Is it possible to spread out the taxes after closing out a guaranteed annuity?
I have a relatively small guaranteed annuity, under $100K, and would like to close it out so I can make a cash payment for a mobile home in a retirement park. I will have them withhold 10% Federal taxes and receive the balance. Next year, when the income taxes on this, along with my Social Security income, is due, is it possible to spread the tax out so I do not have to pay it all in the first year? Also, since this purchase is my first time home purchase, but it is for the mobile home only and not the land, would this qualify in any way as a real estate deduction? Finally, is there a way to close the annuity and transfer the balance to an IRA? I could then use that as collateral on a loan for this purchase and continue to take the required monthly withdrawals, thus avoiding having to pay all the taxes in the following year.
Whoa, I don't know who you've been talking to but let's take this one step at a time. First of all is closing out a "guaranteed [not sure what you mean by that] annuity". This could be a huge mistake for a number of reaons:
1. In addition to taxes there may be significant surrender charges too. You need to verify that there will be no surrender charges.
2. It may have relatively high minimum interest rates locked in that you wouldn't want to give up
3. It may have a more generous guaranteed income table than is available today. Companies have adjusted down their payout factors as longevity increases.
4. It could make more sense to do a 1035 exchange into another annuity with higher lifetime income payout factors, turn on the income, and use that to make the payments on a loan. When the loan for the mobile home is paid off, your income would continue.
There's no way to spread out the income taxes on the gain in a surrendered annuity contract. There's also no deduction for buying real estate, other than mortage interest. And there's no way to transfer the annuity to an IRA unless it already is an IRA, or, you have equivalent earned income for the year (subject to limitations, based on age). Both the annuity and IRA are tax deferred. But the annuity doesn't have required distributions at age 70.5 like the IRA would. Not sure what you hoped to gain by that transaction.
Without knowing the details about the annuity, in general I think it makes more sense to take out a loan on the mobile home and annuitize the annuity to make the payments if the math works. Find a licensed fiduciary financial adviser to analyze your situation. You have the potential to make a very expensive mistake here.
Those are a lot of questions and problems and the reason I dislike annuities. When you take money out of an annuity if it is not in an IRA, then it is income first and principal second. So if you had $50k of principal and $50k of growth, the first $50k is taxable as income when you make the distribution. And yes, you could spread out the income over a couple of years IF you haven't annuitized it are taking monthly income. That is an irrevocable decision once you annuitze.
You could only roll the annuity assets into an IRA if the annuity is already inside an IRA. If not, then no. But if it is inside an IRA, you cannot use as collateral as banks cannot force you to take out a distribution to make a loan payment.
Hope this helps and best of luck, Dan Stewart CFA®