Variable Annunity

[drdino]

Client has a variable annuity that allows him to have a registered investment advisor manage the funds inside the annuity and have the annuity (insurance carrier) pay the client's management fee.

This year, client got a 1099 from the insurance carrier for the fees and it was classified as a taxable distribution, first time this ever happened. My question is will be taxed as ordinary income plus 10% penalty because before 591/2?

I told client he should have paid the fees out of his personal checking account, but his current RIA claims this is always done and they have never had this problem and it must be a mistake - the insurance carrier said it is not. Thoughts?

[AZ-Tax]

AZ-Tax

First, the Reg Investment Advisor is the last person to believe regarding these type of situations. The RIA wants to manage the most assets possible with little to no servicing work. Just last year a RIA told my client her RIA fees were tax deductible but failed to tell her the deduction is subject to phase out. Its a RIA spin job to get the client out of their hair. When the client found out the entire fee was phased out thus not deductible, client was not very happy and we the tax preparer in most of these situations usually receive part of the blame. I became a Securites rep way before I started my tax practice and it made me more conservative. My opinion is this 1099 is going to be taxable and no mistake was made.