Tax Implications Regarding Pulling Funds from 'older' Annuities

[LucyGoosey]

Does any one know what sort of tax implications or penalties there may be from taking out a portion of an existing annuity to fund some sort of 'Pre Need' product or to use for charitable gifting?

A client of mine has an annuity of approx. $100K, set up a few years back - I do not know the carrier at this moment. She would like to take out some of the funds to Pre Pay her funeral, as well as do some charitable gifting.

So you know, I know little to nothing about annuities, as I only do final expense at this time; Simplified Issue, Guarantee Issue, and Single Pay (Asset Protection/Funeral/Pre Need/ Estate Planning).

My first thought was to place the portion of the funds she wants, into an Estate/Funeral Trust, which would fund the funeral the next business day and protect from creditors, probate, law suits, creditors, Medicaid, nursing homes and probate. This same product could be used for that charitable gifting. So you know, it is essentially an annuity built on a life chassis.

Most importantly, I do not want to screw anything up for her come tax season or incur some sort of penalties for her by pulling the funds from the annuity out early.

Any thoughts or recommendations? THANK YOU!

 

[scagnt83]

Obviously you need to get your hands on a statement. Lots of variables here.

Start by giving us her age...

Do you know exactly how far back it was she bought the Annuity?

You also need to find out if this is a pre-tax account (Qualified Account aka: IRA) or an after-tax account (Non-Qualified).


If she is 60 or older she will have no Tax Penalties. If she is younger than that she will have a 10% Tax Penalty.


Staying on Taxes... assuming she is 60 or older.... if she Withdraws funds they will just be considered part of her yearly Earned Income.
If it is an IRA, then she will owe taxes on all of it. If it is Non-Qualified, then she will only owe taxes if she has a gain.


But the bigger issue you have... still assuming she is 60 or over... is Early Surrender Charges. These usually last from 5-10 years on most products and will range from 1%-10% depending on the contract year.

The good news is that most annuities allow you to take out 10% of the Account Value each year free of Surrender Charges. So assuming she is at least 60, you can take out 10% of the value each year to fund her Final Expense needs.

If she is younger than 60 (technically the age is 59 1/2), then you are out of luck because of the 10% penalty.

Get more info and let us know.

 

[Dix86]

If she is over 70.5 she can give to charity from her RMD and not report on taxes... If it's a qualified account. As mentioned, a lot of variables here.