Tax Free Annuity Question

[Burke]

Roland, that's what I thought. The tax-free annuity was never in a retirement plan, although these things were marketed, sold, and bought for retirement.

I can tell the client this. Problem is, his broker has already rolled the thing over into a Roth.

We'll see what the 1099 says. Not even sure this will be a 1099-R. Might be a 1099-B.

It will be a 1099-R for the taxable portion (the earnings.) Taxed at ordinary income rates. And that may be substantial if he has had since the 1970's. His basis (original purchase price) was with after-tax funds if your details are correct. The former insurance company can verify this.

[Roberts]

A qualified tax SHELTERED annuity can be rolled into a self directed Roth IRA.
Anything else is a no-go.

These were rather common and just because it transfered between trustees, it may have originally been a qualified plan. Don't discount the possibility just because you client says so.

[FEDUKE404]

Concur on that one!

I think your client's broker is a grossly misinformed malcreant who has screwed your client royally. But, the broker won't bear the brunt of this come the filing deadline, your client will.

I tend to agree that the vast majority of any current/pending tax problems are the result of improper actions, regardless of "justification," by the investment firm/broker.

It might be a very wise move for your client to obtain legal representation for what lies ahead. Things could get quite nasty.

It is more than likely there is a lot of taxable income pending, and (from the facts presented) no way placing "new" funds into any Roth IRA account would be allowable. You might also want to ask the client and his wife what their personal understanding of "rollover" was.

FE

[JoshinNC]

Snag

I think your client's broker is a grossly misinformed malcreant who has screwed your client royally. But, the broker won't bear the brunt of this come the filing deadline, your client will.

[Snaggletooth]

Josh in NC

Josh, the "original" insurance company is far removed. Various custodians have held the money, and he has transferred from one insurance
company to another several times in 40 years, but never took the money out. The latest "transfer" was to his current broker.

The current broker established a Roth, and "rolled over" this annuity into the Roth. It had never been in a pension plan as such, so the tax-
free annuity never had to contend with Forms 5498, Age 59.5, Forms 550. etc. I just can't see how this qualifies as a rollover.

Even if not kosher, the Roth would be allowed to accept earned income or $6000 whichever was less. But there is no earned income.

I think the burden is on the broker, so long as file consistently with the information provided at year-end. Clients don't always know exactly
WHAT they have, and the broker could be right for all I know. However, the facts as I know them lead me to expect a 1099-B at the end
of the year and not a 1099-R with rollover indicated.

Thanks for your interest.

[JoshinNC]

Riddle me this Snag

For any of you who may remember the "old" days before the mid 1970s:

There was no such thing as an IRA. Or a 401k. Or a 403b.

If someone wanted to save for retirement, the ideal investment was a "tax-free" annuity. Sold by insurance companies, these things
would earn interest, and as long as the investor never touched the account, the earnings were tax free. The concept of a "deferred retirement"
account with RMDs, penalties, exceptions, etc. as we know today had not yet been created. But if you wanted to save for retirement, this
was the way to do it.

One of my older clients has such an investment. His broker wants to take this tax-free annuity and roll it over into a Roth.

Can he do that?

Did the original annuity company allow for the "rollover" to occur as a trustee to trustee transfer or did they require your client to take the money out as a distribution and then re-contribute the funds to the ROTH? The answer to this question will almost invariably answer your questions as to whether the original account qualified as a retirement account (from the sounds of what you have told us it didn't, and your client needs to take all of the money out of the ROTH prior to 12/31 and beg the annuity company to let him put it back like the "transfer" never happened).

[Lion]

He didn't "roll into" he contributed and does not qualify to contribute to any IRA.

[FEDUKE404]

Well, now...

I appreciate your response. My client has no earned income. Zero.

But that is not in question. Although he can "roll into" a Roth from another retirement plan, his broker has "rolled into" a Roth from an investment not in ANY retirement plan whatsoever.

With actions like that, it sounds as if both your client and his broker might have some serious problems requiring resolution.

If the facts hold up, I would suggest your client have the broker pay at least the penalties and interest for his account actions.

FE

[Snaggletooth]

Thanks to Lion

I appreciate your response. My client has no earned income. Zero.

But that is not in question. Although he can "roll into" a Roth from another retirement plan, his broker has "rolled into" a Roth from an investment not in ANY retirement plan whatsoever.

[Lion]

If he has no earned income (you said 67 and living on retirement) he can't contribute to a Roth or Traditional IRA. If he has a part-time job and can contribute, he has a $6,000 (is that it for 2012?) limit. He may need to pull the money out or pull the excess contributions out.

[JohnH]

D

Thanks for responding. Your first question is the essence of my post, as I really don't know how this can convert if it has never been in a retirement plan
without some escape hatch in the code.

Why change to a ROTH? Excellent question. This guy thinks any income whatsoever the govt can't tax is worth whatever economic sacrifice, even if he is otherwise punishing himself. At age 67 and on retirement he would be much better off just living with the income than to put up with all the restrictions of a Roth or any IRA.

Ron: you need to raise his fees. Get him paying you enough to overcome the 2% haircut, then he's getting a full deduction for every dollar he pays you. It's at least as good a tax deduction as the hidden fees in whatever scheme the financial advisor is cooking up. Plus he'd have the satisfaction of knowing that you're being honest about gouging him. Better than the deal he has right now.

[ChEAr$]

One added note. There are so many investment "advisers", most rather salesmen, who think any income, earned or not, can be put into a Roth IRA.

[Snaggletooth]

My first question would be if this so called tax free annuity had been grandfathered in at some time since during the many many tax code changes. IOW, does it still enjoy tax free status?

Probably yes, otherwise the custodian/trustee, whomever would have changed reporting requirements if there had been a change. Still.....
Why change to a ROTH at this late stage IF results are still tax free? Would broker obtain a commission on the transaction?

Thanks for responding. Your first question is the essence of my post, as I really don't know how this can convert if it has never been in a retirement plan
without some escape hatch in the code.

Why change to a ROTH? Excellent question. This guy thinks any income whatsoever the govt can't tax is worth whatever economic sacrifice, even if he is otherwise punishing himself. At age 67 and on retirement he would be much better off just living with the income than to put up with all the restrictions of a Roth or any IRA.

[Roland Slugg]

Problem is, his broker has already rolled the thing over into a Roth.

Well, that's going to be an interesting mess to straighten out! The cynical among us might suggest that this broker understands commissions a lot better than he understands IRAs.

[Snaggletooth]

That's What I thought

Roland, that's what I thought. The tax-free annuity was never in a retirement plan, although these things were marketed, sold, and bought for retirement.

I can tell the client this. Problem is, his broker has already rolled the thing over into a Roth.

We'll see what the 1099 says. Not even sure this will be a 1099-R. Might be a 1099-B.