50+ Lifestyles

Taxes, Taxes, Taxes

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

This is the season! We are in that annual ritual of sorting through all those papers in preparation for income taxes. We all do it. We all are required to do it. Over the last several 50+ Lifestyles’ articles and our last several weekly Safe Money radio shows, we discussed this annual income tax ritual and encouraged filers to look at the tax benefits of annuities with tax deferral, tax exclusion and strategies to minimize social security tax. I always encourage clients and potential clients to consider annuities as a choice to help minimize this tax bite. There is another tax aspect of annuities that should be emphasized.

Many individuals owning a (non-qualified) annuity consider it to be their “rainy day” fund. First let’s look at the term “non-qualified” and what that term means. Non-qualified annuities are annuities that do not fund an IRA, 401K, TSA, or other retirement plan. Annuities not part of these plans are considered non-qualified annuities. Many individuals or couples owning these non-qualified annuities consider this asset as a “rainy day” or emergency fund. Often this emergency or rainy day is unexpected health care costs, or even more common is a very expensive long-term care cost.

Most non-qualified annuities do have provisions that cancel the penalty for early surrender charge because of a long-term care or illness expense. However, even though that withdraw is penalty free, the withdraw remains subject to income tax. There’s the tax risk again! No annuity penalty but income tax penalty.

The Pension Protection Act (PPA) was signed into law August 16, 2006. The date PPA’s provisions are effective was January 1, 2010. Two years later, little known provisions of the PPA need to be broadcast loud and clear.

Provisions of the new Pension Protection Act eliminates the income tax on annuity withdraws for long-term-care costs. Note that only non-qualified annuities with provisions and riders that are “qualified” under IRC Section 7702B(b) are eligible for the benefits of the Pension Protection Act.

How do you know if your non-qualified annuity falls within these guidelines? An annuity with qualified long-term care coverage should contain language similar to the following on the initial policy page: “For taxable years beginning on or after January 1, 2010, this contract is intended to be federally qualified long-term care insurance contract under Section 7702B(b) of the Internal Revenue Code of 1986 as amended.”

Assuming your non-qualified annuity is in place for the same “rainy day” objective discussed here, make sure your contract has this wording. In the absence of this language, withdraws can be subject to ordinary income tax minimizing the value of that emergency fund. I encourage you to position your non-qualified annuity to take advantage of the Pension Protection Act. Not sure if your annuity falls within these guidelines? Please call us for an evaluation. It’s better to be safe than sorry later on. Don’t delay in determining the position of your non-qualified annuity.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJU and Associates, Inc. He can be reached at (563) 332-2200.