IRA into Annuity?

Discussion in 'Annuities Forum' started by jasonten, Jan 11, 2015.

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  1. jasonten
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    jasonten Member

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    My mother has an IRA she can start drawing out of in a few months but will be subject to income tax. Is there any possible way to transfer it to some kind of immediate annuity without being taxed?
     
  2. Newby
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    Newby Well-Known Member

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    She can transfer the money directly from her current IRA into a qualified annuity which is also an IRA. She won't pay taxes when she does that. But when she pulls money out of any IRA she will have to pay taxes unless the IRA is a Roth.
     
  3. jmhalvo
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    jmhalvo Well-Known Member

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    She got a big tax benefit what you put the money in, so there is no way to escape the taxes on the way out.
     
  4. DHK
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    DHK Well-Known Member

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    The only way to "escape" the taxes... is to have the tax liability offset by something else that is deductible.

    Depending on her current situation, it may be a good idea to look into refinancing her home so that she can deduct more of her payment as an interest-deductible payment.
     
  5. fangard
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    Refinance her house, create debt, add interest expense, just for the deduction.

    Not sound advice at all, IMO.
     
  6. DHK
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    DHK Well-Known Member

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    The only way you can evaluate "sound advice" is only AFTER taking a full fact-find with a client, then to explore various options to help the client get what they want.

    The client, in this example, is concerned about taxes. So, you determine what is available to help the client ease that pain. While refinancing may be an option, the client still needs to see if it fits the overall situation.

    It may fit... or it may not. But to judge advice in a vacuum, separate from a fact-find, is irresponsible.
     
  7. Golfnut2112
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    Golfnut2112 Well-Known Member

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    Considering the standard deduction is $6,200 that would be one he$$ of amount to refinance to get any benefit. I agree with fangard it makes no sense at all.
     
  8. DHK
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    DHK Well-Known Member

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    Wow. Without doing ANY kind of fact-finding... everyone is easily able to determine the BEST available advice for someone! It's incredible! You guys must be psychic!

    You are all assuming that she's poor. I wouldn't make that assumption. If someone is poor... why would they be worried about taxes?

    Do we know if this person has other kinds of taxable income that can really make this a good recommendation or not? No... we don't know!

    Are there real estate rental income along with business interests that are driving up her income to a higher amount? Again... we don't know.

    Ever notice that all my posts included the word *may* as in *may be appropriate*?

    Never cast judgment on advice until you take a fact-finder. These threads do not contain enough information to make any kinds of recommendations.

    I will agree that it's something to be discussed, but probably ultimately rejected... once one has the conversation with the client to show that it's an idea... but an idea that may or may not fit.
     
  9. Stephen
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    Stephen Well-Known Member

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    DHK, the advice that you have provided here gives you benefit of the doubt with me, but I am racking my brain here trying to come up with any situation that could be uncovered with a good fact finder that doing a refi would be done to offset taxable IRA distributions.

    I am always one willing to admit that I don't know what I don't know If you can educate us.
     
  10. DHK
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    DHK Well-Known Member

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    To put together a possible case, it takes a lot of assumptions. To simplify this for this post, let's just compare two things: IRA distribution and a new mortgage.

    Let's assume the IRA is sizeable and the RMD is $25,000 per year - all taxable on top of social security income as well as any pension income. (Remember that if they DON'T take out the RMD, that the penalty is 50% of what they SHOULD have taken out.)

    I'm ignoring the very real possibility of this distribution causing the person's social security to become included in the senior's taxable income. I'm also ignoring state income taxes too.

    Let's assume a 20% tax on the distribution: $25,000 x 20% = $5,000 tax liability.

    Let's assume that if there is a current mortgage has a payment of $2,083 ($25,000/year)... but the mortgage is in the later years... so the majority of this payment is principal payments with no tax benefits.

    You refinance the mortgage so that the new payment matches the current payment and that it is primarily interest only during the first few years (as a standard mortgage would be). However, the current tax rate would apply to these payments - let's just assume 20% to keep the math easy.

    Let's assume the same $25,000 interest payments (same payments as before) x 20% tax rate = $5,000 deduction.

    $5,000 liability meets a $5,000 deduction and now it's a "wash". In effect, we've "cancelled out" the affect of the taxes on the IRA distribution for the current year.

    How the mortgage can be structured could be a 10-year mortgage? Whatever it takes to keep the payment the same and maximize the tax advantages up front.


    This is an overly simple method to compare, and it may not fit everyone's objectives. Those in their later years may feel quite uneasy about taking out a new mortgage, and they may even have trouble qualifying for it. I wouldn't do any kind of "Option-ARM" mortgage, nor would I necessarily recommend a cash-out refinance. It's just an idea or a concept that might fit... or it might not.

    There are lots of assumptions in this in order to make it "work"... but sometimes it could be worthwhile to explore it... to make an informed decision.

    Of course, it would also take studying an amortization schedule on the new mortgage to determine how well the strategy will work long-term... against the RMDs of the IRA.

    ----------

    BTW, in my example, we didn't "create new debt"... we only restructured it to give new advantages today.

    Of course, that assumes that they are okay with extending the term of paying on a mortgage. Lots to consider. Because if they've only got 5 years or less... they might as well pay the taxes and enjoy the paid off home in 5 years.

    But if they have a longer-term mortgage... it can make all the sense in the world.

    It all "depends" on the facts in the case.
     
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