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.