How can we get an annuity inside an IRA into a Trust?

How can we get an annuity inside an IRA into a Trust?



Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm. Register via this link or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

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Episode Transcript:


How can we get annuity inside of an IRA into a trust?

A lot of times we talk about this IRA exit strategy. We’re pulling money from these pre-tax accounts strategically because most people agree that taxes are going up in the future. The reason for that is, They’re scheduled to go up. We have a Tax Cuts and Jobs Act that expires in 2026 where taxes across the board are going up three to 5%, and then also we’re 31 trillion in debt.

So a lot of people are concerned about where government is going and, and so they think they’re gonna have to raise taxes. By more than just the three to 5%. They’re scheduled in 2026. So a lot of times what we’re doing is we’re looking at tax returns. We’re looking at what was your adjusted gross income and how much space do we have to be able to pull money out without jumping up into unexpected tax brackets.

If you’re at the 22% tax bracket, it may make sense to look at a IRA exit strategy of pulling money. Paying a 22 or 24% tax now versus waiting until 2026 and paying a 25% or 28% tax when the tax cuts and Jobs Act expires. So that’s the first concept, is just taking it from the IRA bucket, putting it into something else that is post-tax.

Now, inside of these buckets, we can have different types of investments. And so the question was, let’s say I have an IRA account. That I wanna pull money from for all the reasons we just stated, but it’s tied up in an annuity. So annuity is a type of investment and there’s different types of annuities and there’s pros and cons.

And I could do a whole webinar on, on annuities, but the idea is trying to pull money from this annuity. So the way annuities typically work, and again I’m generalizing here, is typically they’re built on a 10 year chassis where. If you pull all the money out within those 10 years, you may have to pay additional or you have to pay a fee.

Now, there are different strategies to get out of the annuities. One is you can take what’s called free withdrawals. So let’s say you’re in year three of annuity and you wanna pull some money out, you could take free withdrawals, and typically that’s gonna be 10% of the account value. So if it’s a $300,000 annuity, you could pull $30,000 out, pay the tax, and invest it somewhere else.

So that’s one option. The other option is that, let’s say you’re past that surrender time period. Maybe you’ve had the annuity for longer than the six years that some are built on, or the 10 years, then you can pull all the money out, pay the tax. Pull it out the IRA and invest it somewhere else. So those are the two main ways people pull money out of the annuities is they wait till the end of the surrender charge or surrender period, which typically is 10 years, sometimes it’s six years, sometimes it’s 12 years.

But also you have those free withdrawals. So if we’re doing an IRA exit strategy of pulling money on an annual basis, With, uh, free withdrawals. Maybe that gives us enough that we can pull all the money out that we want over that period of time. The other thing is we can just go ahead and say, you know what?

I know taxes are going much higher in the future. I know there’s gonna be a fee to get out of this annuity. Maybe we look at paying the fee given that we’re gonna be paying more taxes in the future. I’m not necessarily advocating it. It’s just a, a case by case basis. And then also there’s some annuities that offer a bonus.

So if, if, okay, let’s say there’s a 3% surrender on the current annuity. Let’s pay that 3%, get it out of the ira, put it into the trust, and now we can put it into annuity that offers like an 11% bonus to cover that surrender charge. So there’s different options. The only time that we’re really stuck with regards to annuities where we don’t have any planning options is if the annuity is.

Actually annuitized, and that’s flipping on the income rider where you’re saying, I’m taking guaranteed income for the rest of my life. Not many people actually end up using those. I’m not a big fan of those traditionally for most of our clients, just because now you’re locking yourself into a situation where, let’s say you did annuitize it inside of a ira, you’re gonna have taxes, they’re gonna have to pay the rest of your life.

And then also, if you’re gonna a nursing home, guess what? Those annuity payments. That’s just going to the nursing home versus if you utilize some other strategies, we can protect it. So yeah, if you do have annuity, we’d have to take a look at the annuity and, and figure out when you purchased it, figure out what type of annuity it is, and then we’d develop a, a plan to help you kind of get out of that if that’s part of the plan.

So again, what this question was, I have a pre-tax. Let’s say IRA annuity. So I have an IRA and I have an annuity inside of the ira, and I want to get that money out of the ira, put it in something else, like an asset protection trust. So first we have to look at the tax rules around the ira, and then we have to look at the investment, which is the annuity inside of that ira.

So we have to take a look at those two. Options to develop the, the exact IRA exit strategy. And it’s a little bit different for every client, but it it’s a case by case basis.


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