non-qual annuity and SEPP

L1: non-qual annuity and SEPPFirst, thanks for this site and forum
I am not that sure of the terminology used here so I ask your indulgence.
I bought an annuity 6 months ago with after tax dollars, paid with one lump payment. $200,000. non-qualified annuity, right?
It is an EIA. 14 years term. I got an 11% bonus on purchase. (accumulated value = 222,000)
I am 56 years old.
I would like to start withdrawing money from the annuity at the first anniversary (allowed to withdraw 10% without surrender charge). Would 72(t) or maybe 72(q) apply here and allow me to withdraw $$ without being penalized 10% by IRS? or would I first have to annuitize before invoking 72(t) or (q)? I would rather not annuitize since I would like to have the accumulated value grow in the stock market (I hope).
On Mar 1,2004 the IRS extended Rev. Rul. 2002-62 to non-qualified plans. Prior to that time, were there no IRS penalties involved for early withdrawals from non-qual annuities? or were early withdrawlas not allowed since 72(t) or (q) exceptions (SEPP) could not be applied ?
Any help much appreciated2005-06-15 23:49, By: techno, IP: [207.69.136.199]

L2: non-qual annuity and SEPPGood morning Techno.
If you will go to the list of posts, go to the second board and look toward the bottom you will find an extensive discussion about EIA annuities. I think that string will give you some very useful information. But let me answer some of your questions.
To you comment “… I would like to have the accumulated value grow in the stock market (I hope)” you need to understand that money within and EIA is NOT invested directly into the stock market. I had a more detailed description in the post on page 2 referred to above.
From your description above you do have a non-qualified annuity which is covered by 72(q) and maybe some mixing in of 72(t). I”ll let TheBadger address these two parts of The Code. Any distributions prior to your attained age of 59 1/2 will be subject to the 10% early withdrawal penalty unless you have established a SEPP plan. SEPP rules govern so you will not be able to take the full 10% free withdrawal allowed by the annuity contract. Use the calculators on this site to see what I”m talking about.
If you have to start making withdrawals for personal cash-flow reasons, I would look real hard at getting funds from some other source. If you have to use this annuity, then consider taking what you need and paying the 10% penalty until you hit the penalty-free age, especially if you need more than SEPP will allow. If you set up a SEPP you have to run for 5 years and until after you are age 59 1/2. Both conditions must be met.
Annuitizing is not really a good option, and you seem to realize the downside from the investment perspective. From the IRS perspective, only immediate annuities or those annuitized within the first contract year will avoid the 10% penalty. You have stated that you can”t annuitize until after the first anniversary so there”s your answer to this question. Most deferred annuities have a wait period of atleast one year or more to annuitize.
Check out other posts on this board as we have had some really good discussions on this subject.
Jim2005-06-16 09:27, By: Jim, IP: [70.184.1.35]

L2: non-qual annuity and SEPPJim, thanks for your response, very helpful. It seems there aren’t a heck of a lot of people that really have a firm understanding of this stuff (72t, annuities).
You wrote: “If you have to use this annuity, then consider taking what you need and paying the 10% penalty until you hit the penalty-free age, especially if you need more than SEPP will allow. If you set up a SEPP you have to run for 5 years and until after you are age 59 1/2. Both conditions must be met.”
My situation is this: I don’t think the annuity I own is a good investment. A financial advisor sold it to me (my ex-advisor) and I just didn’t “think it out” enough at the time I bought it…my fault. But, now I just want to get my money out of it as quickly as possible. EIA, 14 years, 12% cap, 3% to 4% margins….a diversified portfolio will do better than that I think.If the stock market does 6 to 8% per year for the foreseeable future as many are predicting, my annuity return only will be 0 to 5%. (I did get an 11% bonus on purchase)
You wrote: “SEPP rules govern so you will not be able to take the full 10% free withdrawal allowed by the annuity contract”
I read on the web site the different methods for calculating the withdrawal under SEPP. As I calculate it:my life expectancy (56 yrs old) is 27.7 years ( Can I use a mortality table other than 1983(a)?)120% of mid-term rate for July= 4.6% (this may be higher by Jan, 2006 , the first anniversary of my annuity contract)accumulated value $218,670.
Distribution method: 7,894 in first yearAmortization method: 13,972/yearAnnuitization method: 15,619/year (not sure about this one) annuitization factor of 14 ???
Any comments appreciated. 2005-06-16 16:16, By: techno, IP: [207.69.137.203]

L2: non-qual annuity and SEPPThe calcuations for 72(q) and 72(t) are identical and use the same assumptions. There are some moregray areas on 72(q) like combining two contracts to make 1 SEPP.
As for using a different table, short answer is no. So the $15,619 that you calculated would only serve to bust the SEPP in the first year.
Instead of a SEPP, consider a 1035 exchange to another non-qualified annuity. There are a variety of variable no-load contracts whereyou could atleast pick the mutual funds to be used.
This sounds like you did some of your homework after you competed the transaction. It is always best – regsrdless of what advice you receive – to verify it before taking any action.
Good luck.2005-06-16 16:44, By: Gfw, IP: [172.16.1.70]

L2: non-qual annuity and SEPPThanks for the info GFW
You wrote:”As for using a different table, short answer is no. So the $15,619 that you calculated would only serve to bust the SEPP in the first year.”I’m not sure what you mean here. Is the calculation wrong? I used the 1986(a) table.
Are my other calculations correct for the other methods?
If I do a 1035 Exchange, do I need to keep the term the same (14 years)? What else MUST stay the same?2005-06-16 20:00, By: techno, IP: [207.69.137.206]

L2: non-qual annuity and SEPPI didn”t check your calculations, just the last one. You can check your calculations by using the 72(t) distribution calculators from the top menu of the main site – they are based on the proper (and only usable)table.
No the 1986(a) table can”t be used – Actually, I didn”t know that there even was a 1986(a) table – there used to be a 1983(a) table, but you can”t use that either.
As far as the 1035 exchange is concerned, it is the exchange of an annuity for an annuity. Your current contract most likely doesn”t have a 14 year term, but possibly has surrender charges that last for 14 years. Most annuity contracts (for tax purposes) have a maturity date that would range from age 95 to age115. 2005-06-16 20:22, By: Gfw, IP: [172.16.1.70]

L2: non-qual annuity and SEPPBefore you pull the trigger and bail out of this contract, do some more homework. See if there is anyway you can work with it since you have it. Please read on.
The positive side of the EIA is ”no negative returns.” The larger the drop in the stock market the better the EIA performs, when compared to an equity investment either inside or outside of an annuity. If we have a negative market, the EIA keeps it”s last value, then when the market turns up you will get some positive movement which adds to the last contract anniversary value of the EIA. This is a very general statement since there are so many ”moving parts” to the EIA, and your contract will spell this out for you.
Since you have only had this contract for 6 months and you have a 14 year surrender period, my guess is you will suffer a large surrender charge to withdraw your money and move to another annuity. The 1035 exchange will transfer the taxable gain from the old contract to the new one, but it will not protect you from having to pay the surrender charge (CDSC). Also, the company will take back that nice 11% bonus they gave you when you purchased it. Check your contract to see the specific details, or better yet make the agent you bought it from explain it. Have fun watching him / her squirm. If you do decide to terminate this contract, do it within the first year and the company will ”charge-back” some of all of the agent”s commission. If you are really down on the agent that could be a little ”pay back” for you.
I”m of the opinion that the only ”bad investment” is one that is illegal, like some of the illegal tax shelters. Problems arise in how a particular investment is marketed or used in the total investment plan. Remember that an EIA is in the category of a ”savings vehicle” and is not an investment. I have seen too many marketing organizations do real damage to people”s financial life by pushing EIA”s to the detriment of someone”s other investments, like variable annuities, ”B” share mutual funds and fee-based investment plans. Used as part of an overall plan, EIA”s are ok, but to make it the total plan is rediculous. I”m waiting for the state insurance commissioners (NAIC) to drop the hammer on these marketing organizations and close them down; maybe in 2 – 5 years.
Jim2005-06-17 07:59, By: Jim, IP: [70.184.1.35]

L2: non-qual annuity and SEPPJim and GFW, thanks again for the help.
I like the part about “watching him / her squirm”. But I do not intend to terminate the contract…too expensive.
I didn’t realize there was a 72(t) calculator on the site. I used it and got 13,875 as the highest withdrawal per year.
I used 4.6 (current 120% of mid-term rate) as the “reasonable interest rate” (and “actual investment rate” ).With an EIA I’m not sure what the the “actual investment rate” is.
Is “Amount Allocated to SEPP Plan ” also the total accumulated value since I want to withdraw as much as possible without IRS penalty?
2005-06-21 22:58, By: techno, IP: [207.69.138.201]

L2: non-qual annuity and SEPPFor a non-qualified annuity the amount in both entries should be the annuity value- make sure that you check the interest rate page to determine the actual rate that can be used based on the month the 1st withdrawal occurs.2005-06-22 04:25, By: Gfw, IP: [172.16.1.71]

L2: non-qual annuity and SEPPHi Techno:
I am glad to see you state, “But I do not intend to terminate the contract…too expensive.” This tells me you have done some homework and determined independently what I knew you would discover that the cost of surrendering this contract was too great. Congratulations!
Now a couple of other things have me a little confused. In you initial post you stated that you put $200,000 into an EIA and got an 11% bonus for a value of $220,000, and you bought the annuity 6 months prior to your post on 6-15-05. Now in your last post you state that the first anniversary value is $218,670. The first anniversary has not occurred andthe value of a fixed annuity (EIA)can’t go backwards. So was your initial amount exactly $200,000 or something less? What is the source of the $218,670 value? My guess is a hypothetical proposal provided by the agent. Now for some other items in your calculations.
When doing SEPP calculations, use the 120% of AFR rate which is conveniently posted on this site, or you can go to the official government site, wherever that is. The important thing is NOT to be concerned about any proposed or assumed GROWTH RATE for the EIA. Hypothetical proposals incorporate the 120% AFR rate along with an assumed growth rate to give you an idea of how the particular annuity or other investment MIGHT perform along with the SEPP distributions. I quit using these hypothetical proposals because of the confusion factor.
My suggestion is to use the 12-31-2005 annuity value and either the November or December, 2005, 120% AFR rate to set up your SEPP to start in January, 2006. GFW or TheBadger can add any thoughts along the technical lines on this discussion, and I gladly welcome them.
Jim2005-06-22 08:51, By: Jim, IP: [70.184.1.35]

L2: non-qual annuity and SEPPJim,
To clear up the confusion: my initial (and only) premium was 197,000 in Jan, 2005
with 11% bonus that gives me 218,670 according to accumulated value stated in my contract.
The reason I assume the acc. value to be 218,670 in Jan, 2006 is basically because I am pessimistic about the stock market. With this EIA the market must do over 3 to 4 % before I see any gain added to my acc. value. The main reason I want OUT as quickly as possible2005-06-22 13:36, By: techno, IP: [207.69.138.198]

L2: non-qual annuity and SEPPThanks for clarifying the actual premium you paid into the EIA and the actual value after the bonus.
Since you don’t plan to start withdrawals until January, 2006, I think the best approach for you is to wait till you get your first annual statement and use that value for starters. It may be the $218,670 as you have assumed, or it may be some value that is greater. If this were an IRA or other qualified annuity, you would get a valuation as of 12-31-2005 and for each subsequent year. But since this is non-qualified, I think you are only going to get the annual valuation at contract anniversary. Then you can use either Nov or Dec of 2005, 120% ofAFRfor the other element of your calculations to set up your SEPP. Work with your annuity company to set it up properly so they know what you are doing.
Jim2005-06-23 15:26, By: Jim, IP: [70.184.1.35]

L2: non-qual annuity and SEPPJim has made some good points. EIA’s are complicated, so you may want to consult with an expert or determine from your advisor some of the following.
Does the EIA have an annual reset feature? Is it figures on a point-topoint basis or is some averaging method used to calculate your credited “interest”? Is the spread applied BEFORE or AFTER the 12% cap? All these will have a significant impact on the ultimate performance of your contract.
If you purchased the contract in the earlier parts of Jan. ’05, your current gains (on a pt. to pt. basis) are probably well over 4% so far, but of course that could be lost by your anniversary date (assuming annual reset).
Also, Jim notes that a contract must be annuitized to avoid the 10% penalty. QUESTION: If you stick w/ the IRS guidelines and set up a 72(q) SEPP program, I don’t believe annuitization would be REQUIRED, you could just take partial withdrawals within the guidelines. Any input?2005-07-25 13:16, By: Jacko, IP: [70.56.34.26]

L2: non-qual annuity and SEPPHi Jacko. Thanks for your additional comments to this string. EIAs do have a lot of moving parts, and I think the ”point-to-point” method is probably the worst. I haven”t run the numbers but I believe that someone buying a 7-year point-to-point contract in the mid to late 90”s would be even in growth and only getting the guaranteed, lump-sum growth percentage of about 5% total after the 7 years. This result would be caused by the stock market”s movement up and down and the EIA owner”s starting index numbers being about equal to the 7-year ending index mumber. I think this is why there are no or very few of these contracts still available for new purchases today.
As to your comment that I said someone would have to annuitize to avoid the 10% penalty, that”s not quite correct. My statement from the top of this string that ”From the IRS perspective, only immediate annuities or those annuitized within the first contract year will avoid the 10% penalty.” only applied to a positive decision to annuitize a contract. Systematic distributions under 72(t) would avoid the 10% penalty and I prefer this method over annuitization whenever possible. Hope this helps clears up any confusion.
Jim2005-07-25 14:15, By: Jim, IP: [70.184.1.35]

L2: non-qual annuity and SEPPThank you for your continued interest and responses to my posts about my non-qual EI annuity.
To answer some new questions: the 12% cap is AFTER the % increase is calculated in the Index. e.g. 20% increase is reduced to cap 12%, then “index margin” is subtracted.
The index baseline is RESET each anniversary. A point-to-point calculations is from year to year, not from the index value at beginning date of the contract to current index value.
The index “averaging” method has a guarantee never to exceed a 15% marginThe index “point-to-point” method has a guarantee never to exceed a 7% margin.(‘Margin’ is the amount of percentage that is subtracted from the gain of the index AFTER the cap is applied. For this year the margin can never be subtracted from a number higher than 12%.)
The “averaging” method for the S&P500 has a margin of .75% while the PTP has a 3.25% margin.
Seems like quite an imbalance here. How could the Ins. company predict HOW the S&P would make its gains this year.? When the imbalance is that much maybe it’s better to pick the method with the smaller margin? With Russell2000 (and the Nas-100) the “averaging” and PTP margins are about the same (4.5%), no imbalances here.
My annuity for this year is equally divided among several indices and equally between both methods.2005-07-25 15:10, By: technn, IP: [207.69.137.135]

L2: non-qual annuity and SEPPGood work! I think your “getting it”.
The insurance co. can’t predict how the market will perform over a year. A ballpark average is that a monthly average will yield about 55% of the Pt. to Pt. method in most up years (with annual reset, ther are no down years). They use a variety of methods such as options to generate the returns and then try to cover there butts with caps and spreads.
Most EIA’s proudly proclaim NO FEES (if a spread isn’t applied), but this is not always the case. The S&P 500 currently pays a dividend of about 1.75% per year, which you don’t get,THEY probably do. The NAS 100 and Russel 2000 pay very little dividends, so the ins. co. doesn’t have that additional 1.75% to work with. This may explain the difference in spreads.
BTW, over the long term, the dividend on the S&P has been responsible for around 40% of the total return!
Good idea to have some in different calculating methodologies. These contracts vary so much that no one can guess which method may be better yr. to yr. In 1987, the monthly average would have beat the pt. to pt. Find the most attractive of the different methods offered then diversify using several makes a lot of sense. And ALWAYS check to see what the minimum caps and maximum spreads can go to over the life of the contract. Good luck!
2005-07-26 05:43, By: Jacko, IP: [70.56.34.26]

L2: non-qual annuity and SEPPThanks again. The didvidend the Ins. gets from the S&P500 was something I didn’t realize. I helps to explain some of the disparities.
You said that the “averaging” method does about 55% of the PTP method.
BUt my margins for the Russell and Mid cap400 have the same margins for both methods(4.5%). Did theIns company screw up here? of course, to their benefit.2005-07-26 13:12, By: techno, IP: [207.69.137.204]

L2: non-qual annuity and SEPPThanks again. The dividend the Ins. gets from the S&P500 was something I didn’t realize. It helps to explain some of the disparities.
You said that the “averaging” methodproduces about 55% of the PTP method.
But my margins for the Russell2000 and Mid cap400 have the same margins for both methods(4.5%). Did theIns company screw up here? of course, to their benefit.2005-07-26 13:13, By: techno, IP: [207.69.137.204]

L2: non-qual annuity and SEPPThe vast majority of time, the PTP will yield higher than the monthly average. That’s why you’ll see lower caps and/or lower Participation Rates for the PTP w/ an annual reset. Check this out on your contract. If all else is equal and since you have an annual reset, I think the odds would be in your favor with the PTP.2005-07-26 13:48, By: Jacko, IP: [70.56.34.26]

L2: non-qual annuity and SEPPI would like to address the idea of the insurance company keeping the dividends from the indexes. When I read the post I wasn’t quite sure of the validity of this concept, so I consulted with someone recognized as an authority on EIA’s … someone who doesn’t sell product but provides research and statistical data for the EIA … to confirm my understanding. Here’s what happens.
The index does not include reinvested dividends. Dividends belong to the holder of the stock, and since EIA’s don’t own any stock investments, they are not entitled to stock dividends. If the EIA did own stocks or stock mutual funds, it would be called a Variable Annuity. Therefore neither the insurance company nor the owner of the EIA receive any dividends from the underlying stocks that make up an index.
EIA income is a function of the insurance company buying Call Options. If they are ‘in the money’ enough to earn enough from these operations then part of these earnings are credited to the owner of the EIA. This is a very simplistic description of how they work but there’s not enough room here to go on.
For more information about EIA’s go to http://www.indexannuity.org/ for The Advantage Group.
Jim2005-07-26 16:37, By: Jim, IP: [70.184.1.35]