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Greetings All,

First let me say that this board has some of the most considerate and wonderful posters in Motley Fool Land. Altruism at its best.

I have a relative who began an annuity about seven or eight years ago. She put $350,000 into it and now it is worth about $480,000. She has tremendous long and short term capital losses from the last three years amounting to 300,000 and 175,000 respectively. I am fairly certain that their is no longer any surrender penalty on the annuity. What are her options and which are the best ones? She is 57 and now only making around .1% on the cash since it is currently in the cash reserves and not one of the mutual fund choices. She would like to take the money out and reconcile it against her capital losses, but I think that the annuity gains are regular income. Can they be reconciled or "washed" that way?

Best,
DQ
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I have a relative who began an annuity about seven or eight years ago. She put $350,000 into it and now it is worth about $480,000. She has tremendous long and short term capital losses from the last three years amounting to 300,000 and 175,000 respectively. I am fairly certain that their is no longer any surrender penalty on the annuity. What are her options and which are the best ones? She is 57 and now only making around .1% on the cash since it is currently in the cash reserves and not one of the mutual fund choices. She would like to take the money out and reconcile it against her capital losses, but I think that the annuity gains are regular income. Can they be reconciled or "washed" that way?

No, they can't. Any annuity gains will be taxed as ordinary income when distributed. Unfortunately, she'll only be able to offset $3000 of her capital losses against her other income each year.

Ira
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A question about annunities. The cost basis is $350,000 and current value is $480,000. If half is withdrawn is the taxable amount $0 (reducing the cost basis), $175,000 (the full amount of the appreciation) or $175,000 * 35/48 (prorated)?

Debra
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Greetings and thanks for your responses.

Do you mean that even the original 350000 will be taxed as ordinary income when it is withdrawn? That's not possible right? Assuming she is in the 28% federal bracket and pays around 35% in taxes, then only 130,000 is taxable, right, resulting in around 45K in taxes. Does it matter if she takes it out at 57 or 59.5? Do any of the rules or tax rules change?

Thanks,
DQ
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DQ,

Suggest you have a look at IRS Pub 575, Pension and Annuity Income. It gets a little complicated... Annuities are qualified or non-qualified, and tax treatment is different. Then there's the question of when she takes money out - before or after the annuity starting date. And how she takes it out - as a big chunk, or in regular periodic payments. If she follows through with the annuity and begins taking regular monthly or quarterly distributions, then (I think!) the taxable part is computed proportionally, much as an IRA with a basis. I don't think there's any question that she'll be paying taxes on the gain only, but when she pays those taxes depends on a lot of factors. Again, see Pub 575. Prepare for your eyes to glaze over.

Lorenzo
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