Annuity statement. Not sure how this works?

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manlymatt83
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Annuity statement. Not sure how this works?

Post by manlymatt83 »

SO has an annuity that she’s had since childhood. Received a statement in the mail this month. Surprisingly, the statement is from Fidelity. It shows investments in about 5-6 “VIP” funds like contrafund, growth, high income, overseas, etc. The annuity seems to be 75% equity and 25% bonds.

I’m confused as I’ve always thought an annuity was just a guaranteed payout each year. But this seems to have actual investments.

We are curious about whether or not it makes sense to cash this out (the balance is sizable). Ideally we want to move it to Schwab (where our other investments are) to take advantage of their increased support at larger investment amounts.

Would love any help interpreting what kind of annuity this might be and what flexibility we might have to move it. Thank you!
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Stinky
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Re: Annuity statement. Not sure how this works?

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manlymatt83 wrote: Sat Apr 10, 2021 7:49 pm SO has an annuity that she’s had since childhood. Received a statement in the mail this month. Surprisingly, the statement is from Fidelity. It shows investments in about 5-6 “VIP” funds like contrafund, growth, high income, overseas, etc. The annuity seems to be 75% equity and 25% bonds.

I’m confused as I’ve always thought an annuity was just a guaranteed payout each year. But this seems to have actual investments.

We are curious about whether or not it makes sense to cash this out (the balance is sizable). Ideally we want to move it to Schwab (where our other investments are) to take advantage of their increased support at larger investment amounts.

Would love any help interpreting what kind of annuity this might be and what flexibility we might have to move it. Thank you!
It sounds like a variable annuity. And it’s likely taxable (as opposed to a tax-deferred/IRA since SO has had it since childhood. It’s currently in “accumulation” phase, rather than “payout” phase which will start when SO starts taking income from the annuity.

The rest of my answer will be framed assuming it’s taxable.

On the good side - if it’s from Fidelity, it probably has good fund choices and relatively low expense charges. You could see an expense charge on an annuity statement - maybe something like 0.25% per year. Also, is no taxable income until withdrawals are made - a “tax deferral” feature.

On the bad side -
1. All income from the annuity will ultimately taxed as ordinary income. So any equities in the VA don’t receive the favorable capital gains and qualified dividend treatment they’d get outside an annuity.
2. There is no step up in basis at death.
3. There is that expense charge - 0.25% or so per year.

I don’t believe that the annuity can be “moved” to Schwab. In order to get the funds to Schwab, SO will need to surrender the annuity. It’s unlikely there are any surrender charges, so that’s good. At the time of surrender, taxable income will be reported equal to the excess of the surrender value over the “basis” of the annuity (likely the premiums paid).

If surrendering all at once will push SO too far up in tax brackets, you could do a series of partial surrenders over a period of years. “Income” is assumed to be distributed first, then “basis”.

That’s a lot of details. Please post back if you have questions.
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Rex66
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Re: Annuity statement. Not sure how this works?

Post by Rex66 »

You have a variable annuity

All gains will be taxed at income rates. No step up in basis at death.

You would need to provide a lot more information about your overall financial picture and plans to get any real recommendations.

It was a bad decision to purchase but at this point it isn’t clear if you have any need for guaranteed income or what riders you may have purchased
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Re: Annuity statement. Not sure how this works?

Post by Silk McCue »

Rex66 wrote: Sat Apr 10, 2021 8:18 pm You have a variable annuity

It was a bad decision to purchase but at this point it isn’t clear if you have any need for guaranteed income or what riders you may have purchased
To be clear OP didn’t purchase this. Their significant others parents did in their childhood.

Cheers
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Re: Annuity statement. Not sure how this works?

Post by manlymatt83 »

Thank you for the replies!

SO is a physician and in a high tax bracket. She could surrender the annuity in pieces to begin paying off student loans, though she is also eligible for loan forgiveness if she sticks things out another 5-7 years.

What about winding down the annuity over a number of years and increasing 401k contributions at the same time to reduce AGI?
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Re: Annuity statement. Not sure how this works?

Post by SlowMovingInvestor »

Stinky wrote: Sat Apr 10, 2021 8:13 pm
I don’t believe that the annuity can be “moved” to Schwab. In order to get the funds to Schwab, SO will need to surrender the annuity. It’s unlikely there are any surrender charges, so that’s good. At the time of surrender, taxable income will be reported equal to the excess of the surrender value over the “basis” of the annuity (likely the premiums paid).

If surrendering all at once will push SO too far up in tax brackets, you could do a series of partial surrenders over a period of years. “Income” is assumed to be distributed first, then “basis”.
Not an expert, but can't the annuity be exchanged for one at Schwab with a 1035 exchange ? I'm not sure it'd make sense to do that, since Fido has a good variable annuity, but it is possible to avoid taxes, right ?
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Re: Annuity statement. Not sure how this works?

Post by HueyLD »

manlymatt83 wrote: Sat Apr 10, 2021 7:49 pm SO has an annuity that she’s had since childhood. Received a statement in the mail this month. Surprisingly, the statement is from Fidelity. It shows investments in about 5-6 “VIP” funds like contrafund, growth, high income, overseas, etc. The annuity seems to be 75% equity and 25% bonds.

I’m confused as I’ve always thought an annuity was just a guaranteed payout each year. But this seems to have actual investments.

We are curious about whether or not it makes sense to cash this out (the balance is sizable). Ideally we want to move it to Schwab (where our other investments are) to take advantage of their increased support at larger investment amounts.
VIP funds are funds designated for variable annuities (VAs) offered by Fidelity Insurance.

I think if you plan to keep VAs, Fidelity is about the best place due to its low annuity charges and wide selections of investment options, including some very low cost index funds. See this link for available VIP funds.

https://fundresearch.fidelity.com/annui ... refann=005

You can move the investments from high cost VIP funds to low cost VIP index funds.

Schwab also offers low cost VAs, but their cost is much higher than that of Fidelity.

https://www.schwab.com/annuities/variab ... le-annuity
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Re: Annuity statement. Not sure how this works?

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manlymatt83 wrote: Sat Apr 10, 2021 8:28 pm Thank you for the replies!

SO is a physician and in a high tax bracket. She could surrender the annuity in pieces to begin paying off student loans, though she is also eligible for loan forgiveness if she sticks things out another 5-7 years.

What about winding down the annuity over a number of years and increasing 401k contributions at the same time to reduce AGI?
One other thing to look at is the guaranteed interest rate on the fixed account. If it’s an attractive rate like 3% or more, you might want to move most or all of the assets into the fixed account and increase the equity allocation in your other accounts to compensate.

Holding the account and spreading out withdrawals might make a lot of sense, especially if the fixed account rate is attractive.
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Re: Annuity statement. Not sure how this works?

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SlowMovingInvestor wrote: Sat Apr 10, 2021 8:31 pm
Not an expert, but can't the annuity be exchanged for one at Schwab with a 1035 exchange ? I'm not sure it'd make sense to do that, since Fido has a good variable annuity, but it is possible to avoid taxes, right ?
Yes, the annuity could be 1035 exchanged to a Schwab annuity. But that wouldn’t avoid taxes, since the basis carries over.

And HueyLD says that Schwab annuities are more expensive than Fidelity.
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Re: Annuity statement. Not sure how this works?

Post by Bronco Billy »

Stinky wrote: Sat Apr 10, 2021 8:43 pm
SlowMovingInvestor wrote: Sat Apr 10, 2021 8:31 pm
Yes, the annuity could be 1035 exchanged to a Schwab annuity. But that wouldn’t avoid taxes, since the basis carries over.
Stinky, when you do a 1035 exchange you have to pay taxes on the gains at that time??
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Re: Annuity statement. Not sure how this works?

Post by Stinky »

Bronco Billy wrote: Sat Apr 10, 2021 9:24 pm
Stinky wrote: Sat Apr 10, 2021 8:43 pm
SlowMovingInvestor wrote: Sat Apr 10, 2021 8:31 pm
Yes, the annuity could be 1035 exchanged to a Schwab annuity. But that wouldn’t avoid taxes, since the basis carries over.
Stinky, when you do a 1035 exchange you have to pay taxes on the gains at that time??
No taxes are due at the time of a 1035 exchange. The embedded gain moves over to the new annuity.
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Re: Annuity statement. Not sure how this works?

Post by tj »

Stinky wrote: Sat Apr 10, 2021 8:13 pm
manlymatt83 wrote: Sat Apr 10, 2021 7:49 pm SO has an annuity that she’s had since childhood. Received a statement in the mail this month. Surprisingly, the statement is from Fidelity. It shows investments in about 5-6 “VIP” funds like contrafund, growth, high income, overseas, etc. The annuity seems to be 75% equity and 25% bonds.

I’m confused as I’ve always thought an annuity was just a guaranteed payout each year. But this seems to have actual investments.

We are curious about whether or not it makes sense to cash this out (the balance is sizable). Ideally we want to move it to Schwab (where our other investments are) to take advantage of their increased support at larger investment amounts.

Would love any help interpreting what kind of annuity this might be and what flexibility we might have to move it. Thank you!
It sounds like a variable annuity. And it’s likely taxable (as opposed to a tax-deferred/IRA since SO has had it since childhood. It’s currently in “accumulation” phase, rather than “payout” phase which will start when SO starts taking income from the annuity.

The rest of my answer will be framed assuming it’s taxable.

On the good side - if it’s from Fidelity, it probably has good fund choices and relatively low expense charges. You could see an expense charge on an annuity statement - maybe something like 0.25% per year. Also, is no taxable income until withdrawals are made - a “tax deferral” feature.

On the bad side -
1. All income from the annuity will ultimately taxed as ordinary income. So any equities in the VA don’t receive the favorable capital gains and qualified dividend treatment they’d get outside an annuity.
2. There is no step up in basis at death.
3. There is that expense charge - 0.25% or so per year.

I don’t believe that the annuity can be “moved” to Schwab. In order to get the funds to Schwab, SO will need to surrender the annuity. It’s unlikely there are any surrender charges, so that’s good. At the time of surrender, taxable income will be reported equal to the excess of the surrender value over the “basis” of the annuity (likely the premiums paid).

If surrendering all at once will push SO too far up in tax brackets, you could do a series of partial surrenders over a period of years. “Income” is assumed to be distributed first, then “basis”.

That’s a lot of details. Please post back if you have questions.
It could theoretically be 1035'd to a Schwab annuity, not sure why one would od that though. I think Fidelity has the cheapest VA's on the market. Could change the investments within the annuity to Index Funds to bring the costs down.
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Re: Annuity statement. Not sure how this works?

Post by Rex66 »

Silk McCue wrote: Sat Apr 10, 2021 8:24 pm
Rex66 wrote: Sat Apr 10, 2021 8:18 pm You have a variable annuity

It was a bad decision to purchase but at this point it isn’t clear if you have any need for guaranteed income or what riders you may have purchased
To be clear OP didn’t purchase this. Their significant others parents did in their childhood.

Cheers
Yes which doesn’t matter

Obviously I didn’t say who purchased it
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Re: Annuity statement. Not sure how this works?

Post by Rex66 »

Keep in mind 1035 exchange just kicks the can down the road. Gains still taxed as income and no step up at death. Highly unlikely a new annuity would have stronger guarantees at this time.
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Re: Annuity statement. Not sure how this works?

Post by Oicuryy »

Should we tell him about the 10% tax penalty on early withdrawals?

Ron
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Re: Annuity statement. Not sure how this works?

Post by HueyLD »

Oicuryy wrote: Sun Apr 11, 2021 10:44 am Should we tell him about the 10% tax penalty on early withdrawals?

Ron
Yes, absolutely!
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Re: Annuity statement. Not sure how this works?

Post by Oicuryy »

From the prospectus for the Brighthouse Accumulation Annuity.
10% Penalty Tax on Early Withdrawals or Distributions
A penalty tax equal to 10% of the amount treated as taxable income may be imposed on distributions. The penalty tax applies to early withdrawals or distributions unless an exception applies. Exceptions include distributions:
(1) to persons on or after age 59½;
(2) after death of the Owner;
(3) to a recipient who has become disabled;
(4) as part of a series of substantially equal periodic payments payable for your life (or life expectancy) or joint lives (joint life expectancies) of you and your designated Beneficiary, or
(5) in the case of qualified contracts, received from the rollover of the contracts into another qualified contract or IRA.
We believe that systematic withdrawals under the Systematic Withdrawal Program would not satisfy the exception to the 10-percent penalty tax described in (4) above. You should consult your tax advisor before electing to take systematic withdrawals commencing prior to age 59½.
Find the prospectus for your annuity in the "prospectuses and shareholder reports" section of this page.
https://www.fidelity.com/research-annuities/overview

Ron
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manlymatt83
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Re: Annuity statement. Not sure how this works?

Post by manlymatt83 »

Oicuryy wrote: Sun Apr 11, 2021 11:17 am From the prospectus for the Brighthouse Accumulation Annuity.
10% Penalty Tax on Early Withdrawals or Distributions
A penalty tax equal to 10% of the amount treated as taxable income may be imposed on distributions. The penalty tax applies to early withdrawals or distributions unless an exception applies. Exceptions include distributions:
(1) to persons on or after age 59½;
(2) after death of the Owner;
(3) to a recipient who has become disabled;
(4) as part of a series of substantially equal periodic payments payable for your life (or life expectancy) or joint lives (joint life expectancies) of you and your designated Beneficiary, or
(5) in the case of qualified contracts, received from the rollover of the contracts into another qualified contract or IRA.
We believe that systematic withdrawals under the Systematic Withdrawal Program would not satisfy the exception to the 10-percent penalty tax described in (4) above. You should consult your tax advisor before electing to take systematic withdrawals commencing prior to age 59½.
Find the prospectus for your annuity in the "prospectuses and shareholder reports" section of this page.
https://www.fidelity.com/research-annuities/overview

Ron
Right now I'm just trying to figure out if this is an IRA annuity or not. The amount that was purchased was much higher than the $6000 IRA limit, and it was done all at once, so I assume it's a non-IRA variable annuity? What's funny is on the statement, it has a "Retirement Reserves Contract Number".
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Re: Annuity statement. Not sure how this works?

Post by Stinky »

Oicuryy wrote: Sun Apr 11, 2021 10:44 am Should we tell him about the 10% tax penalty on early withdrawals?

Ron
Oops! Should have mentioned that!

Any withdrawals of interest from a taxable annuity that are made prior to age 59.5 will incur a 10% "penalty tax". For example, if SO were to withdraw $1,000 that is all deemed to be "gain" from the annuity prior to age 59.5, there would be $1,000 of taxable income which would flow into your tax return, plus an additional $100 in "penalty tax".

Another thought - SO could continue to push this ball down the road by doing a 1035 exchange into any "accumulation" annuity. It doesn't need to be a variable annuity. A viable alternative would be to do an exchange into a multi-year guaranteed annuity, or MYGA. See this thread for information on MYGAs
viewtopic.php?f=1&t=334589
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Re: Annuity statement. Not sure how this works?

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manlymatt83 wrote: Sun Apr 11, 2021 11:21 am
Right now I'm just trying to figure out if this is an IRA annuity or not. The amount that was purchased was much higher than the $6000 IRA limit, and it was done all at once, so I assume it's a non-IRA variable annuity? What's funny is on the statement, it has a "Retirement Reserves Contract Number".
"Retirement Reserves" is probably just a product name.

Above, you said that the purchased amount was well higher than $6,000. Also, in your original post, you said that it was purchased for her when she was a child. It's highly unlikely that she had "earned income" when she was a child, unless she was a child actress or model.

One more way to tell - all of the IRA annuities that I've seen have a multi-page "IRA Endorsement" added to the end of the contract.

I think it's almost certainly a non-qualified, taxable annuity.
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Re: Annuity statement. Not sure how this works?

Post by manlymatt83 »

Stinky wrote: Sun Apr 11, 2021 11:35 am
manlymatt83 wrote: Sun Apr 11, 2021 11:21 am
Right now I'm just trying to figure out if this is an IRA annuity or not. The amount that was purchased was much higher than the $6000 IRA limit, and it was done all at once, so I assume it's a non-IRA variable annuity? What's funny is on the statement, it has a "Retirement Reserves Contract Number".
"Retirement Reserves" is probably just a product name.

Above, you said that the purchased amount was well higher than $6,000. Also, in your original post, you said that it was purchased for her when she was a child. It's highly unlikely that she had "earned income" when she was a child, unless she was a child actress or model.

One more way to tell - all of the IRA annuities that I've seen have a multi-page "IRA Endorsement" added to the end of the contract.

I think it's almost certainly a non-qualified, taxable annuity.
You're probably right. The statement was two pages.

So I guess our only options are:

- Keep it as is.
- Roll it over via 1035, though since Schwab is more expensive, this may not be the best idea.
- Begin cashing it out, pay the 10% penalty, and have her increase her contributions to her 401k or 457b.

We're both index investors now. I'd really like to understand what the potential growth of this annuity is each year. For example, is it capped at a certain amount? Say the market does 8% in one year... will the annuity only grow 4-5%? If so, it might actually make sense to pay that penalty now, and max out 401k in the meantime to have higher growth over the next 30+ years.
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Re: Annuity statement. Not sure how this works?

Post by HueyLD »

The OP commented further that:

“ The amount that was purchased was much higher than the $6000 IRA limit, and it was done all at once, so I assume it's a non-IRA variable annuity? What's funny is on the statement, it has a "Retirement Reserves Contract Number".”

Oops, it looks like Fido’s more expensive FRR product with 0.80% annual annuity charges.

See page 9 of the prospectus

https://fundresearch.fidelity.com/prosp ... roduct=NRR

You should do an 1035 exchange to their much less expensive Fidelity Personal Retirement Annuity product.
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Re: Annuity statement. Not sure how this works?

Post by Rex66 »

It’s a variable annuity not an index annuity

It isn’t capped except the fees are high so there is a drag and in the end gains are taxed as income. All that adds up over decades
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Re: Annuity statement. Not sure how this works?

Post by Stinky »

manlymatt83 wrote: Sun Apr 11, 2021 11:46 am So I guess our only options are:
- Keep it as is.
- Roll it over via 1035, though since Schwab is more expensive, this may not be the best idea.
- Begin cashing it out, pay the 10% penalty, and have her increase her contributions to her 401k or 457b.

We're both index investors now. I'd really like to understand what the potential growth of this annuity is each year. For example, is it capped at a certain amount? Say the market does 8% in one year... will the annuity only grow 4-5%? If so, it might actually make sense to pay that penalty now, and max out 401k in the meantime to have higher growth over the next 30+ years.
As to your options, I would not keep the current annuity, given the high costs as cited in HueyLD’s post above. I would consider an exchange into a Schwab VA (if you want to get your assets in one place) or the lower cost Fidelity VA.

None of the annuities mentioned will limit your upside or downside. Gains and losses will inure to your benefit.

If you’re seeing your options as keeping an annuity until age 59.5, or withdrawing from the annuity to increase 401k or other funding, I think it comes down to the drip-drip-drip of higher expenses on the annuity vs. the 10% tax penalty. When you look at the expenses, be sure to consider all expenses, including maybe higher expenses on the annuity mutual funds than on the 401k funds. You could run a spreadsheet to model this out.
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manlymatt83
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Re: Annuity statement. Not sure how this works?

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Thank you for the help everyone!
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Re: Annuity statement. Not sure how this works?

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manlymatt83 wrote: Mon Apr 12, 2021 12:48 pm Thank you for the help everyone!
Please let us know what you decide to do.

Best of luck to you.
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Re: Annuity statement. Not sure how this works?

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Stinky wrote: Mon Apr 12, 2021 2:30 pm
manlymatt83 wrote: Mon Apr 12, 2021 12:48 pm Thank you for the help everyone!
Please let us know what you decide to do.

Best of luck to you.
Thank you! You too and will do!
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Re: Annuity statement. Not sure how this works?

Post by Jack FFR1846 »

I am not an expert, but just helped my mom, who 1035'd a fixed annuity into an existing variable annuity. One feature that her annuity had was a sales load on exit which was not in place because both annuities were over 10 years old. If that were not the case, the entire value of the annuity would have cost her 5.75% as it was being 1035'd.

Annuities of most types are incredibly complex. Just a few questions to ask that came up during our meeting with her financial advisor (fiduciary). What is the minimum rate? Even with investment options, the annuity may have a minimum rate. My mom's, purchased in the 80's was 7%. The other one (the "from" annuity) was 3%. Can your SO take a portion payment as income? In essence, can a specific amount be taken as income? In my mom's 2 annuities, one was yes, the other was no.

If this were my choice, I would pay for a complete analysis of what you have and what you plan to go into. This stuff has all kinds of moving parts, minimums, tax consequences, potential sales loads going in AND coming out, restrictions on what you can do when deciding to take income, and a million things I don't know about. Until you understand all this, do nothing.
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