Investment - Taxable base?

[MAJ]

I have 2 clients - this is their third season with me I believe. They have since married.

She has an annuity investment that started at about $250,000.
She has been withdrawing on it each year - never taking taxes out - or never near enough (no write offs). That's about where I came in.. Obviously I tell her (& boyfriend) that she can't take from it - or if you must you have to take out an extra 1/3 to pay the Feds & State.. Does she - Nope. Takes large chunks out to help son - Pay off his bills - Rehab, etc... No taxes withheld or very little.

So in our sit down this year we had a lengthly discussion about IRS debt her stress - etc. This has been going on for some time as she only has I think about 30k left.

She then mentions her dead money. Turns out her husband died. $250k policy. How this is the first time I find this out - I'm not sure - Anyway ... This money was then invested. This is the money she has been drawing off of. A Life Insurance investment.

So, the question I have is, Since this money came from a life insurance policy from her husband is the initial investment ($250k) exempt and only the appreciation/interest taxable?

If so, I feel like a fool but look like a hero otherwise - just a fool.....

Thanks!!
Sleep!! Tired!!

[S T]

1099r

Not knowing for sure, whether it is Non-Qualified $$ (non-IRA) or Qualified (IRA rollover) on the "dead" money

I will ask the obvious and say what are the 1099R codes in Box 7 - that might be a clue.

I am thinking that if the Life Insurance Proceeds were rolled over to an Annuity it would be non-qualified plan (other than IRA) and then as the $$ are distributed it is return of principal (non taxable) and interest/earnings (taxable).

Or if the monies were from the decedents IRA with a beneficiary and rolled over - then it is a Qualified Rollover and then "all taxable", I am thinking - Correct?

Maybe you should obtain an account history from the Annuity Company? And find out how they have it listed in their records.

Sandy