annuity rollovers?

[oceanlovin'ea]

Is there such a thing as an annuity rollover?

New client came in because they had found 2 mistakes on the return prepared by another preparer and since they had to bring it to her attention, they wanted me to amend the return.

One thing I know was wrong and will change that part. The second part was a distribution she had from an annuity. She took out money and bought a different annuity. She did it within a week of getting the money.
I was thinking it was a rollover. But is it really a rollover? Would she have had to have the first company send the money directly to the second company?

I am second guessing myself now and wondering if I misspoke about this being a rollover.

Linda EA

[S T]

Maybe

It might be a Section 1035 Exchange -

Here is a link that gives some guidelines http://www.immediateannuities.com/li...5_exchange.htm

http://www.irs.gov/irb/2003-33_IRB/ar11.html

http://www.exeter1031.com/1035_exchange_revenue_ruling_2003_76.aspx

Sandy

[AZ-Tax]

First you need to determine if the annuity is in

a qualified plan, then I believe it falls under the 60 day rule for which the money can be taken out but must be replaced in whole to the new custodian within 60 days. I am little rusty on this so hopefully others will correct me I am wrong.

If NOT a qualifed plan, then a 1035 exchange is where the owner of the annuity completes an application with another insurer (new insurer) thus authorizing the new insurer to liquidate the owners annuity from the old insurer and transfering the "cash value" of the annuity to the new insurer.

[oceanlovin'ea]

What would be a qualified plan? This lady is in her 70's and a little scatterbrained. Not sure she would know if I asked her if it was in a qualified plan.

She did receive a check in her hands. But she had already set up the new annuity.

I'm going to read the reference from Sandy now.

Linda, EA

[oceanlovin'ea]

Read the references

So it would appear that because she actually got the check and sent it to the new company she doesn't qualify and the distribution would be taxable.

That is a real shame. She didn't know you had to do it that way. Why don't the sellers of these annuities explain this to people?

Linda EA

[Jesse]

That is a real shame. She didn't know you had to do it that way. Why don't the sellers of these annuities explain this to people?

Linda EA

I don't think it's always the sellers fault as people tend to not listen, only hear what they want to hear, or have a friend that "knows".

[oceanlovin'ea]

Qualified plan

Am I correct in assuming that a qualified plan would be one of the plans listed on page 13-21 of TTB under kinds of rollovers in the middle of the 2nd column?

I don't think this money was in anything like that. It was just an annuity that she had purchased at one time in her life.

So it's not a qualified plan and it doesn't qualify for the section 1035 exchange either. It is just taxable.

Am I correct? Somebody, anybody

Thanks

Linda, EA

[AZ-Tax]

Linda

I didnt look at the TTB pages. I got a guy here working on my dishwasher and preparing for a 9am client. Usually the annuity statement will say IRA within the same sentence of the owners name. If so, then that would be a qualified plan.

Your client who might not know if you ask is not restricted to seniors. I have quite a few middle to young age clients that probably could not answer this question.

[Burke]

An IRA can be invested in an annuity. It would say "qualified," if that were the case. She should have some old records or statements from the previous company, or she could call them to find out. She could roll that over into a new IRA within 60 days. The IRA box should have been checked on the 1099-R. If it was just a non-qualified tax-deferred annuity that she purchased, she would have an after-tax basis in it from her original contribution or purchase price, and only the earnings would be taxable. Does the 1099-R show gross and taxable the same? Usually it is not advantageous to surrender an old annuity and take out a new one, due to surrender charges starting all over again, and if she is looking for fixed income, the guaranteed interest rates are much lower in new contracts than older ones. If she was "hornswaggled" into this, she may have recourse to reverse it. I just did one last year. My client was 87 years old and did not understand what he was doing. Companies are most receptive to this action to avoid problems with State Insurance Depts for misrepresentation.

[oceanlovin'ea]

1099R both boxes show same amount. It is NOT checked that it is an IRA.

I will ask her questions about how much she invested in it in the beginning and why she did this too.

Thanks for your help.

Linda, EA

[New York Enrolled Agent]

Take a look at Rev Ruling 2007-24. Following up on AZtax post, the taxpayer cannot receive the funds.

Here is the cnclusion of the RR. "If a Taxpayer receives a check from a life insurance company under a non-qualified annuity contract, the endorsement of the check to a second company as consideration for a second annuity contract does not qualify as a tax-free exchange under §1035(a)(3). Instead, the amount received is taxable to the extent set forth in §72(e)."

[Burke]

1099R both boxes show same amount. It is NOT checked that it is an IRA. I will ask her questions about how much she invested in it in the beginning and why she did this too.Thanks for your help.
Linda, EA

There is one circumstance where this could be correct. If it was a non-qualified annuity and she had already previously withdrawn her own contributions (some contracts allowed 10% per year without charges), then she would have already recovered her basis and all of the remaining balance would be taxable. All of this information would be available from the company who issued the 1099-R and they usually have a toll-free number (and the annuitant's account number) on the form

[S T]

Interest-Earnings

Burke,
I always thought that the 10% (ins co penalty free withdrawal) was from the earnings - then might erode the principal. Don't most annuities distribute earnings first, which would be taxable. Maybe we need to look to the contract to see the "small print" and see if it is "Interest-Only Penalty Free (Ins Co) or if it is 10% "Investment penalty free (Ins Co)

The 10% mentionned above is not the same as the IRS 10% early withdrawal penalty.

How are the distributions taxed during the accumulation phase?
When an annuity contract is fully surrendered during the accumulation phase, the owner must pay income tax on the earnings in the contract. The owner is not taxed on amounts that represent a return of contributions (such as premiums or investment in the contract). Partial withdrawals from an annuity in the accumulation phase are taxed on a last in, first out (LIFO) basis. In order words, withdrawals from an annuity are made earnings first, and the owner is taxed on the payments until all of the earnings have been distributed. There is an exception to the earnings first rule for contributions made to annuity contracts prior to 8/14/82. These contributions are distributed on a first in, first out (FIFO) basis and the owner is not taxed until such contributions are fully recovered.

How are distributions taxed during the annuitization phase?
During annuitization, a portion of each annuity payment represents a return of non-taxable investment in the contract and the balance of each payment is considered taxable income. The taxable and non-taxable portions of the payments are determined by an exclusion ratio. The exclusion ratio for a fixed annuity is the ratio the investment in the contract bears to the expected return under the contract. The exclusion ratio for a variable annuity is determined by dividing the investment in the contract by the total number of expected payments. Once the total amount of the investment in the contract is recovered using the exclusion ratio, the annuity payments are fully taxable. If the owner dies before the total investment in the contract is recovered, and annuity payments cease as a result of his death, the un-recovered amount is allowed as a deduction to the owner in his last taxable year.

At any rate, Linda, I believe you have some information gathering on this client. If it is not a Qualified Plan (IRA or rollover - you stated not marked on the 1099R form) Something doesn't seem quite right, if Box 1 and 2a are the same, unless for some reason as Burke stated, T/p pulled out prior investment and this is all interest. I usually see the reverse. Do you have a Box 5 Amount - Contributions or Insurance Premiums?
Maybe if the T/P can find her "Annuity contract" the initial deposit will be noted, as well as whether it is a Qualified or Non-Qualified Annuity. Then you might also need to contact the Insurance Company to have them provide you with an Account History.

Sandy

[Burke]

Good info. And you are correct. A lot depends on when the contract was issued and it's particular provisions. Problem is, most annuitants turn in the contract when it is surrendered. If by some chance, she did not (couldn't find, etc) but she could either locate it now or the agent who sold it to her who might have a copy of the app in his files, the initial deposit would be on that. It still doesn't tell you what happened over the years re withdrawals. I think the only option is to request a history from the company. I used to see a lot of errors on these type of 1099's. They have gotten a lot better in the last 5-10 yrs. Sometimes these contracts have been transferred from company to company before, and the basis got lost along the way.

[oceanlovin'ea]

driving me crazy

This lady is driving me crazy. I talked to her yesterday and she starts telling me that it probably is taxable. She just really didn't want to have to pay all that money. The guy that talked her into doing this told her that there was a way it wouldn't be taxable. But she knew if she had done a direct transfer from company to company it wouldn't have been taxable. But the renewal time was there and she knew she wanted to move it but she didn't have a good rate yet etc etc........................

So now she is saying they will pay me for my time but if the amount due on my amended return is higher than on lady #1's amended return, they will just use hers since it will be less money. I think I know the difference......MWP credit. When she had the income from the farm on Schedule F, he got some MWP credit. But when it goes to farm rental, there is no earned income and he doesn't get that credit. She was just copying over from the first return to the amended. I know that because I did that first. Then I just did a dummy 1040 to see how it came out and the MWP credit was gone.

They are coming this morning to pick up returns (?) or just to pay me. They WILL pay me. I am not wasting my time on this person again.

Linda, EA