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Posted by D.D. Pallmer on June 20, 2006, 2:12 am
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>> Two years ago, my uncle was sold a fixed variable annuity.
>> It paid some teaser interest rate (the bait that Uncle took)
>> but now is paying a paltry 3.45%. I cannot move the
>> investment to an equity sub-account or anything like that.
>> It's stuck at 3.45%. Buying the product was a mistake but
>> not of major proportions, but I was not consulted at the
>> time. Anyway, Uncle recently gifted the annuity to me. Upon
>> transfer of ownership, the insurance company who wrote it
>> told me that they would 1099 my uncle (next January) for the
>> earnings to date. Not very much and Uncle is in a low tax
>> bracket so this is not a problem. Uncle is 88.
> A "fixed variable annuity" is contradictory, it is either a
> fixed annuity or a variable annuity. A fixed annuity only
> earns interest (it does not mean the interest rate is fixed
> forever, it can vary) and the value of the annuity will only
> increase if there are no fees or withdrawals.
>
> A variable annuity is tied to some underlying investments
> (which are usually mutual funds) and the value fluctuates
> with the value of the investments, it may go up, or it may
> lose some or all of its value. Fixed annuities are generally
> a safe investment, variable annuities are as risky as
> investing in any other security.
>
> Under Code Sec 1035 you can exchange an annuity tax free. If
> your uncle had a fixed annuity (sounds like it) he could
> have exchanged it for a variable annuity tax-free. If he
> could find one suitable at his age. A fixed annuity is
> probably much better for someone his age. Since he has
> transferred ownership to you, you may be able to do a 1035
> exchange into a variable annuity. You will still have the
> surrender penalty from the existing company. If you do
> surrender the policy you will be subject to a 10% penalty if
> you are under 59 1/2. It may have been wise to leave the
> annuity alone. Earning 3.45% in a tax deferred account for
> an 88 year old is not a terrible thing. You should not
> assume your investment horizons and tolerance of risk are
> the same as your elderly uncle's.
Thanks for the spanking. But you did not answer ANY of my
questions.
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