If the taxpayer has only held the annuity product for a few years, this gain might not be substantial-in fact, many variable annuity products that were issued just before the economic downturn in 2008 are just now returning owners to the break-even point. It is important that taxpayers realize they will owe taxes upon any gain realized at the time of surrender. If the taxpayer has independently decided to surrender, however, the taxpayer may be able to negotiate a waiver, especially if the taxpayer agrees to reinvest the recovered annuity funds with the same carrier that issued the surrendered product. If the taxpayer has a buyout offer on the table, it is likely that the insurance company has already offered to waive any surrender charges.
Taxpayers who are simply unhappy with the variable annuity’s investment performance may also find this strategy appealing, as they can then invest in another income-producing product while preserving some value in the original annuity.įor taxpayers who are still attracted to the income-producing feature of a variable annuity, however, it might be best to hold on to the product in the face of a buyout offer, especially if the product offers guaranteed returns that may be unavailable in a replacement product.Īfter a taxpayer has determined that his or her best interests will be served by surrendering the product, the surrender charges associated with the annuity still must be taken into account. Taxpayers facing the need for an immediate lump sum of cash should also be aware that it may be possible for them to withdraw a portion of the annuity’s assets, keeping only a small part of the initial investment in the annuity to maintain the contract’s death benefit. Other taxpayers may be facing unanticipated expenses and see the buyout as a way to meet those expenses.
Taxpayers who purchased variable annuities with a view toward generating retirement income may be facing buyout offers from an issuing insurance company, notices that their investment choices are being limited to those that are very conservative, or may simply find themselves facing changed circumstances so that the product no longer makes sense.įor example, a taxpayer who has recently been diagnosed with a disease that is likely to shorten his or her life expectancy may find that surrendering the annuity in exchange for a lump sum payout may better serve his or her reduced need for lifetime income. Of course, if the contract owner takes a lump sum settlement at maturity, the contract owner must include the gain in gross income for the year in which he or she receives the payment.Īre there any considerations that a taxpayer should be made aware of when deciding whether to surrender an annuity or accept a buyback offer? In computing the exclusion ratio for the payments, the amount to be used as the investment in the contract is premium cost, not the maturity value. The annuity payments (whether life income or installment) are taxed under the regular annuity rules as they are received in the future. If the contract provides for automatic settlement under an annuity option, the lump sum proceeds are not constructively received in the year of maturity if the policy provides a choice of settlement options, the policy owner can opt out of the lump sum proceeds choice within 60 days and avoid constructive receipt.
#90000 lump sum 7 years from now full
Is the full gain on a deferred annuity or retirement income contract taxable in the year the contract matures?
The correct computation of John’s gain in the contract is the surrender value minus the amount actually received by John upon surrender, less investment in the contract ($100,000 – $100,000 = zero gain). However, if John had only taken out a partial withdrawal – e.g., $20,000 – the first $10,000 would be gain and the second $10,000 would be return of return (as with partial surrenders, gain is determined without regard to surrender charges). (Related: Qualified Longevity Annuity Contracts and Retirement Planning)
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