10% Penalty on Annuity

[Life Hawk]

To me, based solely on this thread, that makes him a target that is ripe for learning from such a huge error in judgment.

I like to take the wait and see approach to stuff like this.

I would like to know what company she called and who blew her off as far as compliance. This is a "hot button" item these days and I don't know very many companies that would "blow off" a valid question related to this part of the business. My next point of concern is how was the suitability form completed. I'd like to see that, it might reveal where this train went off the tracks.

Just me... and their is always to sides to every coin.

 

[scagnt83]

I am trying to communicate with my financial adviser through email so I can get him to tell me in writing that there will be no surrender charges but he probably will not respond back by email..

Simply tell him you need the response via email and not a phone call. If he calls, tell him to email his response so you can have time to review it and think about your questions. If for some reason he refuses, tell him you will only communicate about this subject via email.

It was his job to inform you of any possible tax penalties. He is not a CPA, but he is 100% responsible for knowing the general tax ramifications for the products he sells.



Id send a registered letter to compliance. Explain the situation in detail, and inform them of your intent to file a complaint and contact legal counsel.

If they call, record the phone call (inform them that you are recording) and take detailed notes. Dont agree to anything on the phone call unless they agree to fully compensate you for the taxes incurred.


Assuming all this is the whole story, this "advisor" should never be allowed to even say the word annuity, much less sell one.

And based on your age and need for income, an annuity was most likely not an appropriate product for your needs.

Im with DHK, its rare that I advocate filing complaints or legal action. But this is a MAJOR ommission on the advisors part. Id be mad as hell if it were my money. There are so many other options that you could have put your money into which would not have caused tax-penalties....

 

[scagnt83]

I like to take the wait and see approach to stuff like this.

I would like to know what company she called and who blew her off as far as compliance. This is a "hot button" item these days and I don't know very many companies that would "blow off" a valid question related to this part of the business. My next point of concern is how was the suitability form completed. I'd like to see that, it might reveal where this train went off the tracks.

Just me... and their is always to sides to every coin.

I agree. No way this would have passed compliance if the agent indicated the client intended to distribute before 59 1/2 without a 72(q) setup.

What I do believe, is that some peon at the carrier level didnt pursue the issue fully. Who you talk to often makes a huge difference, unfortunately. Some carriers are more proactive about stuff like this than others. And if the client didnt really complain, if they were just "asking questions", then I can certainly see that happening.

 

[Julieolo]

Thank you everyone for your input.

I did get the financial adviser to respond to my email. He said that there would be no in house surrender charges for changing the monthly payment from the interest it is earning that I am receiving now to the 15% that I am allowed. He ignored my questions about the annuity set up in accordance to the 72(q) withdraw. He also could not tell me if the full 15% would have a 10% penalty by the IRS.

I decided to call the compliance manager to ask her about the 10% penalty and she told me that no mater what amount I took out it would be penalized 10% by the IRS.

She keeps saying that I have a really good package deal and I should be happy but the way I see it I am in a policy that I am not qualified for. If I take the 15% monthly payment the IRS gets most of what I am earning from the account. This policy is useless to me.

I have been upset about this for almost a year now. I keep trying to push it out of my head and just tough it out until I am 59 1/2 which is another year and a half away but I think I am going to go ahead and take some of the advice here and start with filing a complaint with CA Dept of Ins and insurance.ca.gov. Maybe it will make me feel better.

Would you advise that I inform the compliance manager first of my intentions? At this point I feel like there is really nothing that can be done as I did sign a contract.

Life Hawk...I would love to tell you what company it is but I'm not sure it is the right thing to do on an open forum.

I got myself into this mess because I had no idea what I was doing. I thought that is what the financial adviser was there for...to advise me on the best option for me. I did some research online last year when I found out what I had gotten myself into and I am not the only one who has had issues with this person. My problem seems like nothing compared to what I read about the other people. I guess I should be thankful that he hasn't cost me 30,000 or 100,000 loss like the other people. The complaints I found were rather old but I am willing to bet there are more out there.

 

[DHK]

He also could not tell me if the full 15% would have a 10% penalty by the IRS.

This part is true - that he probably CAN'T tell you. Nor can we without examining the contract and the amount of gains remaining in the contract.

For example: If you started the non-qualified annuity with $50,000 and it grew to $75,000... you'd have to take out the $25,000 first before you are withdrawing your principal - which would be tax-free. In the meantime, you may still be earning interest along the way.

I'd contact the actual insurance company for these details, rather than the broker/agent or even the agent/advisor's compliance person.

I decided to call the compliance manager to ask her about the 10% penalty and she told me that no mater what amount I took out it would be penalized 10% by the IRS.

That's not true, unless this was a Qualified annuity, such as an IRA.

Would you advise that I inform the compliance manager first of my intentions? At this point I feel like there is really nothing that can be done as I did sign a contract.

You can, but I wouldn't. They probably wouldn't have a clue - and this compliance person sounds like a real piece of work and clueless.

In regards to the contract, the contract was signed "in good faith" that the recommendation was at least SUITABLE for your situation. (While I'm not a fan of the current DOL fiduciary ruling proposed legislation, it's for situations like these where it would have "teeth".)

If you watch the different videos I posted above with Ilya Lerma, she talks about consumers rights in regards to contracts and that you can't expect the customer to have "buyer beware" when they are relying upon the advice of a (supposed) professional. A good attorney will "blow that up" for you and put the contract back on the COMPANY for failure to fulfill their part of the agreement.

 

[Julieolo]

Thanks DHK, I am actually going through the videos right now. I will watch the first one.

It is for sure a non qualified annuity.

I will call the actual insurance company tomorrow and ask them about the 10% penalty fees.

 

[Norwayguy]

Thanks DHK, I am actually going through the videos right now. I will watch the first one.

It is for sure a non qualified annuity.

I will call the actual insurance company tomorrow and ask them about the 10% penalty fees.

Also the compliance person you want is the insurance companies person.

 

[scagnt83]

This part is true - that he probably CAN'T tell you. Nor can we without examining the contract and the amount of gains remaining in the contract.

For example: If you started the non-qualified annuity with $50,000 and it grew to $75,000... you'd have to take out the $25,000 first before you are withdrawing your principal - which would be tax-free. In the meantime, you may still be earning interest along the way.
...........

That's not true, unless this was a Qualified annuity, such as an IRA.

It is for sure a non qualified annuity.

This is not correct. The Compliance person was 100% correct on this account.

ALL funds taken out of a Non-Qualified Deferred Annuity are subject to a 10% penalty if withdrawn before age 59 1/2.

Gains vs. Basis upon Withdrawal is only in regards to Income Tax. The 10% IRS penalty is separate. (and different than the penalty for qualified funds.... although it might be the same IRS Code)


When you invest in a NQ Deferred Annuity, you make a trade-off, you get tax-deferral in exchange for waiting until retirement to use the funds.

 

[scagnt83]

I will call the actual insurance company tomorrow and ask them about the 10% penalty fees.

Also the compliance person you want is the insurance companies person.

Wait... you are talking to the Financial Planners internal Complaince people? Not the Insurance carriers Compliance Department??

That is the disconnect here on them blowing you off. The financial firm wants to save the business. The insurance carriers wants to make sure the sale was appropriate.

Call the insurance carrier. Tell them the situation. The response will be MUCH different most likely.

Id also ask them for a copy of the application. There is a section called "financial suitability" that was filled out. Look at the answers there and see if they are correct... Im guessing the agent never asked you or put something different... if so, the insurance carrier will fix things for you in a heart beat.

Make sure to tell the insurance company that you are considering contacting an attorney over this situation. That will make them act a lot faster and take it a lot more seriously.

Assuming what you are saying is all correct, Id most certainly file complaints. If this guy has any professional designations, such as CFP, you can file complaints with that organization as well. You can also reach out to your state attorney generals office in addition to the state DOI.

 

[DHK]

This is not correct. The Compliance person was 100% correct on this account.

ALL funds taken out of a Non-Qualified Deferred Annuity are subject to a 10% penalty if withdrawn before age 59 1/2.

Gains vs. Basis upon Withdrawal is only in regards to Income Tax. The 10% IRS penalty is separate. (and different than the penalty for qualified funds.... although it might be the same IRS Code)


When you invest in a NQ Deferred Annuity, you make a trade-off, you get tax-deferral in exchange for waiting until retirement to use the funds.

It's hard to find IRS information on non-qualified annuities, so I'm using this link:
Non-Qualified Annuity Tax Rules — ImmediateAnnuities.com

Premature Distribution Penalty
Penalty:
10% of taxable amount.

That does NOT say that the entire distribution is taxable. It says 10% of taxable amount. Of course, we know that earnings are tax-deferred until withdrawn.

More below.

Taxation:

• Earnings are subject to income tax at time of transfer
• 10% penalty may apply
• Gift taxes may apply

Again, it states that EARNINGS are subject to taxation (not in dispute), but it does not say that principal or basis in the contract is subject to taxation.

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.

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.

Again, it states taxable amount of distributions, not the entire distribution. Of course, for point #2, that would be the 72(q) sequentially equal periodic payments.

Withdrawals
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

I didn't want to belabor the point, but this is pretty thorough to me.

Off-topic: In fact, this reminds me to check on MEC life insurance contracts because (if I remember correctly), their taxation is exactly like non-qualified annuities. And if they aren't earning much of anything these days, MEC contracts can be a great deal for the right kinds of people.