Question about moving qualified funds into an annuity ?

[LostDollar]

(caveat, not an agent.)

Some qualified fund categories:

Roth funds not subject to RMDs

IRA funds subject to table II or III RMD's

401k funds subject to table ii or iii RMD's

Inherited IRA funds subject to old rule table i RMD's

Are combinations of any of those fund sources allowed in the purchase of an annuity?

 

[Tahoe Ray]

(caveat, not an agent.)

Some qualified fund categories:

Roth funds not subject to RMDs

IRA funds subject to table II or III RMD's

401k funds subject to table ii or iii RMD's

Inherited IRA funds subject to old rule table i RMD's

Are combinations of any of those fund sources allowed in the purchase of an annuity?

You would have to move the 401k to an IRA to buy the annuity in the first place (assuming that's not an investment option in the 401k). So, you could technically combine 2 and 3.

You can't commingle the other ones.

 

[CALTCAgent]

You can move Qualified into a NQ annuity. Just have to pay the taxes.

 

[Allen Trent]

You can move Qualified into a NQ annuity. Just have to pay the taxes.

Honestly cant think of a good reason to do that. Likely would be better to convert to Roth. Still have to pay taxes now to do it like you would to move it to NQ Annuity. But the big difference would be the Roth would be tax free in the future to the owner & to the beneficiaries that receive the death claim. The NQ annuity for lifetime distributions would require the owner to take tax deferred interest out first & pay taxes & at death all the taxable gains would be taxable.

only time I have seen someone take qualified funds out & deposit into NQ was individuals already over 70 (72 now) having to take RMDs & want a decent place to put the RMD amounts that they dont need to live on. If they are insurable, life insurance would be a much leverage & tax play if they are healthy & truly dont need the funds to live on

 

[LostDollar]

You can move Qualified into a NQ annuity. Just have to pay the taxes.

Yes, thanks. I hadn't thought of that.

I had gotten as far as thinking that Roth funds could be increased by converting Traditional to Roth. I guess I am so used to thinking in terms of "IRA is better than Non-IRA" that my mind was not able to make the next jump that you pointed out.

I still haven't quite decided if a $5k-$15K annuity is a useful thing to have or a wise purchase to make, but thinking at those levels and understanding that fund types can't be co-mingled in an annuity took me to the next question of how money could be moved around to get an amount necessary to meet a minimum annuity purchase requirement.

If a person wants to take a chance on having a small gap between the income on their tax return and the actual edge of the tax bracket, your suggestion might be a good way to bump NQ funds to a minimum annuity purchase level.

That same gap between income and the edge of the tax bracket could be used for moving money from traditional to roth funds. My concern with that one, for an annuity purchase, is that I can't decide if it is a wise course of action to lock Roth funds up with annuity withdrawal restrictions.

(And then, for 2021 and 2022, those conversions might also have some effect on ACA subsidy amounts that wouldn't be present in other years. ? (Not sure on that, but can't afford to miss the possibility.))

 

[LostDollar]

only time I have seen someone take qualified funds out & deposit into NQ was individuals already over 70 (72 now) having to take RMDs & want a decent place to put the RMD amounts that they dont need to live on.

Bingo!

If they are insurable, life insurance would be a much leverage & tax play if they are healthy & truly dont need the funds to live on

And Bingo!
But.... if they are not ........... (or if they are on the edge and don't want to take the chance of a decline)

 

[scagnt83]

Yes, thanks. I hadn't thought of that.

I had gotten as far as thinking that Roth funds could be increased by converting Traditional to Roth. I guess I am so used to thinking in terms of "IRA is better than Non-IRA" that my mind was not able to make the next jump that you pointed out.

I still haven't quite decided if a $5k-$15K annuity is a useful thing to have or a wise purchase to make, but thinking at those levels and understanding that fund types can't be co-mingled in an annuity took me to the next question of how money could be moved around to get an amount necessary to meet a minimum annuity purchase requirement.

If a person wants to take a chance on having a small gap between the income on their tax return and the actual edge of the tax bracket, your suggestion might be a good way to bump NQ funds to a minimum annuity purchase level.

That same gap between income and the edge of the tax bracket could be used for moving money from traditional to roth funds. My concern with that one, for an annuity purchase, is that I can't decide if it is a wise course of action to lock Roth funds up with annuity withdrawal restrictions.

(And then, for 2021 and 2022, those conversions might also have some effect on ACA subsidy amounts that wouldn't be present in other years. ? (Not sure on that, but can't afford to miss the possibility.))

The amount converted is considered Earned Income for tax purposes. So yes, it could impact your ACA subsidy. Just use the subsidy calculator and increase your income by that amount to see the impact.


If its wise to "lock ROTH funds into an annuity" it depends on if you think you will need more than 10% of those funds in any given year. You need to look at total liquidity when considering these types of things, not just the single pot of annuity money.


IRA vs. Non-IRA just depends on goals. Annuities are not always the best way to pass on assets on a NQ basis, as there is no step-up in basis for tax purposes. Taxes at inheritance matters to some people... others care more about the benefits of the annuity while living. It just depends on your goals. An IRA can be a great way to pass on assets for some, not so great for others. RMD withdrawals are overblown as a negative thing, and you can even put them to use with something like life insurance to pass on those assets at an even higher value.


My non official advice would be to wait until you are on Medicare to think about conversions since ACA subsidies are an issue for you. Assuming your income is over the standard deduction, any increase will likely lower your subsidy by some amount to some extent. But you could play with your numbers to see if you could convert small amounts each year and not impact subsidies too bad.

 

[scagnt83]

(or if they are on the edge and don't want to take the chance of a decline)

Use a good agent who can pre-screen your health with the carrier and you are not likely to get declined. And I dont mean looking at underwriting guidelines. I mean taking your detailed health info and sending it to an underwriter to give an informal rating on. Its not a guarantee, but 99% of the time its within 1 or 2 rate classes if not exact. My last case was 1 class better than the pre-screen rating, one before that was 1 class worse.

(and many health conditions are not that big of a deal as the client thinks they will be. we just have to use the right carrier for that health condition)

 

[Tahoe Ray]

or if they are on the edge and don't want to take the chance of a decline)

This just means that the agent sent you to a carrier that isn't suitable. It isn't some albatross that follows you around forever. The new carrier will just want to know why and if it fits their underwriting guidelines, you'll still get a policy.

Annuities are not always the best way to pass on assets on a NQ basis, as there is no step-up in basis for tax purposes.

It is one of the worst. An annuity takes a lump sum creates an income, a life policy takes an income (premium) and creates a lump sum. (as you know, but for others)

(and many health conditions are not that big of a deal as the client thinks they will be. we just have to use the right carrier for that health condition)

Agreed. See above.

 

[LostDollar]

This just means that the agent sent you to a carrier that isn't suitable. It isn't some albatross that follows you around forever. The new carrier will just want to know why and if it fits their underwriting guidelines, you'll still get a policy.

My decision, not an agent's. And from reading here, that is not the impression I get about a failed "get up and go" test.