Is a portion of my annual distributions from "Safe Money" annuities tax deductible ?? I have 3 variable annuity contracts with Hartford insurance , non-qualified, which I bought thru Smith Barney. They pay me about $4300 year in monthly installments [I also have a sep ira annuity contract with them, whose distributions are I believe all taxable]. I am 63 years old, and began taking money out of the contracts in "like and equal" payments in
2005. A few months later, I converted all the contracts to "safe money" contracts, in which I have to take the money out over a period of 14 years [in equal monthly installments]. After 5 years, however, if I wanted to, I could "re-up " the contracts for another 14 years..so if the market does well, and what I have left after 5 years of distributions/appreciation would give me the same or greater distributions, I can extend the contracts for another 14 years. I can never get less than what I put in, even if the market tanks to zero-which is why they are called safe money contracts. My broker also says that I could cancel the contracts and draw the money out..presumably like a CD with a penalty. I pay , i think 1/2 of 1% of the value of the contracts for the "insurance" part, by which i can never get less than what I put in. My broker says that all of the distributions on the non-qualified contracts are tax deductible until all of the appreciation is paid out to me, and at that point they start paying out return of principle for tax purposes, and, she said they operate on a LIFO basis [the principle, or contribution being filo--first in, last out], so the 1099 will show all as taxable... does lifo apply to these?? I understand I cannot use the simplified method of "amortizing" the principle I contributed over the 14 years as this is non-qualified money, but cant I use the General method in IRS pub 939 to begin deducting a portion of my contributions?? If so, can I make up for the several years I did not deduct non taxable portions of the distributions by dividing the contribution by the number of years left on the contracts....which is 12 I think [in any case, the whole amount of the contributions are deducted over whatever period, there is nothing left to deduct from any distribution, regardless of how much is left at the end of the contract due to appreciation]?? My stockbroker says that unlike lifetime annuities in which I cant cash out, these annuities are dealt with for tax purposes on a lifo basis..ie., all the money coming out is taxable until I get down to my contributions to them, and then I start getting the money back tax free However , they are annuity contracts, and at pg 26 of the IRS `book of forms and instructions for the form 1040, there is the simplified method for calculating the tax free portion of annuity distributions ...which allows you to amortize your contribution as a tax free portion of the distribution over the number of months in your remaining life expectancy. In doing research on the web..IRS.gov, pub 939 it appears I cannot use the simplified method on the worksheet, but may be able to use the general method for non qualified plans. Essentially dividing my cost of the contracts by the life [14 years] , and that is how much I can deduct as a non-taxable distribution , although I let last year go buy without doing this. Is my broker right that I can not deduct anything until all of the appreciation is returned ..ie, the lifo method, or can I start amortizing my cost over the 13 years remaining?? Thank youJulian Greenspun
Rockville, MD
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