1035 exchange to fidelity personal retirement annuity

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curryitr
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1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Hello,

It is likely that this year my mother and I will receive equal parts of a fixed deferred annuity that has yet to be annuitized. It is a non-qualified annuity. It currently pays 3.4% annually. Mom may decide to keep her part with the current company but I was curious about the process of moving my portion via 1035 exchange to Fidelity’s variable annuity.

On the fidelity page for the personal retirement annuity they mention that withdraws of taxable gains before 59 1/2 are subject to the 10% early withdraw penalty per IRS rules. However the current annuity is non-qualified and would still be non-qualified after a 1035 exchange if I understand the process correctly.

Is the fidelity product made only for qualified annuities?

Does fidelity offer a variable annuity product for non-qualified annuities that aren’t subject to the early withdraw penalty?

I’d like to have market exposure but it will likely take many years to unwind this annuity in a way that doesn’t kill us with taxes as it’s gains are much more than its original principle.

Thanks,

curryitr
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Cyclesafe
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Cyclesafe »

I could easily be wrong, but from your "insurance company's" perspective, the ownership of the contract has changed, but not their obligations and rights under it. IOW's, the annuity as a whole can be 1035'ed to Fidelity, but it shouldn't be able to be "broken up". The prospectus of the contract should spell this out.

Have you considered J&S annuitizing the contract? This will provide what is still a reasonable return, provide "proportional" return of basis, and provide a "free" but fully taxable income after said basis is returned. See IRS Publication 939. The biggest advantage here is that you'll have escaped intact.

Unwinding these things are a nuisance. Sometimes it's just better not to fight and instead take advantage of the (meager) benefits an investment annuity might offer. Good luck.

I don't see how Fidelity would care whether the annuity they would be getting is qualified or non-qualified. That's your problem, not theirs. Also, the 59 1/2 thing is a condition of having the "benefit" of an investment annuity and is thus stipulated by regulations. My two cents. Wait for Stinky to reply.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
Topic Author
curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Cyclesafe wrote: Wed Jun 08, 2022 6:23 am I could easily be wrong, but from your "insurance company's" perspective, the ownership of the contract has changed, but not their obligations and rights under it. IOW's, the annuity as a whole can be 1035'ed to Fidelity, but it shouldn't be able to be "broken up". The prospectus of the contract should spell this out.

Here are you saying that as joint beneficiaries of the annuity we will have to have to receive the annuity payments in the same way? For instance I believe our options are lump sum, 5 years, or over expected life span so if my mom wants a lump sum but I want payments over my expected life we will have to compromise?

Have you considered J&S annuitizing the contract? This will provide what is still a reasonable return, provide "proportional" return of basis, and provide a "free" but fully taxable income after said basis is returned. See IRS Publication 939. The biggest advantage here is that you'll have escaped intact.

Im not sure I understand what you mean by joint and survivor annuitizing the contract. Isn’t this typically for two spouses in case one of them dies first? This type of annuity isn’t like an insurance policy it’s more like a giant bank CD so there is no concern of the insurance company keeping the money and not returning it to us if one of the two of us were to die.

Unwinding these things are a nuisance. Sometimes it's just better not to fight and instead take advantage of the (meager) benefits an investment annuity might offer. Good luck.

Can you clarify what you mean by an investment annuity? I think you are saying it’s less hassle to just stay with the existing fixed annuity contract vs moving to a variable annuity that can hold stocks and bonds?

I don't see how Fidelity would care whether the annuity they would be getting is qualified or non-qualified. That's your problem, not theirs. Also, the 59 1/2 thing is a condition of having the "benefit" of an investment annuity and is thus stipulated by regulations. My two cents. Wait for Stinky to reply.
exodusNH
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Re: 1035 exchange to fidelity personal retirement annuity

Post by exodusNH »

curryitr wrote: Wed Jun 08, 2022 5:12 am Hello,

It is likely that this year my mother and I will receive equal parts of a fixed deferred annuity that has yet to be annuitized. It is a non-qualified annuity. It currently pays 3.4% annually. Mom may decide to keep her part with the current company but I was curious about the process of moving my portion via 1035 exchange to Fidelity’s variable annuity.

On the fidelity page for the personal retirement annuity they mention that withdraws of taxable gains before 59 1/2 are subject to the 10% early withdraw penalty per IRS rules. However the current annuity is non-qualified and would still be non-qualified after a 1035 exchange if I understand the process correctly.

Is the fidelity product made only for qualified annuities?

Does fidelity offer a variable annuity product for non-qualified annuities that aren’t subject to the early withdraw penalty?

I’d like to have market exposure but it will likely take many years to unwind this annuity in a way that doesn’t kill us with taxes as it’s gains are much more than its original principle.

Thanks,

curryitr
Do you keep a bond allocation in your portfolio? If so, is the 3.4% guaranteed? That's not a bad rate for fixed income over a long-term. One option would be to leave it alone and adjust your other holdings to hold more stock funds.

If you're going to move it, Fidelity is the best choice; you're going to have both the 0.25% annuity fee and the slightly-higher fund ERs that will drag your returns slightly.

The earnings from the annuity will be taxed as ordinary income. You might not want an equity-heavy holding here, since that converts what would be capital gains into ordinary income. If most of your wealth is already in tax-deferred, maybe this isn't an issue.
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

exodusNH wrote: Wed Jun 08, 2022 8:04 am
curryitr wrote: Wed Jun 08, 2022 5:12 am Hello,

It is likely that this year my mother and I will receive equal parts of a fixed deferred annuity that has yet to be annuitized. It is a non-qualified annuity. It currently pays 3.4% annually. Mom may decide to keep her part with the current company but I was curious about the process of moving my portion via 1035 exchange to Fidelity’s variable annuity.

On the fidelity page for the personal retirement annuity they mention that withdraws of taxable gains before 59 1/2 are subject to the 10% early withdraw penalty per IRS rules. However the current annuity is non-qualified and would still be non-qualified after a 1035 exchange if I understand the process correctly.

Is the fidelity product made only for qualified annuities?

Does fidelity offer a variable annuity product for non-qualified annuities that aren’t subject to the early withdraw penalty?

I’d like to have market exposure but it will likely take many years to unwind this annuity in a way that doesn’t kill us with taxes as it’s gains are much more than its original principle.

Thanks,

curryitr
Do you keep a bond allocation in your portfolio? If so, is the 3.4% guaranteed? That's not a bad rate for fixed income over a long-term. One option would be to leave it alone and adjust your other holdings to hold more stock funds.

If you're going to move it, Fidelity is the best choice; you're going to have both the 0.25% annuity fee and the slightly-higher fund ERs that will drag your returns slightly.

The earnings from the annuity will be taxed as ordinary income. You might not want an equity-heavy holding here, since that converts what would be capital gains into ordinary income. If most of your wealth is already in tax-deferred, maybe this isn't an issue.
Im sort of a unique case. I live overseas and since my salary is offset by the Foreign Earned Income Exclusion I will be able to pull out up to my standard deduction in gains (around $25,000) tax free each year. I think that in doing that I can get out of either the current annuity contract or a fidelity annuity within 4-5 years and into a regular taxable account. Long term I’d prefer not to be in any type of annuity!

I’m 32 and already have around 15% of our total portfolio in bonds so I really don’t want to allocate any additional funds to fixed income if possible. Of course, if I’m stuck in the current contract I’ll just transfer my yearly distributions into equities.
exodusNH
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Re: 1035 exchange to fidelity personal retirement annuity

Post by exodusNH »

curryitr wrote: Wed Jun 08, 2022 8:52 am
exodusNH wrote: Wed Jun 08, 2022 8:04 am
curryitr wrote: Wed Jun 08, 2022 5:12 am Hello,

It is likely that this year my mother and I will receive equal parts of a fixed deferred annuity that has yet to be annuitized. It is a non-qualified annuity. It currently pays 3.4% annually. Mom may decide to keep her part with the current company but I was curious about the process of moving my portion via 1035 exchange to Fidelity’s variable annuity.

On the fidelity page for the personal retirement annuity they mention that withdraws of taxable gains before 59 1/2 are subject to the 10% early withdraw penalty per IRS rules. However the current annuity is non-qualified and would still be non-qualified after a 1035 exchange if I understand the process correctly.

Is the fidelity product made only for qualified annuities?

Does fidelity offer a variable annuity product for non-qualified annuities that aren’t subject to the early withdraw penalty?

I’d like to have market exposure but it will likely take many years to unwind this annuity in a way that doesn’t kill us with taxes as it’s gains are much more than its original principle.

Thanks,

curryitr
Do you keep a bond allocation in your portfolio? If so, is the 3.4% guaranteed? That's not a bad rate for fixed income over a long-term. One option would be to leave it alone and adjust your other holdings to hold more stock funds.

If you're going to move it, Fidelity is the best choice; you're going to have both the 0.25% annuity fee and the slightly-higher fund ERs that will drag your returns slightly.

The earnings from the annuity will be taxed as ordinary income. You might not want an equity-heavy holding here, since that converts what would be capital gains into ordinary income. If most of your wealth is already in tax-deferred, maybe this isn't an issue.
Im sort of a unique case. I live overseas and since my salary is offset by the Foreign Earned Income Exclusion I will be able to pull out up to my standard deduction in gains (around $25,000) tax free each year. I think that in doing that I can get out of either the current annuity contract or a fidelity annuity within 4-5 years and into a regular taxable account. Long term I’d prefer not to be in any type of annuity!

I’m 32 and already have around 15% of our total portfolio in bonds so I really don’t want to allocate any additional funds to fixed income if possible. Of course, if I’m stuck in the current contract I’ll just transfer my yearly distributions into equities.
If you withdraw, you will be subject to the IRS early withdrawal penalty. Withdrawals are gains first, then basis.

Edit: I lost track of this being an inherited annuity. There's no withdrawal penalty since you must draw it down.

Since you're going to be forced to recognize this income over a small number of years, if the amount of the annuity is about the same as the amount you'd want to hold as fixed income, you could treat that as all of your FI exposure, either by leaving it where it is (assuming the 3.4% is guaranteed and after fees) or moving it to Fidelity and putting it in bonds. You'd then change your other tax-advantaged accounts to shed the bonds.

As you withdraw, you then adjust your tax-advantaged accounts to add back that amount to your FI exposure by selling bonds and buying equities.

This limits the growth of this forced income while maintaining your stock/bond allocation.
Last edited by exodusNH on Thu Jun 09, 2022 7:29 am, edited 1 time in total.
Topic Author
curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

I’m fairly certain that I have to start taking withdraws on this annuity within 12 months of receiving it. Either as a lump sum, over 5 years, or based on my life expectancy. Does that mean I’m forced into paying the IRS 10% early withdraw penalty whether I want to or not??
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Cyclesafe »

curryitr wrote: Wed Jun 08, 2022 7:45 am
Cyclesafe wrote: Wed Jun 08, 2022 6:23 am I could easily be wrong, but from your "insurance company's" perspective, the ownership of the contract has changed, but not their obligations and rights under it. IOW's, the annuity as a whole can be 1035'ed to Fidelity, but it shouldn't be able to be "broken up". The prospectus of the contract should spell this out.

Here are you saying that as joint beneficiaries of the annuity we will have to have to receive the annuity payments in the same way? For instance I believe our options are lump sum, 5 years, or over expected life span so if my mom wants a lump sum but I want payments over my expected life we will have to compromise?

You'll have to read your contract / prospectus, but, for example the Vanguard annuity would not allow this. They'd make whatever payment paid the the order of both of you and you'd have to divvy up the proceeds without involving the company.

Have you considered J&S annuitizing the contract? This will provide what is still a reasonable return, provide "proportional" return of basis, and provide a "free" but fully taxable income after said basis is returned. See IRS Publication 939. The biggest advantage here is that you'll have escaped intact.

Im not sure I understand what you mean by joint and survivor annuitizing the contract. Isn’t this typically for two spouses in case one of them dies first? This type of annuity isn’t like an insurance policy it’s more like a giant bank CD so there is no concern of the insurance company keeping the money and not returning it to us if one of the two of us were to die.

A joint & several annuity can between any two people and it is not uncommon for those two people to not be married. Again, you'll need to spend possibly a great deal of time learning about your contract. Nobody here can help you with this.

Unwinding these things are a nuisance. Sometimes it's just better not to fight and instead take advantage of the (meager) benefits an investment annuity might offer. Good luck.

Can you clarify what you mean by an investment annuity? I think you are saying it’s less hassle to just stay with the existing fixed annuity contract vs moving to a variable annuity that can hold stocks and bonds?

You must both operate within the four corners of the contract. There is no flexibility. You'd be able to 1035 your fixed into a variable because of the tax code.

I don't see how Fidelity would care whether the annuity they would be getting is qualified or non-qualified. That's your problem, not theirs. Also, the 59 1/2 thing is a condition of having the "benefit" of an investment annuity and is thus stipulated by regulations. My two cents. Wait for Stinky to reply.
Hopefully, Stinky will weigh in here. He/she's very knowledgeable.
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Stinky »

It sounds like you want to have equity exposure while your funds remain in an annuity. If so, the Fidelity annuity is an excellent choice, and doing a 1035 exchange of your portion of the inherited annuity into the Fidelity product makes a lot of sense. The Fidelity annuity has very low fees, both administrative and on the underlying funds. It is available for both qualified and non qualified funds.

Under current rules, you’ll need to fully withdraw the inherited annuity proceeds within 5 years. You’ll owe ordinary income tax on the withdrawals, which are taxed as earnings being withdrawn first, and basis withdrawn second. But you won’t owe the typical 10% tax penalty on withdrawals before age 59.5, since it’s an inherited annuity. See this link: https://canvasannuity.com/blog/inherited-annuities

It sounds like you have a good plan. Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Stinky wrote: Thu Jun 09, 2022 5:33 am It sounds like you want to have equity exposure while your funds remain in an annuity. If so, the Fidelity annuity is an excellent choice, and doing a 1035 exchange of your portion of the inherited annuity into the Fidelity product makes a lot of sense. The Fidelity annuity has very low fees, both administrative and on the underlying funds. It is available for both qualified and non qualified funds.

Under current rules, you’ll need to fully withdraw the inherited annuity proceeds within 5 years. You’ll owe ordinary income tax on the withdrawals, which are taxed as earnings being withdrawn first, and basis withdrawn second. But you won’t owe the typical 10% tax penalty on withdrawals before age 59.5, since it’s an inherited annuity. See this link: https://canvasannuity.com/blog/inherited-annuities

It sounds like you have a good plan. Post back with questions.
Thank you for your response. That puts me more at ease and it seems what you are saying is that my mother and I will have independent options as to the timeline for receiving the distributions and if we each want to do a 1035 or not, correct? I believe I found the correct contract and I scanned the text in one of the pages that speaks about death benefits for beneficiaries. Its a lot but here it is:

Death Benefit Provisions

Death of Owner During the Accumulation Period


During the Accumulation Period, the death benefit will be paid to your Beneficiary(ies) upon your death. or the first death of a Joint Owner. If the Contract Is owned by a non-natural person, the Annuitant will be deemed the Owner for purposes of determining the death benefit. If there are Joint Owners, the age of the oldest will be used to determine the death benefit where applicable.

Death Benefit Amount During the Accumulation Period

The "Death Benefit Amount is the Account Balance determined as of the end of the Business Day on which we have received Notice of both due proof of death and the first acceptable election for the payment method. We may pay the Account Balance by placing it in an account that earns interest and to which the Beneficiary will have immediate access.

Death Benefit Options During the Accumulation Period

In the event an Owner (or the Annuitant where the Owner is not an Individual) dies during the Accumulation Period, a Beneficiary must choose payment of the death benefit under one of the options below (unless the Owner has previously chosen an Option). The death benefit options available under the Contract are:

Option 1 - lump sum payment or the death benefit; or

Option 2 - the payment of the entire death benefit within five cars of the date of death of the Owner or the first Joint Owner to die; Or

Option 3 - payment of the death benefit under an Annuity Option or other periodic payment option acceptable to us in substantially equal periodic payments (made at least annually) over the lifetime of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary with distribution beginning within one year of the date of death of the Owner or the first Joint Owner to die.

Any portion of the death benefit not applied under Option 3 within one (1) year of the date of the Owner's or Joint Owners death must be distributed within five Years Of the date of death.

Beneficiary Continuation Options During Accumulation Period

We offer two types of Beneficiary Continuation options during the Accumulation Period: the Spousal Continuation and Non-Spousal Beneficiary Continuation Options described below. We must receive Notice of the election of one Beneficiary Continuation Options by the end of the 90th day after we receive Notice of due proof of death. If the surviving spouse qualifies for Spousal Continuation and has not chosen one of the death benefit options above by the end of the 90 day period, the Spousal Continuation Option will be automatically applied on the 90th day. If a Non-Spousal Beneficiary qualifies for Non-Spousal Beneficiary Continuation and has not chosen one of the death benefit options above by the end of the 90 day period, the Non Spousal Beneficiary Continuation Option will be automatically applied on the 90th day.

Spousal Continuation During Accumulation Period

If the Owner dies during the Accumulation Period and the Beneficiary is his or her spouses the
spouse may choose to continue the Contract in his or her own name and exercise all the Owner's rights under the Contract. The Death Benefit Amount under continued contract payable upon the continuing spouse's death will be computed as described above in the Death Benefit Amount During the Accumulation Period section This option may not be available under certain employer retirement plans, unless your surviving spouse is also eligible to participate in that retirement plan and such continuation is permitted under the terms of the plan.

Non-Spousal Beneficiary Continuation During Accumulation Period

A Beneficiary who is not a spouse can choose to continue the Contract until the fifth anniversary of the Owner's death. The Contract can be continued by a Beneficiary only if his or her share of the death benefit is at least equal to our published minimum for this right. If the Beneficiary continues the Contract under this provision his or her share will not be paid. It will instead be continued in the Contract on the date we determine the Death Benefit amount. Such Beneficiary will have the right to make partial and full withdrawals of his/her share of the Contract. During this continuation period no additional Purchase Payments can be made. During the continuation period the Beneficiary can choose receive his/her share of this Contract in a single lump sum payment or apply it to an Annuity Option or other option acceptable to us that must be payable for the life of the Beneficiary or for a term no longer than the life expectancy of the Beneficiary starting within one year after the death of the Owner.
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Stinky
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Stinky »

curryitr wrote: Thu Jun 09, 2022 11:02 am
Thank you for your response. That puts me more at ease and it seems what you are saying is that my mother and I will have independent options as to the timeline for receiving the distributions and if we each want to do a 1035 or not, correct? I believe I found the correct contract and I scanned the text in one of the pages that speaks about death benefits for beneficiaries. Its a lot but here it is:
......
Yes, you and your mother have independent options as to how to proceed. Effectively, you each have your own annuity, and you can do with it as you like - 1035 or whatever.

You did find the correct contract language for beneficiaries.

It sounds like you're on the right track. Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

I just wanted to give an update on how this turned out. My relative passed and the insurance company confirmed that they would permit a 1035 exchange if it happened before selecting a disbursement option on the existing annuity. I called fidelity and they said they could receive the annuity via 1035 exchange. However, the only option they offered was to set up payments to start now based on my life expectancy. Once starting that there was no way to adjust and take larger distributions in a certain years. Since I don’t want to be in an annuity for the next 30-40 years I’m likely going to set up distributions out of the old annuity or a similar one over 5 years to reduce the tax hit but still get out of the annuity contract fairly quickly.
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Stinky »

curryitr wrote: Mon Aug 01, 2022 11:27 pm I just wanted to give an update on how this turned out. My relative passed and the insurance company confirmed that they would permit a 1035 exchange if it happened before selecting a disbursement option on the existing annuity. I called fidelity and they said they could receive the annuity via 1035 exchange. However, the only option they offered was to set up payments to start now based on my life expectancy. Once starting that there was no way to adjust and take larger distributions in a certain years. Since I don’t want to be in an annuity for the next 30-40 years I’m likely going to set up distributions out of the old annuity or a similar one over 5 years to reduce the tax hit but still get out of the annuity contract fairly quickly.
That sounds like a prudent approach.

It sounds like you’ll be earning something in the range of 3.4% while the annuity remains in force, which is a reasonable fixed income rate.

It’s too bad that Fidelity won’t take the money with the payout schedule you’d like, but the product that you’ll remain in isn’t a bad one.

Best to you.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Chardo »

You can do a 1035 exchange, then take automatic distributions based on your life expectancy (nonqualified stretch). You can manually withdraw more at any time. If a better annuity ever comes along, you could do another 1035 exchange down the road.
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Charro,

The Fidelity rep specifically said that I couldnt take larger distributions after it was set up because Fidelity treats the annuity as a retirement annuity. According to him you are locked into the annuitized payment based on life expectancy.
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Chardo »

curryitr wrote: Tue Aug 02, 2022 8:06 am Charro,

The Fidelity rep specifically said that I couldnt take larger distributions after it was set up because Fidelity treats the annuity as a retirement annuity. According to him you are locked into the annuitized payment based on life expectancy.
Sounds like they are annuitizing the contract, instead of just setting up automatic withdrawals. If so, that's a Fidelity thing. It's not a legal requirement. You might want to ask another Fidelity rep.
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Just to give another update on this. The financial advisor that sold this annuity to my grandmother has come back with options for 5 year certain SPIAs that would pay the annuity out over 5 years and then a variable annuity called the Jackson Elite Access II that allows for a variable stretch distribution and the ability to invest in equities albeit with high fees.

Doing the 1035 as a SPIA would end up paying something around 2% apr per year for the five years that it gets paid out. ($106,935 paid out as $1,937 a month for 5 years)

The variable annuity would have around 1.8% in annual fees when invested in an S&P500 fund, but would give me the ability to take distributions in flexible amounts as long as they at least meet the RMD based on my life expectancy. This would help as due to tax reasons I need to take larger distributions this year but not next year for example.

Either way I want to liquidate things over the course of 5 years and dollar cost average into my vanguard brokerage account at my asset allocation. I’m not really sure which way to go… I don’t want things to devalue due to inflation if I 1035 exchange to the SPIA but on the other hand it really feels wrong to invest in a product with 1.8% in fees if I go for the variable annuity. I would have to earn a 3.8% return (2% SPIA rate+1.8% in fees) in the variable annuity in order to break even with the return that I get in the SPIA.

Any thoughts?
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Stinky »

curryitr wrote: Sat Aug 13, 2022 6:29 am Just to give another update on this. The financial advisor that sold this annuity to my grandmother has come back with options for 5 year certain SPIAs that would pay the annuity out over 5 years and then a variable annuity called the Jackson Elite Access II that allows for a variable stretch distribution and the ability to invest in equities albeit with high fees.

Doing the 1035 as a SPIA would end up paying something around 2% apr per year for the five years that it gets paid out. ($106,935 paid out as $1,937 a month for 5 years)

The variable annuity would have around 1.8% in annual fees when invested in an S&P500 fund, but would give me the ability to take distributions in flexible amounts as long as they at least meet the RMD based on my life expectancy. This would help as due to tax reasons I need to take larger distributions this year but not next year for example.

Either way I want to liquidate things over the course of 5 years and dollar cost average into my vanguard brokerage account at my asset allocation. I’m not really sure which way to go… I don’t want things to devalue due to inflation if I 1035 exchange to the SPIA but on the other hand it really feels wrong to invest in a product with 1.8% in fees if I go for the variable annuity. I would have to earn a 3.8% return (2% SPIA rate+1.8% in fees) in the variable annuity in order to break even with the return that I get in the SPIA.

Any thoughts?
Have you gone back to Fidelity to re-ask the question, as Chardo suggested upthread? If not, that’s the first thing I would do. If the Fidelity annuity worked out, that would be an excellent solution, giving you both equity market exposure and flexibility in withdrawals.

If the Fidelity option doesn’t work out, then either of the solutions you mention would work. The 1.8% in fees on the Jackson annuity sounds abhorrent, but it’s at least on a relatively small amount, on a declining balance, and for a short number of years. Is there a surrender charge on the Jackson annuity on either the annual distributions you plan to take or at the end of five years? - if so, that’s another impediment. The SPIA would give you certainty and simplicity, albeit with a low return.

Another possibility might be to buy a multi year guaranteed annuity (MYGA) for a guarantee period of five years, and then make free partial withdrawals during the term as you want to pull down funds. You can currently get interest rates of 4% or more, and you’ll have a largish lump sum distribution at the end of five years.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

I’ll give fidelity a call on Monday when they open. What are the pros and cons of doing a 1035 exchange to the MYGA vs a SPIA?
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Re: 1035 exchange to fidelity personal retirement annuity

Post by petulant »

curryitr wrote: Sat Aug 13, 2022 9:34 am I’ll give fidelity a call on Monday when they open. What are the pros and cons of doing a 1035 exchange to the MYGA vs a SPIA?
Is your goal to get the money out and pay taxes or to keep deferring taxes?
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

My situation is unique because I live abroad and claim the Foreign Earned Income Exclusion most years. This allows me to use our standard deduction of +- $25,000 to offset income such as this annuity, Roth conversions, or tax gain harvesting. I’ll be able to claim the FEIE for 2022, and then 2024-2026, but for tax year 2023 we will be home for 6 months to the US and unable to claim the FEIE. The goal of withdrawing this within 5 years is because that’s how long it will take to offset the gains using my standard deduction. The only issue is next year when we will have to use our standard deduction to offset our salary.

It would be ideal to use a variable annuity like Fidelity because it would allow me to bunch our distributions in the years we are claiming the FEIE and then only take the RMDs required for the stretch distribution next year when im trying to reduce our taxable income due to not being able to claim the FEIE.
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

My situation is unique because I live abroad and claim the Foreign Earned Income Exclusion most years. This allows me to use our standard deduction of +- $25,000 to offset income such as this annuity, Roth conversions, or tax gain harvesting. I’ll be able to claim the FEIE for 2022, and then 2024-2026, but for tax year 2023 we will be home for 6 months to the US and unable to claim the FEIE. The goal of withdrawing this within 5 years is because that’s how long it will take to offset the gains using my standard deduction. The only issue is next year when we will have to use our standard deduction to offset our salary.

It would be ideal to use a variable annuity like Fidelity because it would allow me to bunch our distributions in the years we are claiming the FEIE and then only take the RMDs required for the stretch distribution next year when im trying to reduce our taxable income due to not being able to claim the FEIE.
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Stinky
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Stinky »

curryitr wrote: Sat Aug 13, 2022 9:34 am What are the pros and cons of doing a 1035 exchange to the MYGA vs a SPIA?
A SPIA will deliver a fixed rate of return over the 5 year period, with no flexibility as to when you receive payments.

A MYGA -
--- Will also deliver a fixed rate of return over the 5 year period
--- Will probably have an interest rate higher than the 2% you quoted on the SPIA. Check Blueprintincome.com for a wide variety of MYGA offerings.
--- Will give you some flexibility as to when you receive payments. If you elect a single five-year MYGA with a 10% free partial feature, you can elect whether or not you want to receive income each policy year (with some products, including the first policy year)
--- Will give you a lump sum in the terminal year of the annuity. This might be a negative for you, depending on your tax situation.

You could even buy a couple of MYGAs - for example, a three year and a five year - to give you more flexibility in timing of taking free partial withdrawals.

I recognize that you might not be familiar with MYGAs. Post back if you have questions or want to further pursue this.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
petulant
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Re: 1035 exchange to fidelity personal retirement annuity

Post by petulant »

It seems to me like the specific goal of spreading out equal payments over a 5-year period is uniquely achieved by the SPIA option in this case. While a similar outcome may be possible with MYGAs, it would require purchasing multiple MYGAs and/or watching surrender values carefully.
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Looking at Fidelity’s website regarding stretch payments on their annuities it appears that once you set up a distribution plan they do not allow you to take additional distributions beyond the original schedule or make changes to the amount distributed. https://www.fidelity.com/bin-public/060 ... n-FPRA.pdf


Beneficiaries may not make additional payments into the contract, take ad hoc distributions, or make changes to the amount distributed.
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curryitr
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Re: 1035 exchange to fidelity personal retirement annuity

Post by curryitr »

Stinky wrote: Sat Aug 13, 2022 10:23 am
curryitr wrote: Sat Aug 13, 2022 9:34 am What are the pros and cons of doing a 1035 exchange to the MYGA vs a SPIA?
A SPIA will deliver a fixed rate of return over the 5 year period, with no flexibility as to when you receive payments.

A MYGA -
--- Will also deliver a fixed rate of return over the 5 year period
--- Will probably have an interest rate higher than the 2% you quoted on the SPIA. Check Blueprintincome.com for a wide variety of MYGA offerings.
--- Will give you some flexibility as to when you receive payments. If you elect a single five-year MYGA with a 10% free partial feature, you can elect whether or not you want to receive income each policy year (with some products, including the first policy year)
--- Will give you a lump sum in the terminal year of the annuity. This might be a negative for you, depending on your tax situation.

You could even buy a couple of MYGAs - for example, a three year and a five year - to give you more flexibility in timing of taking free partial withdrawals.

I recognize that you might not be familiar with MYGAs. Post back if you have questions or want to further pursue this.
Thanks for explaining all that. I have found 2 year, 3 year, and 4 year MYGAs that could potentially solve my problem but in terms of the IRS I’m not sure if it’s allowed. My thought is to take a distribution from the inherited annuity immediately but then do three different 1035 exchanges splitting the inherited annuity into 3 MYGAs. Doing them as 2, 3, and 4 year terms would allow me to skip the 2023 tax year when my tax rate would be much higher. Do you see any way that could be possible under IRS rules? I’m not sure if you are allowed to do separate 1035s like that and leave part of the old annuity behind for an immediate distribution.
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Stinky
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Re: 1035 exchange to fidelity personal retirement annuity

Post by Stinky »

curryitr wrote: Mon Aug 15, 2022 10:42 pm
Stinky wrote: Sat Aug 13, 2022 10:23 am
curryitr wrote: Sat Aug 13, 2022 9:34 am What are the pros and cons of doing a 1035 exchange to the MYGA vs a SPIA?
A SPIA will deliver a fixed rate of return over the 5 year period, with no flexibility as to when you receive payments.

A MYGA -
--- Will also deliver a fixed rate of return over the 5 year period
--- Will probably have an interest rate higher than the 2% you quoted on the SPIA. Check Blueprintincome.com for a wide variety of MYGA offerings.
--- Will give you some flexibility as to when you receive payments. If you elect a single five-year MYGA with a 10% free partial feature, you can elect whether or not you want to receive income each policy year (with some products, including the first policy year)
--- Will give you a lump sum in the terminal year of the annuity. This might be a negative for you, depending on your tax situation.

You could even buy a couple of MYGAs - for example, a three year and a five year - to give you more flexibility in timing of taking free partial withdrawals.

I recognize that you might not be familiar with MYGAs. Post back if you have questions or want to further pursue this.
Thanks for explaining all that. I have found 2 year, 3 year, and 4 year MYGAs that could potentially solve my problem but in terms of the IRS I’m not sure if it’s allowed. My thought is to take a distribution from the inherited annuity immediately but then do three different 1035 exchanges splitting the inherited annuity into 3 MYGAs. Doing them as 2, 3, and 4 year terms would allow me to skip the 2023 tax year when my tax rate would be much higher. Do you see any way that could be possible under IRS rules? I’m not sure if you are allowed to do separate 1035s like that and leave part of the old annuity behind for an immediate distribution.
I'd suggest that you get in touch with an annuity agent to ask those questions. Some agents frequently mentioned on the Forum are Blueprint Advantage, Stan the Annuity Man, and Annuity Advantage.

To simplify the process, you might want to purchase your 2, 3, and 4 year MYGAs from the same insurance company. Given the amounts that I think you're talking about, it shouldn't bump up against State Guaranty Fund limits.

Also, given your tax situation, it wouldn't cost a whole bunch more in taxes to just split the current annuity into three, and forego the current year distribution. That might help to further simplify matters for the annuity company.

I've got the impression that such exchange practices are somewhat insurance-company-dependent, which is why I suggest you get in touch with an agent who knows particular company practices.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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