Taxes Annuitiy-Chris Sumner Financial Planner in Memphis


In 2008, interest rates began to tumble downward leaving many retirees subjected to reinvestment risk. Each time a fixed rate annuity or Certificate of Deposit (CD) matured for renewal, the retiree was faced with a lower interest rate, thus reducing their annual retirement income, says Chris Sumner, Founder of RS Financial Group. By 2012, the five year interest rates on CDs were hovering just above .50%.1 The low interest rates coupled with a rising inflation rate on basic necessities left many retirees with a negative real return on their CD investments. These low rates, annual taxable income and rising inflation lead many investors to search for alternative short-term, safe-money investing solutions.

MYGAs as a solution in low interest rate environments. Chris said many retirees in Memphis, found a solution for their short-term, safe-money needs in Multi-year Guaranteed Annuities, also known as MYGAs. MYGAs are fixed annuities that guarantee a declared interest rate for a pre-set number of years. These types of fixed rate annuities are issued by insurance companies with surrender periods, most commonly, from three to 10 years in duration. The guaranteed interest rate period is usually equal to the duration of the annuity contract’s surrender charge period. At the conclusion of the surrender charge period, the annuity owner has the ability to either invest the annuity contract’s value into another investment vehicle or allow the funds to remain in the current annuity with a new declared interest rate and surrender charge schedule.

Which Safe-Money Investment is Right for Me?

Annuities offer more features and flexibility than CDs, but that does not imply that they are the most appropriate investment account for your safe-money investing. Typically, investors that are still in their accumulation years will purchase CDs while pre-retirees nearing retirement and retirees will opt for MYGAs.

Chris Sumner,an Investment Advisor Representative in Memphis, feels the reason annuities are better suited for those who are age 59 ½ or older; or for those who do not intend to withdrawal interest or principal(on IRAs) until normal retirement age, is that they can be subject to IRS early withdrawal penalties. He explains that whether an annuity is funded with pre- or post-tax dollars, the owner can be penalized by the IRS if taking withdrawals of taxable dollars before age 59 1/2. The IRS early withdrawal penalty does not apply to owners older than age 59 ½ or the beneficiary(ies) of the MYGAs when the owner passes – regardless of age.

MYGAs are Ideal for Retirement Because of Triple Compounding

Albert Einstein once stated that, “Compound interest is the eighth wonder of the world.” With a Multi Year Guaranteed Annuity tax deferral benefit, the investor receives triple compounding interest: interest on the principal, interest on the interest, and interest on the tax-deferred earnings. Your interest will compound through tax deferred growth each year and accumulate more quickly than a taxable CD.

How are Taxes Handled on MYGA Accounts

Navigating through the U.S. tax code can be a daunting task: what, when and how are the three questions that must be answered. One questions 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.

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