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Posted by Steve on July 24, 2007, 9:38 pm
Please log in for more thread options RC,
Thanks, I was on the right track but didn't know the reason why. I'll get
hold of my CPA to work out the details. While I understand the concept of
what you are saying the actual number crunching requires more than my lay
knowledge. And I don't believe your getting more obsolete as time passes.
Your a great knowledge base for us, the lost...
Steve
> Hi, Steve.
>
>> GRIP, "Guaranteed Retirement Income Program"
>
> That still doesn't ring any bells, but your description reminds me of the
> "Universal Life" policy that I bought in the late '80s by converting my
> ages-old whole life policy from John Hancock. Its guaranteed-yield
> feature kept it from dropping too badly in the early 2000s, and I actually
> had a small gain when I cashed it in last year.
>
> My situation is somewhat the reverse of yours: You sold investments and
> bought an annuity. I sold my life insurance policy, which I could have
> annuitized.
>
> In the 1970s and '80s, I taught courses to other CPAs on the taxation of
> annuities and other estate planning subjects. A couple of my favorite
> topics were Federal Estate and Gift Taxes, and Federal Income Taxation of
> Estates and Trusts. But those topics are so complex and change so often
> that you don't want to rely on advice from someone who is even one year
> out
> of date, and I'm over 15 years behind now - and getting more obsolete all
> the time.
>
> An "annuity", of course, is a stream of annual payments; these days, most
> are actually paid monthly. An annuity based wholly or partly on the life
> expectancy of one or more people is a form of life insurance, even if it
> is
> not called that. The "expected return" of the annuity must be calculated
> from tables based on actuarial statistics showing how long a 65-year-old
> (for example) might be expected to live - and to collect payments. If
> there is a named survivor, then the tables get more complicated to
> recognize that the "survivor" may or may not survive the original
> annuitant, and may or may not survive for a long time. The expected
> return must be compared to the "investment in the contract" (generally
> equivalent to the "cost" or other basis - the total premiums paid over the
> life of the contract). The ratio of the expected return to the investment
> determines the "exclusion ratio": how much of each payment received is
> essentially a non-taxable return of capital and how much is taxable income
> that must be reported annually.
>
> Here is Example 1 (the simplest) from the latest reference work I have on
> this subject, which is the 2000 edition (for 1999 returns) of the U.S.
> Master Tax Guide from CCH (Commerce Clearing House) (as reformatted by
> Windows Live Mail):
>
> <quote>
> In 1999, X purchases for $8,000 an annuity that provides for payments to
> him
> of $50 per month for life. At the annuity starting date, his age at his
> nearest birthday is 64 years. Table V (gender-neutral) must be used since
> all investment in the contract is post-June 1986; it shows that for an
> individual of X's age, the multiple to be used in computing the expected
> return is 20.8. X's expected return and annual exclusion, therefore, are
> computed as follows:
>
> Annual payment ($50 per month X 12 months) $ 600
> Table V multiple 20.8
> Expected return ($600 X 20.8) $12,480
> 8,000
> Exclusion Ratio ______ or 64.1%
> 12,480
>
> Annual exclusion (64.1% of $600) $ 385
> <end quote>
>
> CCH points out that you'd get the same annual exclusion ($385) if you just
> divided $8,000 by 20.8, but that doesn't fit all cases.
>
> So, X would report $215 ($600 - $385) as taxable income each year.
>
> In your case, Steve, you must first calculate the gains and losses on the
> investments you sold to generate the cash to buy the annuity (after
> recording 2007 dividends and other transactions to the liquidation date).
> Then record the purchase of the annuity. The purchase does not need to be
> reported to the IRS, but you'll need to determine and record the numbers
> for
> future reference.
>
> In your books (or Quicken), you could simply record the purchase of the
> annuity in a new Asset Account, called something like My Annuity. Then,
> when you start receiving the annuity payments, you can make a single split
> entry for each check. For Mr. X in the example:
>
> Cash $ 50.00
> My Annuity (64.1% of $50) $32.05
> Annuity Income 17.95
>
> Eventually, if you live long enough, the Annuity account balance will drop
> to zero. Thereafter, the whole monthly check will be taxable. If you die
> before the balance reaches zero, the balance will be deductible on your
> final income tax return.
>
> These are only a few of the rules, Steve, and neither my memory nor my
> references are current, so please check with your own CPA before you file
> your 2007 tax return.
>
> RC
> --
> R. C. White, CPA
> San Marcos, TX
> (Retired. No longer licensed to practice public accounting.)
> rc@grandecom.net
> Microsoft Windows MVP
> (Currently running Vista Ultimate x64)
>
>> RC,
>>
>> Thanks for responding. Now that you said you're not familiar with the
>> term GRIP, I pulled the original paper work out. The account was with
>> Manulife and they were bought out by John Hancock. I didn't realize or
>> had forgotten the account was an annuity investing in their family of
>> funds and not truly an investment account. GRIP, "Guaranteed Retirement
>> Income Program", when I opened the account for $30k, I had an option to
>> purchase a GRIP which cost a quarter point annually that guaranteeing the
>> original amount at a 6% growth rate. It required a 7 year holding period
>> to pay out.
>>
>> I bought it in the height on the dot.com period, it dropped like a rock
>> and never recovered. Of my $30k, when I just annualized it, the funds
>> cash value was only $21k. However, the GRIP value was $45k with the 10
>> year certainty. The account also had a guarantee $30k payout as an
>> insurance policy until cashed. Cheap insurance and that's why I held on
>> to it this long.
>>
>> At this point, I don't have the foggiest idea on how to properly migrate
>> the account in Quicken as a fixed cash stream. It might be as simple as
>> leaving it as an investment as is and just transfer the monthly check to
>> checking account. But at some point down stream it will become a negative
>> balance. And that doesn't seem right. The other idea I had was to
>> transfer the cash balance over to an asset account and pay it out from
>> there because I could inflate the balance some how. As you can see I'm
>> just guessing. As for rolling it into taxes, distribution, capital
>> returns I'm even more lost. I haven't found any clear explanation on how
>> to deal with this.
>>
>> I would appreciate and advice you might have.
>>
>> Thanks,
>>
>> Steve
>>
>>
>>
>>> Hi, Steve.
>>>
>>> Annuities require us to adjust our mindset. They are not really
>>> mysterious, but they involve concepts that most of us never think about,
>>> so we have to adjust our thinking when we are confronted with one.
>>>
>>> You probably got a pile of paper explaining all the details, but those
>>> papers may be hard to interpret. Much of it is technical, and we can't
>>> even guess at the details without knowing what is in those papers. For
>>> example, we don't know who gets the annuity check if you die before the
>>> "10 years certain" is up: your spouse or some other named survivor or a
>>> charity or your estate. We don't know your age or your life expectancy.
>>> We don't know if you are married, or if your wife (or some other
>>> survivor) will collect the annuity for some period after your death, and
>>> the age of that survivor. All those factors are important.
>>>
>>> Even when we know all those facts, we still need to figure out how to
>>> record it in Quicken. And how to report it on your tax return - both
>>> for
>>> this year of conversion and for each future year as you collect the
>>> benefits. For 2007, you have 3 kinds of transactions to record:
>>> pre-conversion, just like in prior years; the conversion itself; and
>>> checks received after the conversion.
>>>
>>> In the simplest view, you sold your investments and now must reckon with
>>> any gains or losses on the disposition (after recording the current
>>> year's transactions before the disposition). Then we need to record
>>> your
>>> "purchase" of the annuity. And then we need to calculate how much of
>>> each future check received will be a partial return of your "investment
>>> in the contract" (not taxable) and how much is a gain (taxable) in the
>>> nature of interest, although it won't be called that. If the payout
>>> period is based on your life expectancy, you will need to consult
>>> IRS-approved charts to make such calculations.
>>>
>>> I've been retired too long to remember all the annuity rules off the top
>>> of my head, and I no longer have a tax library to look them up. Heck,
>>> the rules I can't remember might not be worth remembering anymore,
>>> anyhow. :>( But there are some well-established formulas for allocating
>>> future receipts between the taxable and non-taxable portions.
>>>
>>> I'm not familiar with the term GRIP. There may be a tax code section
>>> that allows special treatment of any accumulated gains when annuitized,
>>> but I am not aware of any such provisions.
>>>
>>> Perhaps all those details are in the papers that you probably received -
>>> or maybe not, if your fund/annuity company is lax in helping you
>>> understand the situation. Do you have a local CPA who can help you with
>>> this problem? If you can spell out the details, the tax experts in the
>>> newsgroup: misc.taxes.moderated may be able to help you.
>>>
>>> It is probably not as complicated as I'm making it sound, Steve.
>>> Trouble
>>> is, when we don't know the facts, we have to imagine all sorts of "what
>>> ifs", most of which you don't really need to worry about. Once we know
>>> the actual situation, we can discard all those contingencies and
>>> concentrate on just the real facts. If you give us more details, I'll
>>> try to help, but I can't promise that I'll actually be helpful. Maybe
>>> someone more familiar with current annuity and tax rules will jump in.
>>>
>>> RC
>>>
>>>>I have been tracking this investment account in Quicken for years. When
>>>>I
>>>>originally open it, I bought an option (GRIP) on it to convert it to an
>>>>annuity which I did last month. So effectively it not an investment
>>>>account any longer.
>>>>
>>>> They sold off the funds making it a zero balance. Now I receive a
>>>> monthly check to my checking account for the next 10 years and
>>>> continuing for as many years there after as I live on.
>>>>
>>>> Right now, I'm showing the sell off cash value in the account ($21k).
>>>> Do
>>>> I now transfer the balance over to an Asset account? And pay out the
>>>> monthly checks to myself? In round year 7 of payouts, the total checks
>>>> will exceed the $21k current cash value. And how do I deal with the tax
>>>> issue, is it a distribution or a return of capital? I would appreciate
>>>> some advise.
>>>>
>>>> Steve
>
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