It's pretty simple. The bank advisor wants you to move the money to another annuity so he can make a large commission. Even if you spread the income over several years, you will still pay the tax. You may save a small amount in taxes by delaying the income, but you will also save money by avoiding the annuity fees and other restrictions.

I would suggest that you ask the bank advisor to give you a copy of the "entire" annuity contract, not the sales brochure. He will probably refuse to provide it. But, if he does give it to you, it will be a very large document that you will not understand. I have never been able to get an annuity salesperson to provide the contract they are trying to sell. I had one hang up on me when I asked. Their sales policy is to make you buy it before you can read it. Absurd.

there are two points of view in this type of financial decision

TAX MINIMIZATION and INCOME MAXIMIZATION

USA a CPA/tax expert for the tax minimization. Most CPA's primary goal is to minimize taxes on events which may or have happened. Minimizing taxes is good, but can be counter productive to future income or investments. ie, you can pay 27% in taxes, and lose the 27% in asset pricing, and still have to pay tax if you sell, so tax planning is strictly a tax minimizing exercise. . .

Income generation is the opposite exercise of tax minimization, which is the strength of a CFP, or other financial planner. both have consequences, one has a longer term implications to your quality of life, the other doesn't

either way, the net effect is increased financial assets and security, since it came from an outside entity, so the total just adds to your current pile of financial assets. . .

good luck, but keep the perspective of who does what and how to use them together.

corporate finance guy

I have been a CFP since 1982 and we deal with this constantly. There are several factors to consider: taxes, risk tolerance, personal needs, and inheritance to name a few. My partner and I will be at the Baby Boomer Expo in September and we are setting up an office in the Villages soon. Feel free to contact me anytime to review options. Cliff Duffield

Talk to Parady Financial. We have FIXED index annuities and love them....as do many others. Parady will teach you about them. It costs nothing to listen.

I would hope by this time you are having a good laugh at all the, “ give me your money” and I’ll make you rich...

Keep in mind that if our government hadn’t tampered with the economy by printing funny money, created practically free money to borrow thus removing any profit from CDs to push money into the failing stock market, it would have all collapsed during the second Great Depression, oops... Great Recession. Our country is living in a house of straw and owning property is like having a house built with bricks.

Ouch, that hurt.
As a guy with plenty of C's, the goal is to Maximize After Tax Net Worth.
:ho:

Where do you get a gain of $40000?

Long term capital gains are taxed at 15%, isn't it? Don't pay taxes look for tax deferred, but stay out of the stock market. Or split it up and put parts if it in different investment vehicles!

Gigi3000...........Pull up your stakes & get out of this thread. The nuts have arrived.

:duck:

...

Assumed fact pattern: You have inherited an annuity worth $360k with a $160k basis, so $200k is taxable. $160k is not taxable, assuming there is no estate tax.

Discussion #1: IMMEDIATE CASH. Take the tax hit and open bank account. Earn 0.5%. Complete safety. Tax hit is $200k times your incremental tax bracket. Maybe 15-20% if you have no base income. $200kX15% = $30k. $200X20%=$40k. Your arithmetic sounds off. Probably because you are not factoring in the non-taxable $160k. Annuity inheritances are taxed as ordinary income, not capital gains.

Discussion #2: CONSIDER PAYMENT OPTIONS. Talk to the existing insurance company and ask what your options are as a non-spousal beneficiary. You'll most likely find these options:
1. Cash (see above)
2. Partial payments not to stretch past 5 years if non-qualified and 10 years if qualified (this levels your taxes, since payments include both basis and earnings)
3. Possibly a conversion to an annuity which buys you lifetime income (Usually bad deals even if available to beneficiaries). Probably not available prior to paying taxes. Long shot, but worth asking about.

Discussion #3: CASH INVESTMENTS. Assuming you took the cash and paid the taxes, you are now facing investment decisions for the cash ($360k less say $40k of taxes = $320k). You can invest in stocks, bonds, annuities, or whatever you want, and none of those care what the source of your cash is. You can read thousands of threads on investments. Or you can consider Willie Nelson's philosophy: " I spend most of my money on whiskey and women.... and wasted the rest!" But I digress.
The point is that the source of your windfall has ABSOLUTELY NOTHING to do with your investment decision. The guy trying to sell you an annuity is confusing the issue. If YOU owned the annuity, you could roll it into another annuity via a 1035 exchange, but there is no way an inherited annuity can be transferred to you without paying taxes.

Discussion#4: MERITS OF ANNUITIES. I have done a lot of work on comparing annuities vs equity investments. I have opted for both. There are a lot of different annuity types. A pension is a type of annuity. So is a variable annuity with fees up to 4%. Don't listen to those who tell you to run as soon as you hear "annuities." Also don't listen to those who try to sell you annuities without explaining all the questions you may have or don't know to ask. ...and run from advisors who don't understand basic taxation law as it applies to inherited annuities.

PS If you're reasonably healthy, wait until 72 to tap your Social security, especially since you're got your inherited cash to fall back on.

How are you calculating the taxes again(on lump sum withdrawal)? What does the $160000 cost basis have to do with it? Cost basis was already taxed, right?

Correct. Cost basis is not taxed. Gains on annuities are taxed as ordinary income.

Apparently there's no low taxes on gains in annunities. Taxed at ordinary tax rate.

First, annuity income is ordinary income not a capital gain. Second, some amounts principal are excluded from income. Third, a quick google search shows three options, lump sum, distribution over 5 years or annuitizies amount over your remaining life. I don’t like annuities but from a tax standpoint this may be your best option. However, I think your first step like others have said is find a fee only planner. They can lay out your options and show you the risk/reward for each option with the tax impact.

Financial Advisor
 

You need a fiduciary Financial Advisor. Flat fee.

Cost Basis, Gain
 

Just making sure I understand this correctly, you have stock and the cost basis was $160,000; your gain was $200,000; so the value of the stock right now is $3i60,000 - correct. I think you taxes on a $200,000 gain with no income your gain would be taxed at 15% or $30,000 - not $70,000. If I'm misunderstanding and the current value is $200,00 - your gain would only be $40,000 and your tax - $6,000.

Either way, I would not get an annuity. Keep it in stock and don't cash it in all at once. Cash the newest - as long as you've had it at least a year. Only take out what you need AND only pay the tax on what you take out. If you're playing it safe because you made a lot of money in a short period of time and it's at least a one year investment - take it out, pay the tax, and thank the powers that be for the big gain.

I was wondering what the terminology was for what I needed. Entire annunity contract. I'll see about getting that and maybe take it to my CFP

It's a non-IRA annunity. Do you know if the 5 year thing is just stretching the amount in the existing annunity or if I would need to take out a whole new annunity?

Disagree immediate annuities are not paying anything…….just put the money in the bank and get better interest

That one I would stay away from…..far away

I mentioned it in case the OP wants security of monthly income, although not inflation protected, and low fees.

The benefit of an annuity is if you live until 110 you still get paid even though you long ago got all your money back. Thus your health should be considered.

You are correct that an annuity is not a good investment product but it can be good for those that want security and do not want to rely on investment results.

Annuities can be a useful part of a portfolio. Statistically, they will not beat the raw market over the long term, since you pay for marketing and risk mitigation.

They are good for three things:
1. They beat CDs hands down. "MYGA" type product.
2. A pension type payment stream. You buy the security of not outliving your money. Withdrawing 4% annually from an equity account will not guarantee that, no matter what Ken Fischer (with whom I have accounts) says. "SPIA" or "FIA" with income provision
3. It can mitigate or eliminate downside market risk. The price you pay is reduced upside opportunity. "FIA"

Interesting to see the range of opinions. Some informed. Some not so much.

Your item number 3 is often misunderstood and not explained properly by the annuity salesperson. The downside market risk is only eliminated if the market is lower over the entire cumulative time period that you own the annuity. Many people think that, if the market goes down 25 percent in one year, they don't lose money that year. But, it is not calculated on a yearly basis. So, if you own the annuity for 20 years, the only way you benefit from the market downside guarantee is if the market is down over the entire 20 year period, which rarely happens. Also, paying management fees, surrender charges, etc. are not considered losing money.

For those who like puzzles.....


Ok, I have decided to take it lump sum. Here's why. I don't like how shady these annunity companies are with giving out the annunity contract before hand for a complete review. It doesn't appear I'll pay more than $70,000 in taxes for 2021 year and maybe even less..and #3 is, I'm losing sleep over this and it's not worth it. And # 4 is, I have 403b inherited IRA($76,000, qualified) that the distribution has all ready been taken for 2021 so I can cash it out in 2022. I
appreciate everyone's input....I would rather live frugally to make up any loss than deal with wondering what they're doing to my money.

I know exactly what you mean in that last sentence. Some of us are not wired to own annuities. I know I'm not. Heck, I am not even wired to be able to stand to hire a financial advisor. . .

(Believe you me, I sometimes wish I could make myself hire an advisor, but I have been making money decisions for so long that I cannot seem to turn over the reins. Maybe someday. I did find one that I have said I would use if my family notices that I am suddenly investing in Pound Puppies or Franklin Mint Plates or Pez Dispensers.)

But we do depend on a CPA to give us good advice on how to navigate through taxes. I hope you will talk with an accountant, too, before you make your final decision so you can get professional advice on how to best handle the taxes while getting your money out.

I am linking an article here from Kiplinger that you might find interesting -- especially the part about the flexibility of the stretch. If you think this article could help, may I suggest that you print it and run it past an accountant.

Kiplinger, in general, is pretty good at synthesizing information into short articles which can be, at least, a starting point. The article could be worth a look and a conversation with the accountant to find out if she thinks you are really going to need to owe as much as $70,000 in income tax.


Inheriting an Annuity? Stretch Its Tax Benefits | Kiplinger

Boomer

Good decision. And, I think your tax will actually be less than $70K.

Great decision and never underrate a good night’s rest, sleep well!

For those posters who recommend Parady Financial. They sell annuities. Why won't they provide a copy of the annuity contract that they are selling? I have called them several times and tried to just get a copy of the contract to review, but they will not provide it. Apparently, you have to pay them the money, sign the contract, and then they will send you the contract. Personally, I would prefer to read a contract before I decide to pay money and sign it. But, maybe that is just me.

The 5 year rule sounds like I keep the SAME annunity and take the $360,000 any time over 5 years. So I could skip a year and not take any? There is no new annunity I need to worry about figuring out?

If you can use the 5 year rule, you could take $72K per year for 5 years, and have a taxable income of $40K each year. That may save you some taxes over the 5 years because of the standard deduction. Then, you would be done with the annuity.

The bank advisor didn't even explain the 5 year thing. She just said she didn't recommend it.

The only reason she didn't recommend it is because she wants you to transfer the money into another annuity so she can make a large commission. Annuity commissions are huge.

And remember at the current rate of inflation how much less those dollars will buy each year.

Another possibility - Do you support any charities? You could donate the asset to a charity, get a tax deduction for the full appreciated amount (thus avoiding any capital gains tax), and still get a lifetime annuity. At your death, the charity gets the money. Your gift could be restricted as to how it could be used. For example, you could have a scholarship named for you at your alma mater.

I talked to the bank advisor who said I would keep the same annunity (which is.in a balanced fund 60/40) but they are checking if it has an exclusion ratio. If not, I would have to pay taxes on the whole $360,000( over 5 years)....no benefit of cost basis. How can they sell something like that?

That doesn't sound correct. If the person you inherited the annuity from had a non-taxable cost basis, you should have the same cost basis. I would get an opinion from an experienced tax preparer. Also, if the person who purchased the annuity had an accountant or tax preparer, I would contact them. They should have maintained a record of the annuity cost basis. When you purchase any investment that has a cost basis, it is your responsibility to maintain records to prove to the IRS that you have a cost basis when you sell the investment. Sometimes, those records can go back decades.

One other thing. Your original post said the annuity had a cost basis of $160,000. If the inherited annuity was funded by transferring an IRA or other qualified retirement account with pre-tax dollars, then the cost basis could be taxable because the $160,000 came from an account that had never been taxed. In that case, you would be required to pay tax on the entire amount.

Although true, you are less likely to get an audit as long as you show reasonable taxable gains. And you only have to prove taxable gain basis if audited.

However, a CPA/Tax lawyer is your best source of tax minimizing choices, and that should be the next step after your decision to be sure that you get the most favorable tax treatment.

Depending upon the particulars of the situation, you have plenty of time to figure it out, but do the CPA tax lawyer NOW and don't wait until next year, as that is too late. . . as you will also want to make a quarterly payment after the distribution so that you don't get interest tacked on to your tax bill next year.

and its great to use this board to get generalized tax advice, but not at all good enough to file taxes properly for the particulars of your situation :ohdear: :ohdear: :ohdear: :blahblahblah: :blahblahblah: :blahblahblah:

Fascinating thread. Sounds like Gigi (OP) is learning a lot. Yes, we move from "earning and accumulating" to "sleeping well at night." In Gigi's case, maybe the main driver is not age, but just predisposition and an aversion to annuities !:)

..and thanks, Gigi, for sharing your tentative decision. Financial decisions, I'm learning are often (usually?) driven by emotion, rather than financial logic. Took me a while to learn after many years of education and spending most of my former lives doing the latter! :)

To the substance:
- 60/40 split will not guarantee the money will be available as you envision it. It's subject to volatility, up or down. There may be other, more predictable (fixed) options available within that annuity.
- There will be tax savings if you take the money out over time.
- The bank (and IRS) has to recognize the basis as non-taxable money. The nuance is how it's recognized. When you make a partial withdrawal from an annuity, gains come out first. Gains are 100% taxable at ordinary income rates. After all gains are accounted for, you get the basis, which is not taxable.

In a predetermined payout (as opposed to owner dictated random withdrawals descibed above), the taxable and non-taxable amounts are often both paid over time, so that each payment has a taxable and non-taxable component. The ratio of non-taxable to taxable is called an exclusion ratio.

It sounds like what the bank person is saying is that she doesn't know which scenario applies. Should be easy to find out before you decide anything. The differences will be smaller compared to the overall savings you'll achieve by taking the inheritance over time.

Forget the proposal to buy another annuity. That just confuses the question. It's a whole different topic and bears no relation to your withdrawal decision. As many have pointed out, that's an investment decision for the money after it's in your bank account.