July 31, 2014

Income Tax Exclusion

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

Good retirement planning should always consider options that may help to minimize or reduce taxes.

Taxes, taxes everywhere. I read in an industry publication recently over 200 new taxes are a part of the Affordable Care Act. Remember first and foremost folks, I am not an income tax specialist. I don’t attempt to prepare taxes. I am an insurance agent and financial professional with the mission to manage and protect assets safely from the risks we face in life and those risks enhanced in retirement. Taxation is a risk to retirement income. Taxation reduces spending ability. Good retirement planning should always consider options that may help to minimize or reduce taxes.

Annuities help to accomplish this objective. All annuities are classified by the Internal Revenue Service in one of two ways. Annuities are either qualified or non-qualified.

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 or early surrender charge because of a long-term care or illness expense. However, even though that withdrawal is penalty free, the withdrawal 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. Four years later, little know 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 7702(B)(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. 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. Our split annuity strategies help to minimize tax ramifications on both qualified and non-qualified annuities. Encourage you to call us for details. See our ad for details.

We continue our monthly Community Meeting for folks aging into Medicare. Turning 65 within next several months? I know you are being inundated with solicitations for Medicare Supplements, Medicare Prescription Drug Plans and Medicare Advantage Plans. Our monthly Community Meeting is designed to clarify the basics of Medicare as well as to review one of the more competitive Medicare
Advantage Plans in these regions –
AARP Medicare Complete Plans. Regulators state I need to remind you this meeting is classified as a sales meeting. We will have applications and enrollments forms available for persons wanting to enroll. However we do not ask you to make a choice of Medicare plans at our monthly Community Meetings. We provide information to help you make a decision. Next meeting is Thursday August 21 10 AM. Call for a reservation 563.332.2200.