NQ Transfer Annuity to SPWL

[mhutch]

I have an individual that I'm talking to about single premium life. They have an indexed annuity that is NQ and has had it for about 8 years. We have been discussing transferring the annuity to a single premium life policy. So, in doing my own research on what kind of taxation is involved in this type of transfer I'm unsure on some things. Seems every where I've looked you don't really get an exact answer.

Will the gain be taxed as normal income under current tax bracket AND capital gains tax? Gain, taxed as normal income only or capital gain tax only?

Here is the details: Annuity surrender value is $111,000 and the amount on inception is $86,000. Looking to transfer the $111k into a spwl policy which would create $155k. Tax bracket is 10-15%. Capital gains tax could be 0%

What, if any, tax consequences would this person have in this scenario?

 

[DHK]

No capital gains with NQ annuities. Taxation is LIFO - last in (interest credited), first out.

All interest is taxed upon withdrawal or surrender as ordinary income.

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IRS Publication 575 may be helpful for you:
https://www.irs.gov/pub/irs-pdf/p575.pdf

 

[Tahoe Ray]

I have an individual that I'm talking to about single premium life. They have an indexed annuity that is NQ and has had it for about 8 years. We have been discussing transferring the annuity to a single premium life policy. So, in doing my own research on what kind of taxation is involved in this type of transfer I'm unsure on some things. Seems every where I've looked you don't really get an exact answer.

Will the gain be taxed as normal income under current tax bracket AND capital gains tax? Gain, taxed as normal income only or capital gain tax only?

Here is the details: Annuity surrender value is $111,000 and the amount on inception is $86,000. Looking to transfer the $111k into a spwl policy which would create $155k. Tax bracket is 10-15%. Capital gains tax could be 0%

What, if any, tax consequences would this person have in this scenario?

Ordinary income on gain. No cap gains.

One note of caution...I'm assuming that this client is of retirement age. Many times, people will 1035 from annuity to annuity in order to avoid paying tax on gains.

You'll want to verify where that 86k came from...he/she might have a much lower cost basis.

 

[Golfnut2112]

Is he out of the surrender charge period? If he is, I would talk to his accountant and see what $25,000 of additional income would do to his tax situation, also like Tahoe Ray said the cost basis may be even lower which would cause even more tax being due.

 

[walthamny]

If the person is under 59.5 there is also the additional 10% penalty in addition to regular income tax.

 

[aclaro]

You can 1035 annuity to life insurance and continue the tax deferral. It will most likely MEC the policy so if the cash value is accessed it will taxed as an annuity.

 

[Todd King]

You can 1035 annuity to life insurance and continue the tax deferral. It will most likely MEC the policy so if the cash value is accessed it will taxed as an annuity.

Are you sure you can do a 1035 from annuity to life? You might want to double-check that.

 

[Golfnut2112]

You can 1035 annuity to life insurance and continue the tax deferral. It will most likely MEC the policy so if the cash value is accessed it will taxed as an annuity.

You cannot 1035 from an annuity to life insurance. You can go from life to an annuity.

 

[aclaro]

You cannot 1035 from an annuity to life insurance. You can go from life to an annuity.

My bad. You're right.

 

[mhutch]

Thanks for all the posts and everyone's input. The guy is 73 and we waited till he filed his taxes to get a better idea of what his situation will be tax wise this year.

I ended up moving his money from his current indexed annuity into another indexed annuity with a bonus, and income rider with bonus which his current annuity does not have. Then after one year, am turning his income rider on to pay for premiums on a life policy. Was a much better option than doing a single pay, for tax reasons. So, all in all moved $104k into another annuity, withdrew $7,200 from current annuity penalty free for 1st years life premium, and will turn the income rider on after the first year which will fully fund a $200k life policy.