The taxpayers took funds available and purchased an annuity
from a company. The period for surrender charges has passed
and the proposed payout is greater than the original
investment. They put in about $195K and will get back about
$205K. Given the number of years in the annuity and the
general market performance, I don't blame them for wanting
their money back. The wife is a very astute investor and
knows what she is doing. She just asks for tax advice.

Linda

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

<DORFMONT[at]aol.com> wrote:

- quote -

First, we have to determine what type of annuity they have,
how was it funded - with qualified or nonqualified monies?

If it was funded with qualified money then it can be
directly transferred into an IRA. However, you have to be
mindful of any surrender charges. An annuity owner can
always take his money anytime, as long as he is willing to
pay the surrender charges.

If it was funded with nonqualified money then it CANNOT be
transferred into an IRA. He would have to surrender the
annuity, in effect cash it out and pay taxes on the
proceeds. And YES, a penalty will apply if he is under 59.5
AND takes out more than he put in. If the annuity is doing
as poorly as you suggest, he may actually have a deductible
ordinary loss if he gets back less than what he put in.

Before you do anything though, I would strongly suggest you
have the annuity reviewed by someone familiar with
annuities. Many annuities have guarantee provisions that
protect the principal amount under certain circumstances.
Many of these guarantees require that the annuitant or owner
say in the contract for the guarantee period and this period
may differ from the surrender period. For example, I know
of several annuity companies that offer principal protection
guarantees - providing you stay in the contract for 10
years, the company guarantees they will return no less than
100% of your original contribution regardless of the actual
contract value of your account. Most of these contracts
include a 7 to 9 year surrender provision.

It is entirely possible that your client has an annuity that
isn't doing well RIGHT NOW, but may be guaranteed to provide
certain other benefits that he may lose if he surrenders the
contract.

Please be very careful,
Gene E. Utterback, EA, RFC

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

The taxpayers have several annuities that are not doing
well. They want to take one of them out and do better with
it. He is over 55 and not working due to health problems and
he is the annuitant, although the policy is owned by their
living trust and may be payable to it. They don't need the
income and are willing to roll it into an IRA.

Can he roll the annuity into an IRA to avoid immediate tax?
They don't want to do a 1035 exchange because of the poor
return prospects. Is an annuity distribution covered by 72
(t)(2)(a) v, the over 55 and retired exception? If he goes
back to work for his own corporation managing the family's
real estate, will this cause problems with the over 55 and
retired exception?

Linda Dorfmont E.A., CFP, CSA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >