1099r

[theresa d]

44 year old taxpayer received proceeds from a whole life insurance policy. it was reported on a 1099 r with a distribution code of 7-normal distribution. is this an error by the insurance co-code 7 no penalty applies? or is this something to do with the whole life policy? client tells me it was not an annuity but a whole life ins policy which contains an investment component. any help appreciated.

[rosieea]

I don't know the answer, and we do know that 1099s are occasionally incorrect. But in this case, I'd accept the code 7 at face value and move on.

[Black Bart]

Whole life insurance

policies do have an investment component. You're buying insurance and a retirement fund simultaneously. Supposedly it's not a good investment, as most financial planners will say to buy the cheaper "term" (no retirement) insurance and put the difference in something better. On the other hand, many people don't have the discipline to do that, so something is better than nothing.

Now, apart from Investments 101: I agree with rosie--no point in looking a gift horse (code 7) in the mouth. I'd take it and go on. It's probably there because the clerk didn't have a clue what they were typing, but it's what's on the form and what went to IRS. I agree that it seems a 44-year old should get a "code 1," but I guess it comes down to how zealous you want to be and whether or not you're a worrier. If t/p accidentally got audited for something else, an eagle-eyed agent might notice it (remote-but possible) and charge pen and interest.

I usually am just complaining on these when we get a "1" and it should be a "7" (no surprise there). About half the time I am (or the client is) successful in getting it changed--the other half they tell us to drop dead--it's done--they're not changing it.

Also, I was thinking, since the t/p did put some money into the thing (the investment part--not the insurance part), don't you get to subtract that off and what's left is the "taxable" part of the 1099-R? Anybody know about that?

[rosieea]

Also, I was thinking, since the t/p did put some money into the thing (the investment part--not the insurance part), don't you get to subtract that off and what's left is the "taxable" part of the 1099-R? Anybody know about that?

I wonder what the taxable amount box shows. Or perhaps the taxable amount not determined box is checked.

[Black Bart]

Yeah,

I wonder what the taxable amount box shows. Or perhaps the taxable amount not determined box is checked.

that's what I was wondering.

[theresa d]

followup

thanks for the quick responses. you're correct that the taxable amount is different from the gross amount due to the taxpayer's contribution. i agree and am grateful for the comments that the code 7 is a good thing and i am going with it. i was just wondering if there was something unique about this type of investment that waranted the code 7 or was it simply a clerical mistake. as you both indicated if it was an error it's a good one and i'll just let sleeping dogs lie. thanks

[jainen]

Life Insurance

Life Insurance is not a qualified plan or tax-advantaged annuity. The earnings are taxable and there is no penalty for withdrawing before age 59.5.

[Black Bart]

Well; so much for my

Life Insurance is not a qualified plan or tax-advantaged annuity. The earnings are taxable and there is no penalty for withdrawing before age 59.5.

"careless clerk" theory. Still, no pen, so all's well that ends well.

It's just amazin' ain't it? It's like havin' an encyclopedia handy at all times. All you gotta do is hang around the board for awhile and he'll clue you in.

All good things to those who wait. -- HANNIBAL LECTER

[Bees Knees]

Life Insurance is not a qualified plan or tax-advantaged annuity. The earnings are taxable and there is no penalty for withdrawing before age 59.5.

Not true. Any policy that defers tax on earnings is a tax-advantaged plan. If a distribution is being reported on a 1099-R, that means tax deferred earnings are coming out of the plan, and the 10% penalty applies if the participant is not age 59 ½.

Section 72(v) imposes the 10% early withdrawal penalty for taxable distributions from modified endowment contracts. Section 7702A defines a modified endowment contract for purposes of Section 72 as one meeting the requirements of Section 7702. Section 7702 defines the type of life insurance contracts that would qualify for the accumulation of tax-deferred earnings.

It is true that certain life insurance contracts require the participant to pay tax on the earnings annually. Distributions from these contracts would not be subject to the 10% early withdrawal penalty, since the earnings are not tax deferred. But if there is any hint of tax deferral, such as is the case with a qualified plan, an annuity contract, or a modified endowment contract, then the 10% early withdrawal penalty applies if the participant cashes in before age 59 ½ and none of the other exceptions applies.