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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.

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