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Scott Thomas, ChFC®, CAP®, CKA®, RICP®

Strategy to Unwind Non Qualified Annuity Efficiently

Strategy to Unwind Non Qualified Annuity Efficiently

So you bought an annuity many years ago and it has grown a lot maybe doubled or tripled in size and now creates a real tax problem if you cash it out.  Why? Because annuity will be taxed first on the last money earned.  Taxes are ordinary income rates not the lower capital gains rates. Another problem if you simply cash it out is the lump sum often pushes individual or a couple into higher income tax bracket and for those retired often creates both taxes on Social Security and higher Medicare costs due to spike in income.

Let’s look at how one couple was able to more efficiently unwind or get out of their annuity with less taxing affect.  The main idea here is to spread out the taxable income to more manageable amount as not to bump into another bracket of taxes and to avoid making other items taxed like Social Security and Medicare.

Roger & Jane have annuity they purchased decades ago for $65,000 and today is worth a little over $200,000.  If they cash it out the negative affect would be more costly than they could process simply looking at a gain and tax rate.  $135,000 of gains and if capital gains some at zero some at 10% and some at 15% is normal method for taxable investment accounts. Not annuity structure- taxed as ordinary income.

In the numbers below let me explain this case: both on Social Security total $36K, and RMD started for Roger this year $6,800 so left side considers full liquidation of annuity today verses stretch it over 10 years. The difference in this case is loss of $28, 853 in taxes paid that could be otherwise avoided with planning.


                        Lump Sum                             Spread Out 10 years


Ordinary        $135,000                               $14,843

IRA Dist.          $6,800                                 $6,800

Qualified Div  $2,000                                   $2,000

Social Sec.      $36,000                                $36,000

AGI-Total        $174,400                               $28,464


Medicare        $4,848                                   $0

Taxable SS     $30,600                                $4,822


Taxable Inc.   $23,705                                  $0


Total Tax       $28,853                                 $0


If you interested in this conversation of how to properly stretch out taxable ordinary income from non-qualified annuity to lessen tax impact then reach out to me

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