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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 35 years experience providing financial advice
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...purchased Manulife Venture anuuity ( Manufacturers Life

Customer Question

...purchased Manulife Venture anuuity ( Manufacturers Life Ins. Co. of N. Amer. , which later became XXXXX XXXXXcock ) Purchase price was $ 70,000.00 and was in my IRA acct. Purchase date was 8/26/1999.
Never performed to expectations so cashed out $ 35,000.00 on 9/6/2007 and remaining acct. balance on 10/25/2007 $ 42,805.10 Age in 2007 was 63 yrs.
Filed gain of $ 7,805.10 on 2008 tax return reflecting profit realized for total term of ownership.
IRS wants tax on entire $ 77,805.10. Can this be right ??
Submitted: 7 years ago.
Category: Tax
Expert:  Bill replied 7 years ago.

If you withdrew $77,805.10 then it would all be taxable in the year of withdrawal if all of your IRA contributions were deducted when you made them. If you had made nondeductible IRA contributions then those amounts would be recovered tax-free. If you did make nondeductible contributions then you should have filed form 8606 in the years that those contributions were made.

 

If you only withdrew $35,000 and the balance remains in the IRA then only $35,000 should be taxable. You would have received a 1099-R in early 2008 with the amount of the distribution. So if the IRS is stating that $77,805.10 is taxable, then they must have received a 1099-R showing that amount. If you didn't receive that amount, then you should contact the annuity company to have a corrected 1099-R issued or a letter of correction.



Edited by Bill on 10/1/2009 at 3:08 AM EST
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Customer: replied 7 years ago.
Bill, thanks for answer I didn't want to hear. Purchase price was lump sum $ 70,000.00 of already taxed money..... how can I be taxed again on the original $70,000.00......eight year gain of only $7,805.10 I can understand. ???
Expert:  Bill replied 7 years ago.
Where did the $70,000 come from if it was already taxed? Was it a rollover from another retirement plan? If so, what kind of plan did it come from?

Edited by Bill on 10/1/2009 at 3:51 AM EST
Customer: replied 7 years ago.

no roll over from another account...... by already taxed money I just meant that this particular annuity was purchased with money saved, from payroll income that I had already paid taxes on.

So, I'am looking at this as ( round figures ) .....I earn $100,000.00, pay my taxes and wind up with $ 70,000.00 ...... use all this to buy annuity........cash in annuity...... and owe taxes again on the $ 70,000.00. ...hard pill to swallow.

Expert:  Bill replied 7 years ago.

If you had already paid taxes on the funds, then they were not permitted to be rolled over to an IRA in 1999 (they would be permitted to be rolled over now as the law was changed). The rollover would have been considered an excess contribution rollover and subject to a 6% penalty every year it remained in the IRA ($4,200 a year). If you were advised to do this by a financial consultant, then he/she may have been negligent depending on the circumstances and you may be able to obtain a settlement from his/her firm for such action if you have sufficient documentation proving this.

 

If your payroll deductions were contributed to either a 403(b), 401(k), or 457(b) plan by your employer then they would have been pre-tax contributions.

 

 



Edited by Bill on 10/1/2009 at 12:04 PM EST

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