"D.D. Pallmer" <ddpalmer[at]hotmail.com> wrote:

- quote -

1. Sounds reasonable
2. 10% of the amount includable in your gross income (i.e.
the earnings). Form 5329.
3. If you are totally and permanently disabled the penalty
would not apply. If you can document this to the
insurance company they can issue the 1099 with an
exception code. If not, Form 5329.

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"Harry" <misc.tax[at]dcomptech.com> wrote:
- quote -

Thanks for the spanking. But you did not answer ANY of my
questions.

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"D.D. Pallmer" <ddpalmer[at]hotmail.com> wrote:

- quote -

A "fixed variable annuity" is contradictory, it is either a
fixed annuity or a variable annuity. A fixed annuity only
earns interest (it does not mean the interest rate is fixed
forever, it can vary) and the value of the annuity will only
increase if there are no fees or withdrawals.

A variable annuity is tied to some underlying investments
(which are usually mutual funds) and the value fluctuates
with the value of the investments, it may go up, or it may
lose some or all of its value. Fixed annuities are generally
a safe investment, variable annuities are as risky as
investing in any other security.

Under Code Sec 1035 you can exchange an annuity tax free. If
your uncle had a fixed annuity (sounds like it) he could
have exchanged it for a variable annuity tax-free. If he
could find one suitable at his age. A fixed annuity is
probably much better for someone his age. Since he has
transferred ownership to you, you may be able to do a 1035
exchange into a variable annuity. You will still have the
surrender penalty from the existing company. If you do
surrender the policy you will be subject to a 10% penalty if
you are under 59 1/2. It may have been wise to leave the
annuity alone. Earning 3.45% in a tax deferred account for
an 88 year old is not a terrible thing. You should not
assume your investment horizons and tolerance of risk are
the same as your elderly uncle's.

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Two years ago, my uncle was sold a fixed variable annuity.
It paid some teaser interest rate (the bait that Uncle took)
but now is paying a paltry 3.45%. I cannot move the
investment to an equity sub-account or anything like that.
It's stuck at 3.45%. Buying the product was a mistake but
not of major proportions, but I was not consulted at the
time. Anyway, Uncle recently gifted the annuity to me. Upon
transfer of ownership, the insurance company who wrote it
told me that they would 1099 my uncle (next January) for the
earnings to date. Not very much and Uncle is in a low tax
bracket so this is not a problem. Uncle is 88.

There is a lockup period on the annuity where a big penalty
(from the insurance company, in addition to any tax
penalties) hits if you withdraw. Some of the money recently
became unlocked, so I withdrew it. The rest comes unlocked
in a year. I am 47 years old. A few questions:

1. I assume my basis will be what it was on the day of the
gift, since Uncle will be paying taxes on all earnings thru
that date. (?) 2. What is the penalty for me withdrawing all
or part of the annuity before my own age 59 1/2? And what
form do I report all of this on? And if one is disabled, is
there an exception to the IRS penalty? And if so, what for
do I report THAT on?

It's just a bad investment that I want to close out as
quickly and as cheaply as possible. I think I need to wait
for the "lockup period" to end at the very least. But even
beyond that, what are the implications of all of this?

<< ================================================== ===== > << 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 (2006) - All rights reserved. > << ================================================== ===== >