Q.: Hello Dan, I’m the beneficiary of a number of nonqualified annuities that my father had. The businesses holding these annuities are saying that the fee foundation is undetermined. How can I keep away from being double taxed on the quantity my father paid for these annuities with after tax cash? Please assist!
A.: Hello Mary,
Yikes. You might be smart to be taking a look at this. As a nonqualified contract, the account was began with after-tax funds, also known as “foundation.” Earnings shall be taxed when withdrawn however foundation shouldn’t be taxed once more. You must speak to the insurance coverage agent on the account or your adviser in regards to the particulars however listed below are some fundamentals which will assist repair the issue.
If the annuity was bought by your dad from the corporate that holds the contract now and he hasn’t taken cash from it, the idea is his unique funding plus any further purchases. Clearly, the corporate ought to have that of their data. The quantity of an preliminary buy must be within the utility connected to the contract. If not, most account statements embody the acquisition quantities.
Chances are high good the insurance coverage firm is saying they don’t have the idea as a result of your dad bought this annuity with cash that got here from one other annuity, or a life insurance coverage coverage they usually weren’t given the idea quantity. These transfers are carried out through a “1035 trade,” named after the part of the tax code describing these transfers.
One straightforward to identify clue that this contract was obtained via a switch is to take a look at the unique buy quantity on the assertion. If it isn’t a pleasant even quantity like $20,000, say one thing like $23,876.34, it’s nearly a positive factor the contract was purchased through a 1035 trade. This can be a sturdy clue as a result of, nobody buys an annuity and strokes a verify for a bizarre quantity. It’s nearly at all times an excellent quantity.
If it was an trade, the fee foundation of the previous contract carries to the brand new one. The present insurance coverage firm ought to have data of which firm held the previous contract. In truth, it must be on the applying for the contract you inherited as a result of it was a “alternative” transaction.
He could have exchanged greater than as soon as so some digging could also be wanted. Observe that very same chain I simply described. See what the acquisition value of the contract is and look on the applying for the prior firm. In the end you’re in search of the unique buy quantity or an organization that had a foundation determine that ought to have been given to and recorded by the brand new firm.
Once you do have the idea recognized, maintain your individual data after all however ask the present insurance coverage firm if they’ll add it to their data. In the event that they refuse, a minimum of you could have documentation for the IRS in the event that they ever query what you report for taxable quantities distributed.
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Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving purchasers nationwide however with places of work in Orlando, Melbourne, and Tampa Florida. His feedback are for informational functions solely and aren’t an alternative choice to customized recommendation. Seek the advice of your adviser about what’s greatest for you. Some questions are edited for brevity.