Annuity Penalty Question

[DHK]

Thank you - looks like death, disability, 72q, and annuitizing the contract.

I think that's all I found before too.

No exclusions or exemptions for "1st time homebuyer", "threat of eviction", or "education funding" like with qualified plans. Not a big deal as only the growth is taxable and subject to penalities as needed.

 

[Tahoe Ray]

For NQDA, gains are withdrawn first. It's 'LIFO' - last in, first out. The last thing in it, will be the interest credited... and it will be taxable upon withdrawal... as well as a 10% penalty on those gains.

This is for disclosure purposes, not that it would necessarily be a big deal.

So, let's work out some hypothetical numbers:

$200k (plus your current balance) + 5% = $10,000 interest.

When you withdraw $210,000..., this will include $10,000 taxable interest + $200,000 basis (just to keep the math simple) + 10% penalty on the growth ($1,000).

$10,000 taxable at your top tax bracket. Will that be a big deal? You'd have to talk with your tax advisor &/or financial advisor to determine how it may affect your taxes for the current year.

But let's assume you're in the 25% tax bracket: 25% of $10,000 = $2,500. You'll NET $6,500 in growth ($7,500 - $1000 penalty).

$6,500 net gain / $200,000 balance = 3.25% net return.

If you're in the top tax bracket (39%): 39% of $10,000 = $3,900. You'll NET $5,100 in growth ($6,100 - $1,000 penalty).

$5,100 net gain / $200,000 balance = 2.55% net return.


In short, it depends on your tax situation... and if you'll be turning 59 1/2 next year.

Still better than any CD.

That's all accurate if he/she was starting this from scratch. Considering the OP mentioned a 20k mistake, I'm assuming that there are already significant gains in the existing contract, meaning almost all of the 200k (if withdrawn in a lump sum to put a down payment on a new home) would be taxable/could incur penalties (assuming they are pre-59 1/2).

 

[DHK]

Exactly. Also, it may depend if new contributions are subject to a new surrender period. If so... then it would be a bad idea entirely.

I edited my post above to make sure I clarified this point.

 

[scagnt83]

Was it purchased before 08/14/1982?

 

[SirLurkAlot]

Thanks for all the responses. After reading them, I called Jackson Life and spoke to a "supervisor" who admitted they have been telling me incorrectly. Fortunately, I avoided a big mistake although I have added $10k based on what they had told me that I won't be able to get without penalty for 12 years- but oh well, at least it is 5%.

Fyi, it was taken out in 1994 and has gains.

 

[scagnt83]

Thanks for all the responses. After reading them, I called Jackson Life and spoke to a "supervisor" who admitted they have been telling me incorrectly. Fortunately, I avoided a big mistake although I have added $10k based on what they had told me that I won't be able to get without penalty for 12 years- but oh well, at least it is 5%.

Fyi, it was taken out in 1994 and has gains.

Im glad you pushed the issue further. It very well could have been just the phrasing used that led to the misunderstanding. But then again there are always incompetent CSRs at insurance carriers... which is why you are smart to have a professional advisor.

If you want your $10k back, if you make a big deal about it they will probably refund it to you since you were given incorrect info. (not guaranteed to, but often they will try to fix their mistakes if you make a big deal about it... and to avoid a doi complaint if you threaten it (since it had to do with a very basic annuity concept))

I asked about the purchase date because the 59.5 rule was not enacted until 08/14/83. So any contracts before it are grandfathered in to not having that rule apply to them.

But a guaranteed 5% is very strong in today's rate environment. I would hand on to that policy. Even with the 12 year surrender, that is a good place to stash extra money with that rate.

 

[rayluk]

12 years surrender is a pretty long time for fixed annuity. Regardless, even if the 10k new contribution starts a new clock. You can still distribute from the initial contribution (depends how much you have in there) when needed, granted with the 10% tax penalty. So it is not all bad.

I encountered few situations with clients similar to what you shared. They want NQ money in safe area but time horizon is "not sure" or rather short. With my clients who are under 60, fixed annuity is never a good option. That leaves us with:

1) CD
2) MM, which is pretty similar to CD nowadays
3) Bond/Bond fund

CD and MM are almost the same in terms of return. Bond and bond fund carries their own risk in interest rate sensitive environment. Then we also have to consider the sales charge and expenses on purchasing bond in retail market, not counting the taxable gain.

Muni Bond can also be an option for NQ money, again facing the risk of default as well as yield fluctuation.

Which leads to #4, additional lump sum dump in in a whole life policy. If my clients has decent health and qualify for life policy, or has existing policy with me that has room for additional dump in. The purpose is not to buy additional coverage, but to put money in a safe place and a tax free environment. It gives guarantee cv growth plus dividend. Did a review with a policy has 10k dump in 2 years ago with a 3% one time charge, it has grown to 10700.
It certainly beats CD or most new annuity rate for NQ dollars.

In your situation, i would hesitate to put the whole 200K in a CD or MM. You will most likely break even with inflation. good luck!

 

[scagnt83]

12 years surrender is a pretty long time for fixed annuity. Regardless, even if the 10k new contribution starts a new clock. You can still distribute from the initial contribution (depends how much you have in there) when needed, granted with the 10% tax penalty. So it is not all bad.

Annuities sold after 08/14/1982 are LIFO, not FIFO.

So the new money would be the first funds taken out for tax purposes.

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In your situation, i would hesitate to put the whole 200K in a CD or MM. You will most likely break even with inflation. good luck!

Re-read the OPs first 2 posts. He needs something liquid that guarantees principle for the $200k.

 

[DHK]

12 years surrender is a pretty long time for fixed annuity.

Interesting statement and opinion.

Regardless, even if the 10k new contribution starts a new clock. You can still distribute from the initial contribution (depends how much you have in there) when needed, granted with the 10% tax penalty. So it is not all bad.

Huh?

I encountered few situations with clients similar to what you shared. They want NQ money in safe area but time horizon is "not sure" or rather short.

Time horizon was 12 months with liquidity and guarantees.

With my clients who are under 60, fixed annuity is never a good option.

Interesting opinion.

That leaves us with:

1) CD
2) MM, which is pretty similar to CD nowadays
3) Bond/Bond fund

CD and MM are almost the same in terms of return. Bond and bond fund carries their own risk in interest rate sensitive environment. Then we also have to consider the sales charge and expenses on purchasing bond in retail market, not counting the taxable gain.

Uh... are you new to securities? Why would your recommend ANYONE get into any kind of security with a time horizon of 12 months or so? Yes, even with Bonds?

Muni Bond can also be an option for NQ money, again facing the risk of default as well as yield fluctuation.

Still no guarantees...

Which leads to #4, additional lump sum dump in in a whole life policy. If my clients has decent health and qualify for life policy, or has existing policy with me that has room for additional dump in. The purpose is not to buy additional coverage, but to put money in a safe place and a tax free environment. It gives guarantee cv growth plus dividend. Did a review with a policy has 10k dump in 2 years ago with a 3% one time charge, it has grown to 10700.

You want to dump $200k principal lump-sum into a whole life policy? Well, I suppose you could do it as a SPWL... same taxation as a NQDA...

But since you said "tax-free environment"... you have to realize that you have to have the cash flow to support the policy for that $200k. You can't just 'dump it in' without MEC'ing the contract.

It certainly beats CD or most new annuity rate for NQ dollars.

Yes it would... in fantasyland.

In your situation, i would hesitate to put the whole 200K in a CD or MM. You will most likely break even with inflation. good luck!

You are new and dangerous... based solely on this post. You have poor reading comprehension and are too sloppy with your "recommendations".

I would recommend re-reading suitability requirements for securities recommendations again.

 

[scagnt83]

You are new and dangerous... based solely on this post. You have poor reading comprehension and are too sloppy with your "recommendations".

I would recommend re-reading suitability requirements for securities recommendations again.

I couldnt agree more. That had to be one of the worst pieces of "advice" ever given on this forum. Im glad you picked it apart and not me... I dont even know where to start about the dump-in recommendation.... lol. And anyone that knows me on this forum knows I advocate permanent insurance for cash value almost more than anyone... but that is just horrible horrible and extremely dangerous advice.

Whats crazy is that he didnt even realize that he created the exact same taxation situation that the annuity would have by MECing the WL with huge dump-in.

He is also ignoring the fact that the time horizon for Permanent Insurance is LIFE. And this guy needs the money in the next year.