Transferring annuity proceeds to IRA

[Allen Trent]

I'm not talking about one's total tax situation. I'm only talking about how our products work.

Agree.

But here are some real life scenarios I have seen that got agents in big trouble with their clients.

1. Encouraging someone to do a back door Roth, saying it is a great way to get money in a Roth without paying tax to convert. But agent knew nothing about the IRS pro rata rule that makes you count the values of all IRAs you own, not just the one you converted with after tax contributions

2. Agent tells client they can take their cost basis out of a life policy prior to 1035 exchange to new company. IRS rules consider this is a step transaction that the consumer received "boot" as part of the 1035 & thus client owes taxes on the gains

3. Client bought 300k NQ annuity from agent. Client called in needing $100k temporarily. Agent said as long as he put it back in within 60 days, it wouldn't be taxable. There is no 60 day rule on NQ. Plus, this agent royally screwed this one up as he told the client he would only be taxed on interest since purchased....but client had 1035'd the money at least 2x over the last 20 years & prior carriers didn't even report cost basis & gain to new carrier, so client was taxed on 100k even though he had only earned about 10k since newest annuity purchase.

4. Client with MEC life policy is told they can change ownership or pledge policy as collateral to a bank for a loan. Both scenarios are considered taxable events with a MEC.

5. Agent sold a client an IRA index annuity. Funded it with initial indirect rollover check. Client had another CD IRA come do 6 months later. Agent said he should move that money into the new index annuity IRA. Agent didn't know the IRS only allows 1 indirect rollover per year per taxpayer no matter how many IRAs are owned

While I am comfortable with some agents talking about how products work tax wise, I have found many agents only understand the big picture items like life insurance death benefit is tax free, gains on NQ are taxable, everything taxable on traditional IRA.

 

[Allen Trent]

In fact, I'm reminded of this older article:

FINRA Award Goes to Client After Advisor’s Tax Oversight by Ed Slott.

https://www.oxfordrmg.com/wp-conten...s-to-Client-After-Advisor-s-Tax-Oversight.pdf

Ignore the tax consequences of a client's decisions at one's own professional risk.

Advisors with securities licenses are exposed to alot more than life insurance agents. Partially because of who regulates them, but also because many of them put themselves out to the public as financial advisors.

 

[Tahoe Ray]

In fact, I'm reminded of this older article:

FINRA Award Goes to Client After Advisor’s Tax Oversight by Ed Slott.

https://www.oxfordrmg.com/wp-conten...s-to-Client-After-Advisor-s-Tax-Oversight.pdf

Ignore the tax consequences of a client's decisions at one's own professional risk.

Excellent example.

 

[DHK]

Advisors with securities licenses are exposed to alot more than life insurance agents. Partially because of who regulates them, but also because many of them put themselves out to the public as financial advisors.

There's no such thing as a "financial advisor license." Lots of supplemental educational programs and designation courses (CFP, etc.), but every license is about the products, uses, and regulatory environment.

That complaint could've happened with a life agent too. The difference is usually that FINRA complaints are far more public than insurance agent complaints.

 

[DHK]

Agree.

But here are some real life scenarios I have seen that got agents in big trouble with their clients.

1. Encouraging someone to do a back door Roth, saying it is a great way to get money in a Roth without paying tax to convert. But agent knew nothing about the IRS pro rata rule that makes you count the values of all IRAs you own, not just the one you converted with after tax contributions

2. Agent tells client they can take their cost basis out of a life policy prior to 1035 exchange to new company. IRS rules consider this is a step transaction that the consumer received "boot" as part of the 1035 & thus client owes taxes on the gains

3. Client bought 300k NQ annuity from agent. Client called in needing $100k temporarily. Agent said as long as he put it back in within 60 days, it wouldn't be taxable. There is no 60 day rule on NQ. Plus, this agent royally screwed this one up as he told the client he would only be taxed on interest since purchased....but client had 1035'd the money at least 2x over the last 20 years & prior carriers didn't even report cost basis & gain to new carrier, so client was taxed on 100k even though he had only earned about 10k since newest annuity purchase.

4. Client with MEC life policy is told they can change ownership or pledge policy as collateral to a bank for a loan. Both scenarios are considered taxable events with a MEC.

5. Agent sold a client an IRA index annuity. Funded it with initial indirect rollover check. Client had another CD IRA come do 6 months later. Agent said he should move that money into the new index annuity IRA. Agent didn't know the IRS only allows 1 indirect rollover per year per taxpayer no matter how many IRAs are owned

While I am comfortable with some agents talking about how products work tax wise, I have found many agents only understand the big picture items like life insurance death benefit is tax free, gains on NQ are taxable, everything taxable on traditional IRA.

Agreed. I'd consider these examples are done with more amateur agents who aren't as serious about learning more about the tax code.

They'd do well to subscribe to Van Mueller's newsletter as he goes into a fair amount of detail on tax matters.