Question About Variable Annuities in General

[Drifting]

Understand that my goal is to eventually get all of my money out of this non-qualified variable annuity of mine. I'm 48 now. I was duped into investing in it by a sales agent years ago when I was young and stupid. Way too much was invested in it, etc. Long story. To this day I am only starting to understand how this annuity works so bear with me!

Anyway I always thought that once you turned age 59 1/2 you could just start taking all of it or chunks of it out perhaps within just a small few years. I figured I would stagger the withdrawals beginning at age 59 1/2 for perhaps 3 years because of the big "ordinary income tax monster". But in reading the prospectus I'm not sure that this annuity is what I thought it was. For example I read text about....
"Partial withdrawals are not permitted after the income date"
AND
"After the income date no full surrenders are permitted"
And I'm reading that if I don't elect an income method then one will be selected for me. Am I locked in with the annuity for life or can I get out in short order after age 59 1/2? If I'm reading this right the only way out is to pay the pre-59 1/2 penalties + income tax. Please help shed some light!

 

[scagnt83]

Without seeing what you are reading it is just a guess.

But it sounds like you are reading the Annuitization provisions. Meaning "what happens once you annuitize".

When you annuitize you agree to receive income for a specific amount of time, often for the rest of your life, but sometimes for as few as 5 or 10 years. It sounds like the section your reading pertains to that.


Currently (assuming you have not annuitized) you are in the deferral period.

Each annuity is different. But most do not require you to annuitize to get to your funds. So most likely the section you are reading does not apply to your current situation. Again, without seeing it myself, this is just a guess.

But most likely, you can withdraw what you want when you want. As long as you are past the surrender period the only penalty you would have is the 59 1/2 penalty of 10% extra taxes.

If you can post a scan or pic of what you are reading then we can give you a better answer.

Is this the Sun America VA you mentioned in the other thread?


The "ordinary income tax monster" you mentioned is all relative. If you had bought a taxable investment that had the same return you would have less $$$ saved.
The majority of people (especially married couples) have income tax rates pretty close to the capital gains rate anyway (I think the cut off for 15% EI is around $72k for a married couple... then the 25% bracket goes up to $146k). Obviously this is situation dependent. But it all depends on what the alternative would have been....
Even at 25%, being able to forgo all of the capital gains taxes over the years has most likely given you a higher net return.
But you also mentioned in the other thread something about excessive fees... so it sounds more like a problem with the product and not necessarily the taxation.

 

[DHK]

Drifting,

I recommend you find a licensed financial consultant in your state to help you go through all this. Because most of your needs are "service work", I'd probably recommend an advisor that will work on a fee-for-service basis.

You need a licensed advisor to review your contract AND your prospectus to help you make sense of everything you have going on. Based on your need for an accountant (in the other thread), I'd probably look up a CPA/PFS professional, so you can "kill two birds with one stone".

 

[Drifting]

Currently (assuming you have not annuitized) you are in the deferral period.

Each annuity is different. But most do not require you to annuitize to get to your funds. So most likely the section you are reading does not apply to your current situation. Again, without seeing it myself, this is just a guess.

Yes. I'm 48. Deferral period. I am looking over Vanguard's Variable annuity. Just did a 1035 exchange. I will talk to them on Monday. I am hoping that they don't require me to annuitize.

As long as you are past the surrender period the only penalty you would have is the 59 1/2 penalty of 10% extra taxes.

Don't you mean as long as you are 59 1/2 or older then you only pay ordinary income tax? No 10% penalty?

 

[xrac]

Yes. I'm 48. Deferral period. I am looking over Vanguard's Variable annuity. Just did a 1035 exchange. I will talk to them on Monday. I am hoping that they don't require me to annuitize. Don't you mean as long as you are 59 1/2 or older then you only pay ordinary income tax? No 10% penalty?

Right! No penalty after 59 1/2 just taxes.

 

[Norwayguy]

Most policies have a maturity date and at that date if no election has been previously made income would start. Most often this date is far into the future beyond when a normal person would already begin to take income from the policy I know with one of my carriers on qualified policies the maturity date is age 90 when they would already have been subject to RMDs starting at April of the year following 70 1/2 so in most cases it is a nonissue.

I know you just purchased a Vanguard annuity instead of asking us who have no idea what annuity you have why not ask the people at Vanguard? I assume you prefer self help but these are questions that your agent/Registered Rep can typically answer for you.

 

[Drifting]

I know you just purchased a Vanguard annuity instead of asking us who have no idea what annuity you have why not ask the people at Vanguard? I assume you prefer self help but these are questions that your agent/Registered Rep can typically answer for you.

Because it's the weekend and these questions are driving me crazy, plus my "free look period" ends at the end of next week, although Vanguard has no surrender period. Also I have been getting conflicting information from Vanguard depending on who I talk to over there. It is Vanguard's Variable annuity. AFAIK they only offer one variable.

 

[scagnt83]

Yes. I'm 48. Deferral period. I am looking over Vanguard's Variable annuity. Just did a 1035 exchange. I will talk to them on Monday. I am hoping that they don't require me to annuitize.


Don't you mean as long as you are 59 1/2 or older then you only pay ordinary income tax? No 10% penalty?

I dont think they will require you to. But just ask to make sure.

And yes, I probably could have worded that better. If you are over 59.5 no 10% penalty, under 59.5 then your charged 10% penalty.


I would follow DHKs advice and find a fee based planner.
The Vanguard VA is known for being very low cost and consumer friendly. But have the financial planner review the prospectus with you so you fully understand it.

Did you add on any Riders to the VA?



Out of curiosity, why do you want to get out of it? What is your goal with these funds?

Personally I am not a big fan of VAs. They can work ok for some situations, but they tend to act like a swiss army knife... it does a lot of things, but it is not the best at any of those things. That is just my personal opinion.


You really need some type of professional guidance. The forum can help some, but only up to a certain point.

It sounds like you had a bad experience with an agent/advisor once with the Sun America VA and now feel you got bilked on Fees. And yes, some VAs tend to have high fees unfortunately.
But, there are plenty of good advisors out there who could help you out a lot.

The customer service reps at the various companies are not agents or advisors. They might hold a license but a piece of paper does not make an agent or advisor. I can tell you horror stories worse much worse than yours.
You are playing a dangerous game relying just on customer service reps for advice. You already got burned once by not seeking professional help... not trying to be mean, just realistic.

But if your goal is to get out of VAs all together, Vanguard might have been a good low cost choice. I seem to remember another advisor telling me once that they have no Surrender Charges. But again, ask them or your advisor that question to get the facts.

----------

who have no idea what annuity you have why not ask the people at Vanguard? I assume you prefer self help but these are questions that your agent/Registered Rep can typically answer for you.

Vanguard only has one Deferred Annuity. It is underwritten by Monumental (Transamerica if its NY). From what I hear it has no Surrender Charges and M&E under 50bps.

 

[Drifting]

Did you add on any Riders to the VA?
Out of curiosity, why do you want to get out of it? What is your goal with these funds?

I didn't add any extras.
Why do I want to get out? Long story. Most of my savings is in the VA. Wealth Manager's study called "Photo Finish" says that deferred taxation is over rated. It's actually a net loss after ordinary income taxation. I would invest in ETF's instead, without being constricted. Even Vanguard's index subfunds are about 0.4% more expensive than regular ETF's. I have no need for the .3% mortality and expense charge.

 

[scagnt83]

Wealth Manager's study called "Photo Finish" says that deferred taxation is over rated. It's actually a net loss after ordinary income taxation.

I would highly disagree.

It is extremely situation dependent.

I am not saying to keep your funds in the VA or not. As I said earlier they are not a product I am very fond of.

But I highly disagree with the "Photo Finish" study. There is no way to make a blanket statement such as that and it be accurate for everyone.


Are you married? Do you file jointly? What tax bracket are you in after deductions?

Didnt I see that you are in CA?? Are you aware that they have a combined state & fed capitol gains tax of 33%?

So if you are in a 25% income tax bracket (up to $142k for a married couple) and you add on the 9% state income tax, that puts you at 34% total on annuity withdrawals.... only 1% higher than the capitol gains rate....

So if you are getting taxed yearly at 33% on Capitol Gains, and at 34% on Income, then the Tax Deferred account is a no brainer.

Even at the next tax bracket up (28%, up to $223k if your married), then it is only a 4% difference for you.


Keep in mind that the study you referenced was done in 2003.
(by the way I personally know the guy that wrote that article. we live in the same city)

Also, that hypothetical scenario that had a big flaw in it. They left out state capitol gains taxes. Here in SC (where he did that scenario) thats an extra 8%.

Fast forward to 2013. Capitol Gains have risen to 20% since then.

So to compare that study to your personal situation:
They used 15% Capitol Gains. Your Capitol Gains rate is more than double that.


If we take the same study and apply YOUR 33% Capitol Gains Tax, then the available after tax amount of the Separate Account lowers to $869,487, compared to the VA with $880,865.

And that is not applying the higher Capitol Gains to the earnings over the time period, only to the end number.

They also only showed a 10 year time period. When you extend the time period out to 15/20/25 years, then the numbers become very different since the difference in value of the tax deferred vs. taxable only becomes greater and greater with time.


Nothing against Will, but he is wrong.