Aggregating of Contracts
L1: Aggregating of ContractsI own 3 NQ Variable Annuities. I am taking SEPP from two of them and have been for many years. My principle is low on these contracts and I pay taxes on the entire amount of the withdrawals. I am not 59 1/2.
I need to liquidate the third annuity. As I understand it, I will be paying a 10% penalty on the taxable amount of the withdrawal as well as taxes on the investment income earned while I have owned it.
That seems clear enough however I read about aggregating of multiple annuities and am confused. My principle amount is a fairlyhigh percentage in this third annuity. Will this annuity be aggregated in any way with the other two contracts that I continue to own? Could this cause a problem with theSEPP’s on those other two contracts?
2012-10-10 03:06, By: WayneB, IP: [126.96.36.199]
L2: Aggregating of ContractsAre you aggregating the two annuities in a single SEPP plan or are you running two independent SEPP plans separately with each annuity?
As long as the third annuity is not in any way involved in your SEPP plans and you did not include the value of the 3rd annuity in calculating your SEPP (72q plan), you can take a distribution from it without affecting your SEPP plans.
Conversely, your tax basis in each annuity cannot be aggregated in any way. Distributions from each annuity (whether SEPP or non SEPP) are taxed according to the basis and earnings in each contract. For post 1982 annuities, the earnings come out first. But if your third annuity is mostly basis, once you have taken out the earnings and paid tax and the 10% penalty on the earnings amount, the rest of that contract is tax and penalty free. This will not affect your SEPP plan(s).
Both multiple IRAs and multiple NQ annuities can be aggregated with respect to SEPP calculations, but aggregation is optional. An annuity SEPP (72q) cannot be aggregated with an IRA SEPP (72t).
For basis calculations, IRA accounts are aggregated but NQ annuities are not. Each annuity carries it’s own basis.2012-10-10 03:41, By: Alan S, IP: [188.8.131.52]
L3: Aggregating of ContractsThere is another aggregation rule which may be in play. Under IRC Sec 72(c)(11)(A)(ii) all annuity contracts issued by the same company to the same policyholder during any calendar year is treated as one annuity contract for tax purposes.
What this means is that for non-qualified annuitiesthe earnings from all contracts will be taxed before any cost recovery will take place. This only applies tonon-qualified contracts issued in the same year by the same company and owned by the same person. Just another twist to be aware of when using multiple contractsto calculate SEPP for non-qualified annuities. Fortunately this does not apply to qualified annuities and IRAs.
2012-10-10 14:29, By: DMS, IP: [184.108.40.206]
L4: Aggregating of ContractsDMS,
That provisions appears reasonable, but I cannot pull it up under your code reference. Could you recheck your Code sections? Thanks2012-10-10 23:10, By: Alan S, IP: [220.127.116.11]
L5: Aggregating of ContractsCheck…
72(e)(11) ANTI-ABUSE RULES. –72(e)(11)(A) IN GENERAL. –For purposes of determining the amount includible in gross income under this subsection -72(e)(11)(A)(ii) all annuity contracts issued by the same company to the same policyholder during any calendar year shall be treated as 1 annuity contract. The preceding sentence shall not apply to any contract described in paragraph (5)(D).2012-10-10 23:16, By: Gfw, IP: [18.104.22.168]
L6: Aggregating of ContractsThanks, gfw.
He indicated 72(c).
If the annuity owner invested the same amount in two contracts in the same year, and one grew far more than the other, then a distribution from either one would have the same amount of earnings included. Taking a distribution from the one with much lower earnings would not produce a lower tax bill.
Bottom line, for some 72q plans, there are more variables to consider in taking distributions:
1) 72q plan aggregation of contracts
2) Limited aggregation of basis only in the case of same company, same year issue. For annuity distributions, the 1099R should show the taxable amount, unlike IRAs where basis is reported by the taxpayer on Form 8606.
2012-10-11 03:15, By: Alan S, IP: [22.214.171.124]
L7: Aggregating of ContractsMy contracts were all issued in the same year to the same owner by the same company. These were all transferred to that company about 5 years ago by 1035 exchanges.
With that information, where am I now?
The SEPPS are 72q, non-qualified2012-10-11 20:19, By: WayneB, IP: [126.96.36.199]
L8: Aggregating of ContractsIf I were you, I would contact the insurance company where you have the current contracts. Tell them your situation as you have outlined it here and see how thhey would handle.
They are the ones that will be issuing any 1099s and you need to get their opinion on what they will do.
Please let us know what they tell you.2012-10-11 21:39, By: Gfw, IP: [188.8.131.52]
L9: Aggregating of ContractsI agree you should contact the company, as the exchange introduces yet another variable. It does not seem logical that a 1035 exchange would create aggregation unless the original contracts were issued in the same year.
You did not indicate whether the original contracts were issued in the same year, only that they were exchanged in the same year. That’s the question, since basically an exchange is a non recognition transaction that carries forward the remaining investment in the contract.2012-10-12 02:32, By: Alan S, IP: [184.108.40.206]
L10: Aggregating of ContractsThe two contracts under SEPP were issued a few years before the one thatwant to liquidate which is not under SEPP.
Thanks for the help, these things get complicated at times.
I’ll see what the company says, it’s hard to trust that info though, one never knowsif it will be accurate information.
Maybe I should 1035 exchange that contract to another company and then liquidate it. Does that make sense?
2012-10-12 03:03, By: WayneB, IP: [220.127.116.11]
L11: Aggregating of ContractsIf you do 1035 the contract to another company and plan to liquidate it, you better use a contract that can be liquidated without penalty to the client. Also take into account whether the client will suffer a surrender charge upon the transfer from the existing company.
Document, document and then document some more what you are doing and why. Then get your OSJ and B/D Compliance Dept on board with you before processing any paperwork. Mess this one up and your career could suffer.
Just my thoughts.
Jim F2012-10-12 15:35, By: Jim F, IP: [18.104.22.168]
L12: Aggregating of ContractsThere has been alot of territory covered here. First, the annuity you wish to cash in is NOT part of any SEPP plan and therefore will not affectthe SEPP. That eliminates the worst exposure.
The annuity to be cashed in was issued prior and not in the same year as the other two. The 1099R for the distribution will be separate and show the contract # of that annuity, and therefore this should be clear to the IRS.
What remains is the amount of investment gains which will be taxable and subject to penalty. Since this is the oldest contract, it may have a greater % of earnings than the others. While I don’t think the 1035s should trigger aggregation when the original contract was older, if the company takes the position that it does, then it looks like the 1099R would report a LOWER taxable amount.
And if the 1099R for the full distribution is lower, that advantage will be offset with the SEPP distributions. Investment in the remaining contracts would be less under aggregation if some of that was aggregated to the full distribution of the earlier contract.
2012-10-12 18:31, By: Alan S, IP: [22.214.171.124]
L13: Aggregating of ContractsJust to keep the facts clear, the contract I want to liquidate is not as old as the other two, it was originally issued two years later.
There is a lot more principle in the contract I want to liquidate since more was invested in it originally and it hasn’t grown as much as the others.
On my SEPP distributions, they are not codeds as SEPP’s and I have to change that each year on my return. The annuity company does not know I am taking SEPP’s from them. There is a risk they will just lump all the distributions together as that’s what they do to my SEPP’s. I might be able to get them to seperate this distribution if I call them, I haven’t asked them yet.
Thanks for the advice, it seems this is a complicated situation. If my company is willing to seperate this distribution, do you think I am free and clear or do you think, since the investment gain in this contract is significantly is lower than on my other SEPP’s, I will have issues with the taxable amount to report?
2012-10-13 01:13, By: WayneB, IP: [126.96.36.199]
L14: Aggregating of ContractsNot getting the 2 code in Box 7 of your 1099R on the accounts that comprise the SEPP is normal. Most custodians do not offer the 2 code, even if they know you are executing a SEPP. Form 5329 takes care of that.
I don’t follow your comment about the company lumping the distributions. Don’t you order a specific distribution from each annuity? You have 3 annuity contracts I assume. But if only two of them were used to calculate your SEPP distributions, the other one is not part of your plan. It also means that your SEPP distribution must be met solely fromthe two annuities that comprise the SEPP. Are you getting distributions from all 3 annuities? That’s OK if the 3rd one is an additional amount, but if the 3rd one is used to meet part of the SEPP total, you have a busted plan.
How many 1099R forms do you get now? There should be one for each annuity that issues a withdrawal.
Here I’m back to the SEPP itself, not worrying about how much is taxable, since that is comparatively a minor issue.
2012-10-13 03:16, By: Alan S., IP: [188.8.131.52]
L15: Aggregating of ContractsAlan, I have 2 SEPP’s but the insurance company only send me one 1099R showing the total of the two withdrawals with both account numbers on the 1099. I attach a printed spreadsheet to my return showing the two different contracts included in that total and the IRS has not questioned it. The insurance company probably lumps them together because they do not know I have SEPP’s going and are coding the withdrawal as 1. I take the same specific withdrawal from each account every year and have records to show that and that is how it is shown on my return.
I am not taking SEPP from the third contract.
Jim, I am an indivual buying the contracts myself so I am not worried about being sued by a client.
I have been doing the SEPP’s for almost 10 years and am now 58. It has been smooth sailing until now. The IRS questioned me one year but after supplying them with some info, they dropped it.
As this seems to be getting too complicated, I’m considering not liquidating the third contract after all. I do not want to do anything that could risk busting the SEPP’s at this point. I really need the money for a personal reason, but I might have to reconsider.
2012-10-13 15:07, By: WayneB, IP: [184.108.40.206]
L14: Aggregating of ContractsWayne:
Based on your statement …
“There is a risk they will just lump all the distributions together as that’s what they do to my SEPP’s.”
I think that if you liquidate the subject contract while it’s with the current company, they will follow their precident and issue one Form 1099-R with the TOTAL distribution amount, which will definitely bust your SEPP Plan. So to be safe I believe moving this contract to another company is your only safe option. Please review my previous comments above.
Please clarify; are you a broker working with a clientor are you an individual buying annuities direct with the insurance company?
Jim F2012-10-13 14:01, By: Jim F, IP: [220.127.116.11]
L15: Aggregating of ContractsVery good Wayne. It sounds like you know how to handle 1035 exchanges and other aspects of working with annuities. My only caution, as previoiusly stated, is to consider any penalty you may pay to the current insurance company, called Contingent Deferred Sales Charge (CDSC), as a result of processing a 1035 Exchange. Since you are working directly with the insurance company I suspect they probably didn’t tell you about or offer you a contract with no surrender charge. If you have to pay a CDSC you might lose a considerable amount, in addition to the 10% IRS penalty.
Are you dealing with Variable Annuities (VA’s) or Traditional Fixed/Equity/Fixed Index Annuities (FIA/EIA)? The fixed type generally have a more harsh CDSC than VA’s.
Based on your last post I think it is probably definite that any distribution from the 3rd annuity at the current insurance company will be reported on the single Form 1099-R which will bust your plan.
If you can do something else to raise funds for your needs then I would pursue that course. At age 58 and having take the SEPP distributions for 10+years, you are close being able to take whatever distributions needed without worrying about the 10% Early Distribution Penalty.
PS. Since you seem to have a pretty good handle on dealing with annuities and SEPP Plans, when you really retire maybe you might want to consider a second career with financial services.2012-10-15 14:18, By: Jim F, IP: [18.104.22.168]
L16: Aggregating of ContractsWayne and Jim,
I agree that if possible the funds should be raised somewhere else. Also, that the insuror would likely issue a single 1099R, although if you needed to request a distribution from the non SEPP annuity, you could ask them to issue a separate 1099R.
However, in the end if you needed this distribution andif you were to get a single 1099R showing 3 account #s, youshould be able to convince the IRS that your SEPP was not busted if you hadCLEAR documentation that the additional amount on the 1099R came solely from the non SEPP annuity.But it would probably be afrustratingprocess.
Any aggregation of basis applied will affect your taxable amount on line 16b, but the IRS considers only the gross amount showing on line 16a in determining if you withdraw the correct amount for your SEPP.
2012-10-15 17:31, By: Alan S, IP: [22.214.171.124]