Any Annuity Experts?

[dan doshan]

I am having trouble trying to figure out an Annuity. Around 5 years ago or so a client put 450K (her own money not some retirement rollover thing) into some sort of annuity deal. In 2009 at age 68 client started withdrawals of around 28K a year which according to her she will receive this amount each year for life. The 2009 1099R showed the 28K withdrawal in box 1. Box 2 specifically showed taxable amount 0. Box 5 which indicates employee contribution, which they really were not, showed the 450K investment. Note that the 2010 and 2011 1099R's did not explicitly show 0 taxable in box 2, it was blank,but also did not indicate taxable amount not determined. Nor did those 1099R's show the clients 450K contribution in box 5 as the original did.

In 2009 and 2010 none of the 28K was entered on the return as taxable. Shouldn't at least a small portion each year be taxable based on her contribution and her projected lifetime income she will receive. Or could it be a case where none is taxable until she has recovered her entire cost.

I guess I do have to find out more from her just exactly what kind of annuity dohickey thing this was. Could this be something that the company which sold her this product will be tracking and once she has recoverd her cost they will then show any excess payments as taxable on the 1099R they issue her?

I am just having trouble understanding this or getting a handle on. Any suggestions welcome.

[Burke]

You are absolutely right on this. You have to determine the taxable amount by using her $450K as the basis. A portion comes back to her as non-taxable based on her age, the amt, and the period the annuity covers. If this is an annuity policy from an insurance company, THEY should be doing this. They probably are not because you do have a couple of options. But you can refer to the worksheet in TTB 13-20 to handle it under the Simplified General Rule. Instructions also in IRS Pub 575. Most software has the worksheet too, in the input worksheets for 1099-R. And it will carry over each year. Good luck on those amended returns! You can no longer recover your costs up front after 7/1/86.

[ddoshan]

I know I need to get more information from her but ... Although it does not make any sense to me at all, she said that this annuity thing is not earning anything. She also said, which did not make sense either when I asked her what would happen if she passed away, that any balance would be lost.

[RitaB]

Sounds like

Sounds like the worst deal ever. 450/28 = 16 years until she gets her investment back, age 84. And, when she buys the pine pajamas, it disappears?

Yeah, I think there is more to this deal. I sure hope so.

This reminds me of the book "How I Lost Six Pounds In Five Years". (I don't know why.)

[Mo Sheets]

Not an expert either, but.....

There are several different types of annuities (fixed/variable/others). Some annuities are structured to be paid out over the life of the recipient only, while others are structured to pay the primary insured (the annuitant) a set amount of money over their lifetime, with a "remainder" paid to a beneficiary. Obviously, those annuities that are paid out over a single annuitants lifetime pay a higher amount each year than those which have a remainderment.

Normally, once an annuity has been "annuitized", no additional interest is earned/paid. An annuitant receives a fixed amount for the duration of their lifetime, whether that be for 3 days or 50 years. Consider it legalized gambling....the annuitant hopes to live forever (because they will collect for their lifetime) whereas the insurance company who issues the annuity hopes the annuitant will not live too long. As an example, suppose you give the insurance company $50,000 for a single-life annuity (no remainder for a beneficiary). They promise to pay $5,000 a year for the rest of your life. If you die within 3 years, you lose. But if you live another 25 years, you've collected $125,000 and only invested $50,000.

It sounds like your client got snookered. Obviously, the salesperson did one HECK of a sales job because that is the worst scenario that I've every heard of.

Good luck!

Mo

[Burke]

I know I need to get more information from her but ... Although it does not make any sense to me at all, she said that this annuity thing is not earning anything. She also said, which did not make sense either when I asked her what would happen if she passed away, that any balance would be lost.

As Mo said, it may not be earning anything now, but you said she bought it in 2005 and did not start withdrawals until 2009? It had to be invested in something during that time, even if it was just a money market or CD-type fixed rate vehicle. I would ask her 1) to bring in the policy; that will tell you if it is an immediate, life annuity with no survivor benefit; 2) the last statement from this company showing its current value. They are usually a wealth of information. I have an elderly client who took one of these. He has no children, no heirs, and wanted the biggest payout during his lifetime. After that, he really didn't care. He's 92.

[New York Enrolled Agent]

As Mo said, it may not be earning anything now, but you said she bought it in 2005 and did not start withdrawals until 2009? It had to be invested in something during that time, even if it was just a money market or CD-type fixed rate vehicle. I would ask her 1) to bring in the policy; that will tell you if it is an immediate, life annuity with no survivor benefit; 2) the last statement from this company showing its current value. They are usually a wealth of information. I have an elderly client who took one of these. He has no children, no heirs, and wanted the biggest payout during his lifetime. After that, he really didn't care. He's 92.

Ddoshan - Suppose it was a variable annuity - it may not have earned anything. It might have been invested in the stock market and could have suffered a loss.

If payments are made for a single life, then calculating the taxable amount in a variable annuity uses the single - one life table V (for post 1986 annuities) in the IRS annuity tables.

More information needs to be gathered.