Navigating through the U.S. tax code can be a daunting task: what, when and how are the three questions that must be answered. Chris Brundige, VP of Advanced Markets with RS Financial Group, says one question to answer first, what is taxable? The short and sweet answer is, anything that has not been taxed previously. When distributing from a non- qualified MYGA, the principal investment is not taxable because it was taxed prior to the original investment. All of your gain are taxable. For annuities issued after August 14, 1982, distribution is based upon the accounting practice of LIFO (last in, first out). Which means the first distributions will all be taxable until you reach the original deposit amount, known as the cost-basis. Distributions are considered taxable income to the owner in the year of distribution at their personal income tax rate.
The owner of a non-qualified MYGA is allowed to continue deferring the taxable portion of their account indefinitely. A MYGA account is distributed to the beneficiary(ies) identified on the contract, once the owner passes and the beneficiary(ies) are responsible for paying the taxes on their portion of the MYGA’s account value at their personal tax rate in the year of receipt.
If you have or are looking into a qualified IRA MYGAs, due to the initial deposit being made from tax-deferred contributions or rollovers, all distributions(principal and gains) will be taxable income in the year of receipt, Chris explains. If distributions from the IRA MYGA has not begun by April 1 after the year the owner turned 70 ½, then Required Minimum Distribution (RMD) rules will apply to the IRA MYGA.
There is one exception to the taxable income rule, a Roth IRA MYGA. In a Roth IRA, if the contributions or rollovers are deferred for five years and the owner is over age 59 ½, then the distributions are tax free. Roth IRAs are distributed based upon the accounting practice FIFO (first in, first out). The owner and/or spouse of a Roth IRA MYGA are not subjected to RMD rules, however their non-spouse beneficiaries will be.
RS Financial Group, LLC is not a CPA Firm nor a Tax Attorney and always reccomends that their clients consult with a tax professional.