Suitability - percentage loss

[ValeRosso]

I have a client who was placed into 3 separate variable annuities, one of which was in 2021 which we were able to rollover to a FIA. The other two variable annuities were in 2023. The surrender values for these two will be 13% and 20% loss. The client wants to change to a FIA, but I don't believe any company will accept this amount of loss for a replacement. Other than cashing out the annuities and then purchasing a FIA, are there any other options that I might be missing? Thanks.

 

[Allen Trent]

I have a client who was placed into 3 separate variable annuities, one of which was in 2021 which we were able to rollover to a FIA. The other two variable annuities were in 2023. The surrender values for these two will be 13% and 20% loss. The client wants to change to a FIA, but I don't believe any company will accept this amount of loss for a replacement. Other than cashing out the annuities and then purchasing a FIA, are there any other options that I might be missing? Thanks.

Are these qualified or non-qualified funds?

If they are NQ & each has various taxable gain or taxable losses, could he 1035 all 3 into 1 new contract to "wash" the losses againts the gains?

Not saying I think taking a big loss due to surrender charge is a good idea as he may have some fixed interest rate options in the variable annuity to wait out surrender charge. Also, is it possible that some of these variable Annuities are actually RILAs that have a similar concept as FIA in that they may have a floor or buffer in regard to losses that can be experienced?

lastly, if the 2 bought in 2023 are with same carrier & are non-qualified, there are some special tax laws regarding "serial contracts" in regard to having to take gains from the cumulative gains of the contracts issued by same carrier in same calendar year before you can access taking tax free cost basis from either.

 

[scagnt83]

Are these qualified or non-qualified funds?

If they are NQ & each has various taxable gain or taxable losses, could he 1035 all 3 into 1 new contract to "wash" the losses againts the gains?

Not saying I think taking a big loss due to surrender charge is a good idea as he may have some fixed interest rate options in the variable annuity to wait out surrender charge. Also, is it possible that some of these variable Annuities are actually RILAs that have a similar concept as FIA in that they may have a floor or buffer in regard to losses that can be experienced?

lastly, if the 2 bought in 2023 are with same carrier & are non-qualified, there are some special tax laws regarding "serial contracts" in regard to having to take gains from the cumulative gains of the contracts issued by same carrier in same calendar year before you can access taking tax free cost basis from either.

 

[scagnt83]

Not saying I think taking a big loss due to surrender charge is a good idea as he may have some fixed interest rate options in the variable annuity to wait out surrender charge.

Another consideration to account for would be existing income riders.

Also fixed income options within the VA to minimize risk.

If the client is dead set on taking a loss.... stupid but I digress... look at Period Certain Annuitization options to prevent a loss and spread out taxation.

 

[ValeRosso]

Are these qualified or non-qualified funds?

If they are NQ & each has various taxable gain or taxable losses, could he 1035 all 3 into 1 new contract to "wash" the losses againts the gains?

Not saying I think taking a big loss due to surrender charge is a good idea as he may have some fixed interest rate options in the variable annuity to wait out surrender charge. Also, is it possible that some of these variable Annuities are actually RILAs that have a similar concept as FIA in that they may have a floor or buffer in regard to losses that can be experienced?

lastly, if the 2 bought in 2023 are with same carrier & are non-qualified, there are some special tax laws regarding "serial contracts" in regard to having to take gains from the cumulative gains of the contracts issued by same carrier in same calendar year before you can access taking tax free cost basis from either.

These are all qualified funds in which he rolled over from his 401k, but you bring up a interesting point with the 1035. I know for stock investments you can do tax loss harvesting, but Im not sure how this works with annuities...Ill have to ask my tax guys on this one.

Unfortunately the fixed rate on these variables is 1%, so hes losing money to inflation on that. They're all true variable annuities as well.

Thank you for the insightful response, you have some great points. It looks like he might be stuck with these variable annuities for a while until the loss percentage is within the guidelines.

 

[ValeRosso]

Another consideration to account for would be existing income riders.

Also fixed income options within the VA to minimize risk.

If the client is dead set on taking a loss.... stupid but I digress... look at Period Certain Annuitization options to prevent a loss and spread out taxation.

Thank you for the input, will look into the period certain options on his current annuities and see what's available.

 

[Allen Trent]

These are all qualified funds in which he rolled over from his 401k, but you bring up a interesting point with the 1035. I know for stock investments you can do tax loss harvesting, but Im not sure how this works with annuities...Ill have to ask my tax guys on this one.

Unfortunately the fixed rate on these variables is 1%, so hes losing money to inflation on that. They're all true variable annuities as well.

Thank you for the insightful response, you have some great points. It looks like he might be stuck with these variable annuities for a while until the loss percentage is within the guidelines.

If qualified funds, no way to wash losses against gains as 1035 is only for non qualified annuity. Traditional Qualified funds all have a zero cost basis, so there is no losses & any movement is done via a Rollocer/Transfer, jot a 1035 exchange.

On the 1% fixed. Let's say he only has 5 years left of variable annuity surrender charge schedule. Better to only make 5% the next 5 years total than to take a guaranteed 20% loss today. Also, why not just move 10% surrender charge free each year from the variable by way of partial rollover/transfer to avoid surrender charge while waiting for surrender charge period to expire?

What you are proposing by way of taking a huge surrender hit is likely not suitable & very likely not in best interest of client

 

[Allen Trent]

Thank you for the input, will look into the period certain options on his current annuities and see what's available.

While a good concept, annuitizing this into fixed period payout is likely not an option for qualified funds in your scenario. Those annual payout annuity checks will be reported as taxable distributions in most situations & doesn't sound like your clients wants the income & doesn't want to consume his entire balance over the next 5-8 years. I think the suggestion of annuitization to avoid surrender charges was under assumption it was Non Qualified funds

 

[scagnt83]

While a good concept, annuitizing this into fixed period payout is likely not an option for qualified funds in your scenario. Those annual payout annuity checks will be reported as taxable distributions in most situations & doesn't sound like your clients wants the income & doesn't want to consume his entire balance over the next 5-8 years. I think the suggestion of annuitization to avoid surrender charges was under assumption it was Non Qualified funds

Yes and no. It works a lot better with NQ funds. lol.

I feel it depends largely on the amount.

Annuitization is a method to avoid Surrender Charges.
(if available at this point in time on this product)

Taxes are a totally separate subject.

If its $50k QF spread over 5 years, then probably not a huge deal adding $10,500 to their annual income.

If its $500k QF spread over 5 years, then $101k in extra income is a big deal.

 

[Allen Trent]

Yes and no. It works a lot better with NQ funds. lol.

I feel it depends largely on the amount.

Annuitization is a method to avoid Surrender Charges.
(if available at this point in time on this product)

Taxes are a totally separate subject.

If its $50k QF spread over 5 years, then probably not a huge deal adding $10,500 to their annual income.

If its $500k QF spread over 5 years, then $101k in extra income is a big deal.

Sorry.

I meant if this client is younger & still wants the qualified traditional funds kept off their tax return until retirement, it may be more difficult to annuitize & rollover the checks back into a qualified traditional account. I am sure it can possibly be done, but guessing it is prone to being fully taxable & not rolled over/transferred