to withdrawal an income stream; then can withdrawal income as needed from the interest made, or may take a lump sum at the end of the contract.
Impaired Life Annuities
There has also been a significant growth in the development of Impaired Life annuities. These involve improving the terms offered due to a medical diagnosis which is severe enough to reduce life expectancy. A process of medical underwriting is involved and the range of qualifying conditions has increased substantially in recent years. Both conventional annuities and Purchase Life Annuities can qualify for impaired terms.
Multiple annuitant products include joint-life and joint-survivor annuities, where payments stop upon the death of one or both of the annuitants respectively. For example, an annuity may be structured to make payments to a married couple, such payments ceasing on the death of the second spouse. In joint-survivor annuities, sometimes the instrument reduces the payments to the second annuitant after death of the first.
(aka. Deferred Income Annuities) are contracts between an individual and an insurance company. The insured party deposits a premium payment into the contract today and in exchange, receives a guaranteed income stream for life beginning at a pre-determined future date.
The income stream will be based upon the premium deposited, the age of the contract owner, their life expectancy and the date/time frame in which the income will be paid. Market fluctuations will not impact the income payments received. In some cases, contract owners will be permitted to make additional contributions to their annuities. These additional payments will impact the income received.
One important consideration of longevity annuities is that they are deemed illiquid investments. (Article continues below the tables)
Long Term Care Annuity (LTCA)
A Long Term Care Annuity (LTCA) combines estate and income features offered by traditional annuities, with long term care protection. Long term care insurance (LTCI) is designed to provide you with financial assistance for costs associated with long term care, generally those costs not covered by Medicare or a traditional health insurance plan.
Long Term Care Annuity Basics
Long term care benefits provided by a LTCA are based upon the premium dollars you paid; the greater the premium, the greater your coverage. Coverage levels typically range between 200%-300% of your initial premium deposit. If and when you require long term care, expenses will be paid from your annuity’s accumulated value, up to the specified maximum monthly amount until the account value has been depleted. In some cases, extended benefits may be available for an additional cost.
Long term care annuities often offer you optional riders worth consideration. An inflation rider is designed to protect your purchasing power over time, increasing the benefits received by a specified percentage. Some annuity contracts permit the transfer of remaining benefits to a spouse upon your premature death.
Long term care annuities can be funded using nonqualified or qualified monies or through a 1035 exchange which utilizes funds from an existing annuity or life insurance policy.
Secondary Market Annuity
Lock in a high yielding Secondary Market Annuity from List #1 without depositing any money down. Just click the "Get More Info" button next to an SMA you would like to reserve and one of our SMA reps will call you to confirm your order. SMAs in Lists #2-5 require a deposit to reserve. http://www.immediateannuities.com/secondary-market-annuities/
Our SMA inventory lists are sorted by the payment Start Date and are updated throughout the day
Tax-Free Rollover Rules to Move Your IRA or 401k into an Annuity
Q. Is it possible to roll over my retirements savings, such as my 401k, IRA, or 403(b) accounts into an annuity without paying taxes?
A. YES. You can roll over your IRA, 401(k), 403(b), or lump sum pension payment into an annuity tax-free. Annuities funded with an IRA or 401(k) rollover are "qualified" plans, enabling an insurance company to create an "IRA annuity", into which you can deposit your retirement funds directly. Additionally, you can have your employer roll over your 401(k) funds into an annuity without withholding any taxes since no mandatory withholding requirements pertain to funds directly transferred into an annuity by an employer.
Q. If I decide to roll over my IRA, 401(k), or lump sum pension payment into an immediate annuity, will I be hit with distribution taxes?
A. NO. While pension and other pre-tax distributions can be subject to taxation when withdrawn, by federal law, you are permitted to roll over such payments into an immediate annuity tax-free because the insurance company automatically creates an IRA account into which your monies are transferred. So essentially these transactions become either "direct transfers" or "direct rollovers" which are tax-free. Taxes will need to be paid on the monthly distributions you receive from the immediate annuity.
Q. Is an "immediate annuity" available for tax-free IRA or 401(k) rollovers?
A. YES, so long as you satisfy the rollover rules described in the previous paragraphs. As its name suggests, an immediate annuity will begin making monthly payments to you on a regular basis shortly after purchase. Immediate annuities payments are determined by a number of factors, including your gender, your age, and your payment option choice.
By Hersh Stern
A variable annuity is an insurance contract which allocates your money in stock or bond portfolios. As with every annuity, during the accumulation phase, your account grows on a tax deferred basis.
When considering whether to invest in a variable annuity as part of your retirement plan, you should carefully study all of the provisions of your contract. Variable annuity contracts can be confusing. There are many moving parts which effect the underlying performance of your account. It is advisable to consult with an experienced insurance agent or broker before committing any money to a variable annuity.
With variable annuities, there is a risk that the value of your account may drop below the amount you originally invested. This is not the case with so-called fixed annuities.
There are two phases in a variable annuity. The accumulation phase is the period during which your investment grows (hopefully). The payout phase begins when you decide that you would like to withdraw your principal and/or earnings from the account.
There are various charges you will have to pay when owning a variable annuity. These include surrender charges, mortality and expense charges, administrative fees, and underlying fund expenses. There may be other fees as well, depending on the type of contract you purchase. Some companies offer bonus features, but there may be higher fees as a result.
Each insurance company "manufactures" different bells and whistles in their contracts which you need to be aware of. Be sure to read the prospectus you receive from your agent and have all of your questions answered before purchasing this annuity.
Taxation of Annuities
Non-Qualified Annuity Tax Rules
by Hersh Stern - June 28, 2013
Annuities have become increasingly popular. Tax deferred growth is arguably the most appealing feature of a non-qualified annuity. This permits earnings on premiums to avoid income taxation until distribution. Long-term savings advantages and the ability to insure an income stream for life add to annuities' increasing appeal. As a consequence of their rising popularity, the past few years have brought a significant increase in the number of available annuity products.
In this article we review some of the most common tax concerns that arise around non-qualified annuities. Armed with this information, current and future annuity owners can proactively navigate around them. Before we start, though, its important to advise that the information on this page should not be taken as tax advice. You should consult with a competent tax professional before buying an annuity or before making changes to any existing annuity which may potentially trigger a taxable event.
Types of Annuities
Annuities are classified in a number of different ways. For federal tax purposes, annuities are classified as either qualified or non-qualified. A qualified annuity is purchased as part of, or in conjunction with, an employer provided retirement plan or an individual retirement arrangement (such as an Individual Retirement Annuity or a Simplified Employee Pension Plan). If certain requirements are satisfied, contributions made to qualified annuities may be wholly or partially deductible from the taxable income of the individual or employer making the contributions.
A non-qualified annuity is not part of an employer provided retirement program and may be purchased by any individual or entity. Contributions to non-qualified annuities are made with after-tax dollars and are not deductible from gross income for income tax purposes. For the purposes of this article, we will limit further discussion to non-qualified annuities.
Annuities are also classified by type of investment and type of payout. Under a fixed annuity, the owner has both the security of a set rate of return and no investment decisions related to the annuity funds. The title "fixed annuity" does not mean that the earnings rate credited will never change; rather, it means that the earnings rate is set periodically by the issuer and then "fixed" until the rate is changed again.
Parties To an Annuity Contract
The three parties to an annuity contract are the owner, the annuitant, and the beneficiary. In many instances, the owner and the annuitant will be the same.
The owner is usually the purchaser of the annuity and has all the rights under the contract, subject to the rights of any irrevocable beneficiary. The owner is subject to income tax on all payments made from the annuity, regardless of who is named as payee or annuitant if different than the owner). When applicable, the penalty on any premature distributions is based on the owner's age. If the owner dies while the contract is in the accumulation phase (discussed later), there usually is a mandatory distribution of the death benefit (except when a spousal continuation rider takes effect).
The owner names the annuitant and the beneficiary of the annuity contract. The annuitant must be a natural person and serves as the measuring life for purposes of determining the amount and duration of any annuity payments made under the contract. The beneficiary receives the death benefit or any remaining annuity payments upon the death of the owner.
Natural Owner of an Annuity
The owner of an annuity may be a natural or non-natural person. A natural person is a human being, for example. Some examples of non-natural persons are corporations, partnerships, and trusts.
An annuity contract will be treated as owned by a natural person even if the owner is a trust or other entity as long as that entity holds the annuity as an agent for a natural person. However, this special exception will not apply in the case of an employer who is the nominal owner of an annuity contract under a non-qualified deferred compensation arrangement for its employees. Immediate annuities are also excepted from the non-natural owner rule.
Why is it important to know if the owner is a natural person? Generally, only annuity contracts owned by natural persons are treated as annuity contracts for federal income tax purposes and the earnings on such contracts are taxed deferred until withdrawn. On the other hand, annuity contracts owned by non-natural persons are not treated as annuity contracts for federal income tax purposes and the earnings on such contracts are taxed annually as ordinary income received or accrued by the owner during the taxable year. As with many other income taxation rules, there are several exceptions to the non-natural owner rule.
Non-Natural Owner of an Annuity
As stated earlier, contracts owned by "non-natural" persons are subject to annual tax on the inside buildup in the contract. Notable exceptions are contracts held in a trust or other entity as an agent for a natural person, immediate annuities, annuities acquired by an estate upon the death of the owner. Annuities are also not taxable if owned by a charitable organization or a pension plan.
Purchasing several individual annuity contracts from a single insurance company within the same calendar year is often referred to as aggregation. In this scenario, the IRS treats these purchases as a single transaction in order to prevent the owner of the policies from manipulating the basis in each contract. Aggregation can result in an unexpected tax liability for the annuity owner. This rule does not apply when contracts are purchased from different insurance companies or if one annuity is deferred and another is immediate.
All contracts issued by the same company to the same policyholder during any calendar year will be treated as one contract for purposes of computing taxable distributions.
The following are exceptions to the aggregation rules: deferred annuity contracts which are exchanged into immediate annuities; immediate annuities; distributions required on account of the death of the owner; contracts issued prior to 10/21/88. Note, if a pre-10/21/88 contract is subsequently exchanged or transferred, the new contract becomes subject to the aggregation rules.
Premature Distribution Penalty
10% of taxable amount.
* The owner is over age 59½
* The owner is disabled after contract purchase
* The owner, not the non-owner annuitant, dies
* Pre-TEFRA (prior to 8/14/82 contributions) non-qualified money
* Immediate non-qualified annuity
* Substantially equal payments
must continue for 5 years or until owner reaches 59½, whichever is later
must be computed based on life expectancy
Annuitization (for the owner's life or life expectancy
Note: An exchange from a deferred to an immediate annuity does not qualify as an immediate annuity for the purposes of avoiding tax penalty.
Tax Consequences of Ownership Changes
* Addition/deletion of joint owner
* Transfer to another individual or entity
Earnings are subject to income tax at time of transfer
10% penalty may apply
Gift taxes may apply
* Transfers between spouses
* Transfers incident to divorce
* Transfers between an individual and his/her grantor trust
* Mandatory Distribution upon Death of Owner
If Owner dies Prior to Annuitization:
Surviving owner (or beneficiary) must elect one of the following:
* immediate lump sum
* complete withdrawal(s) within 5 years of death
* annuitization (over the life of the new owner) to start within one year of death. If spouse is sole surviving owner (or beneficiary), spouse can also elect to continue contract. If owner is a grantor trust, death of grantor triggers mandatory distribution
* Mandatory distribution applies to all contracts issued after 1/18/85
If Owner Dies After Annuitization:
Payments continue to beneficiary, based on annuitant's life and type of payment plan chosen
What are the phases of the annuity contract?
There are two distinct phases of the annuity contract: the accumulation phase and the annuitization phase. During the accumulation phase, the owner generally is not taxed on the earnings credited to the cash value of the annuity contract unless a distribution is received. The accumulation phase continues until the annuity contract is terminated or the annuitization phase begins. The annuitization phase starts when the contract value is applied to an annuity payout option. This phase continues until the last payment is made according to the annuity payout period chosen by the owner (or in some cases, the beneficiary).
How are the distributions taxed during the accumulation phase?
When an annuity contract is fully surrendered during the accumulation phase, the owner must pay income tax on the earnings in the contract. The owner is not taxed on amounts that represent a return of contributions (such as premiums or investment in the contract). Partial withdrawals from an annuity in the accumulation phase are taxed on a last in, first out (LIFO) basis. In order words, withdrawals from an annuity are made earnings first, and the owner is taxed on the payments until all of the earnings have been distributed. There is an exception to the earnings first rule for contributions made to annuity contracts prior to 8/14/82. These contributions are distributed on a first in, first out (FIFO) basis and the owner is not taxed until such contributions are fully recovered.
There is an aggregation rule which requires that all annuity contracts issued by the same company, to the same owner, in the same calendar year must be treated as one annuity contract for purposes of determining the taxable portion of any distributions.
How are distributions taxed during the annuitization phase?
Annuities are designed to function as retirement investment vehicles, placing withdrawals after the attained age of 59 1/2. Should the annuity owner begin withdrawals following this age and assuming that they have satisfied any relevant surrender schedule, they will not be assessed fees outside of their tax liabilities. However, should the annuity owner opt to receive withdrawals prior to reaching the age of 59 ½, they may be subject to a 10% IRS penalty on any gains posted to-date. One exception to this rule is if the annuity owner has established an agreement with the IRS, referred to as substantially equal periodic payments (SEPP). Under this agreement, equal withdrawal payments can begin prior to the annuity owner’s age of 59 ½ without penalty as long as they continue to the agreed upon future date, which at a minimum is the later of age 59 ½ or a 5 year period.
During annuitization, a portion of each annuity payment represents a return of non-taxable investment in the contract and the balance of each payment is considered taxable income. The taxable and non-taxable portions of the payments are determined by an exclusion ratio. The exclusion ratio for a fixed annuity is the ratio the investment in the contract bears to the expected return under the contract. The exclusion ratio for a variable annuity is determined by dividing the investment in the contract by the total number of expected payments. Once the total amount of the investment in the contract is recovered using the exclusion ratio, the annuity payments are fully taxable. If the owner dies before the total investment in the contract is recovered, and annuity payments cease as a result of his death, the un-recovered amount is allowed as a deduction to the owner in his last taxable year.
When does the 10% penalty tax apply?
The 10% penalty tax generally applies to the taxable amount of distributions from annuities made before the owner attains age 59½. However, there are exceptions for distributions: (1) made as a result of the owner's death or disability; (2) made in substantially equal periodic payments over the life or life expectancy of the owner, or joint lives or joint life expectancy of the owner and designated beneficiary; (3) made under an immediate annuity; or (4) attributable to investment in the annuity made prior to 8/14/82.
What are the tax consequences of a transfer of ownership?
If an individual transfers ownership of a non-qualified annuity issued after 4/22/87, without full and adequate consideration, the owner must pay income tax on the earnings in the contract at the time of the transfer (except for transfers to a spouse or transfers made to a former spouse incident to a divorce). If the contract was issued before that date, the earnings in the contract can continue to be deferred, with the old cost basis carried over to the new owner. Transfer of ownership includes the addition or deletion of a joint owner. Also, the transfer of ownership may result in gift tax consequences for the owner.
Listing Annuities as Collateral Assignments
If the annuity owner lists their contract as collateral, its value will be treated as if it has been surrendered, thereby triggering applicable taxable gains.
Individuals who assign their annuities as collateral for loans may be surprised by the treatment of assignments. Generally, any collaterally assigned, pledged, or received as a loan under an annuity issued after 8/13/82 is treated as if it was distributed from the annuity. The amount collaterally assigned is taxed according to the rules applicable to partial withdrawals and full surrenders and may also be subject to the 10% penalty tax. If the entire contract is assigned or pledged, then earnings subsequently credited to the contract are automatically deemed subject to the assignment or pledge and are treated as additional partial withdrawals.
What happens at the owners' death?
If the owner dies after the annuitization phase has begun, the remaining payments, if any, must be paid out at least as rapidly as under the annuity payout option in effect at the time of the owner's death. If a beneficiary receives the remaining payments under the annuity payout option in effect at the owner's death, the taxable and nontaxable portions of such payments will continue to be determined by the original exclusion ratio.
Pre-TEFRA Contracts (Prior to 8/14/82):
Principal out first - Not taxable
Earnings outlast - fully taxable, but no penalty tax
Post TEFRA Contracts (After 8/13/82)
Earnings out first - Fully taxable and may be subject to penalty tax
Principal out last - Not taxable
Notes: If a pre-TEFRA contract is subsequently exchanged, it keeps pre-TEFRA tax treatment. Sub-accounts are combined to compute income in the contract.
If the owner dies during the accumulation phase, the entire death benefit must be distributed within five years of the date of the owner's death. However, there is an exception to the five-year rule, if the death benefit is paid as an annuity over the life, or a period not longer than the life expectancy, of the beneficiary and the payments start within one year of the owner's date of death. If an annuity contract has joint owners, the distribution at death rules are applied upon the first death.
Under a special exception to the distribution at death rules, if the beneficiary is the surviving spouse of the owner, the annuity contract may be continued with the surviving spouse as the owner. If the owner of the annuity is a non-natural owner, then the annuitant's death triggers the distribution at death rules. In addition, the distribution at death rules are also triggered by a change in the annuitant on an annuity contract owned by a non-natural person. Income Tax. Unlike death benefits paid from life insurance policies, the beneficiary may be taxed on distributions made from an annuity after the owner's death. Amounts paid under the five-year rule are taxed in the same manner as partial withdrawals or full surrenders, and amounts paid under an annuity option are taxed in the same manner as annuity payments. For variable annuity contracts issued on or after 10/29/79, and for all fixed annuity contracts, there is no "step-up" in basis for income tax purposes and the beneficiary pays income tax on the earnings. However, the beneficiary is entitled to deduct a portion of estate tax paid on the annuity for income tax purposes. For variable annuity contracts issued prior to 10/21/79, there is a "step-up" in basis for income tax purposes and no income tax is payable on the earnings.
Deducting Capital Losses
If the annuity owner receives a lump sum distribution at a value below their cost basis, they may be able to claim the loss on their federal tax return if they itemize. Surrender charges assessed to the annuity owner following a withdrawal or surrender will not qualify as a loss under this ruling.
Classification of the Annuity’s Owner as a Trust
When the owner of a nonqualified annuity is a non-natural person, such as a trust, it is taxed on an annual basis and is ineligible for tax deferral benefits. One exception does exist; should the trust act in an agent capacity.
Trusts Listed as an Annuity’s Beneficiary
Most annuities offer three primary distribution options to listed beneficiaries; lump sum payment, even payments over a five year period or income payments over the life of the named beneficiary(ies). Should the beneficiary of the annuity be the spouse of the original owner, an additional option may be presented; for the surviving spouse to step in as the new owner of the annuity. If a trust is listed as the annuity’s beneficiary, no-look through provisions are offered. Essentially what this means is that the trust is ineligible to receive lifetime income payments. One exception to this general rule does apply; should the trust act as an agent of the spouse’s named beneficiary.
Gifting an Annuity
When an annuity is gifted to another party, the transaction triggers a taxable event for the donor. Any relevant capital gains will be taxed at the current owner’s tax bracket. And, should the gift occur prior to the annuity owner’s age of 59 ½, the transaction will be subject to a 10% IRS early withdrawal penalty. Two exceptions may apply; should the transfer occur between spouses or former spouse (as in the event of a divorce settlement), or if the annuity was issued prior to April 23, 1987. Annuities issued prior to this date will be taxed following donation when the contract is surrendered rather than at the time of transfer.
Some previously purchased contracts may be eligible to receive favorable tax treatment. Withdrawals from annuities purchased prior to August 14, 1982 are subject to the first in, first out treatment. A step up in basis will be provided to beneficiaries of annuities purchased before October 21, 1979 upon the original contract owner’s death. If these original contracts are exchanged, these grandfathered benefits will be forfeited.
Required Minimum Distributions
IRAs with annuity holdings are subject to the IRS rule known as required minimum distributions (RMDs), which triggers when an individual reaches the age of 70 ½. RMD withdrawals, however, are NOT required to be taken from a non-qualified annuity. Simply stated, the concept of RMDs does not apply with non-qualified annuities.
For federal estate tax purposes, the total value of the contract is subject to estate tax. Except as noted above, annuities are income in respect of a decedent and there is no "step-up" in basis for the contract and the annuity is subject to income tax when distributed.