A Hidden Tax on Annuities Lurks in the Health Care Reform Law

[Scoobie]

A Hidden Tax on Annuities Lurks in the Health Care Reform Law

By SARA HANSARD
Posted 2:30 PM 03/29/10

[excerpt]

The Obama administration is trying to encourage people to buy annuities to ensure that they don't outlive their savings. But a little-noticed provision of the new health care reform law will slap a 3.8% tax on payouts from annuities purchased by high-income earners outside their workplace. And, not surprisingly, the life insurance industry isn't happy about that.

Life insurers, which have sold approximately 15 million so-called "nonqualified" policies containing some $710 billion in assets, hope to get this particular provision of the Health Care and Education Reconciliation Act of 2010 repealed. The health care reconciliation bill made amendments that House wanted for the Patient Protection & Affordable Care Act, which President Obama signed into law on March 23.

"This is a countermand to all that this administration has been doing since they took office in encouraging saving for retirement and using annuities as guaranteed lifetime income," says Catherine Weatherford, president and chief executive officer of the Insured Retirement Institute (IRI), a Washington, D.C., trade association that represents the annuity industry.

To help pay for the $940 billion health care reform measure, the administration and congressional Democrats included a 3.8% Medicare payroll tax on single people who earn more than $200,000 a year and couples earning over $250,000 a year. Starting in 2013, the tax will be applied to annuity distributions, interest, dividends, capital gains, rents and royalties. While there are no estimates of how much the annuity portion of the tax may raise, all of the investment taxes are expected to contribute $210 billion over the next 10 years to Treasury's coffers.

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[zeitgeist]

So it begins.  I can hardly wait to discuss this with my better half.  This looks to be the foot in the door stealth strategy.  

But a little-noticed provision of the new health care reform law will slap a 3.8% tax on payouts from annuities purchased by high-income earners outside their workplace. And, not surprisingly, the life insurance industry isn't happy about that.

Democrats included a 3.8% Medicare payroll tax on single people who earn more than $200,000 a year and couples earning over $250,000 a year. Starting in 2013, the tax will be applied to annuity distributions, interest, dividends, capital gains, rents and royalties. While there are no estimates of how much the annuity portion of the tax may raise, all of the investment taxes are expected to contribute $210 billion over the next 10 years to Treasury's coffers.

It is not hard to imagine someone who receives stock in a pension plan leaving the company then placing the stock into an annuity.   Any financial planners want to explain what the options are when you take a retirement payout when you change jobs???

I know many people who have taken stock and options in start-up companies for their retirement accounts. When the companies go pubic these folk do very well (from janitor to CEO).   When you leave the money gets rolled over to a 401k or similar vehicle.  

And so it goes..........

1)  You cannot legislate the poor into prosperity by legislating the
wealthy out of prosperity.

 2)  What one person receives without working, another person must
work for without receiving.

 3)  The government cannot give to anybody anything that the
government does not first take from somebody else.  The government has
no funds that it didn't extricate from its citizens.

 4)  When half of the people get the idea that they do not have to
work, because the other half is going to take care of them, and when
the other half gets the idea that it does no good to work because
somebody else is going to get what they work for, that my dear friend,
is the beginning  of the end of any nation.

5)  You cannot multiply wealth by dividing  it.


Obama, OTOH seems to have found a way to divide and conquer!!


As an aside, my personal tax forms ran  to 18 pages this year.  18 PAGES .  Excessive in the extreeme.  Tax code reform is needed now.

[The Village Idiot]

This isn't all annuities is it? Just ones from health insurance companies?

[zeitgeist]

This isn't all annuities is it? Just ones from health insurance companies?

Interesting question, I guess it all depends on what the meaning of is is.  Or is that the meaning of ALL?  Once a beach head has been established the next step is to push inland, not sit around under an umbrella with a drink in your hand.

First they came for the very rich, but I was not very rich.........

[DumbAss Tanker]

Not that I'm any kind of Obama fan but I don't see this having a significant effect on anything besides really, really pissing off the people who have to pay it.  If these people are supposedly retired then it's hard to make an argument that it is going to impact businesses directly, and it doesn't even kick in until you are over $250K per year (Which could be really $250K or a considerably higher number depending on if that means all-source total gross income, gross income per the tax code, adjusted gross income, or something else yet).  I just don't see it getting a lot of traction with anyone outside certain creaky parts of Florida, Arizona, and California. 

[zeitgeist]

Not that I'm any kind of Obama fan but I don't see this having a significant effect on anything besides really, really pissing off the people who have to pay it.  If these people are supposedly retired then it's hard to make an argument that it is going to impact businesses directly, and it doesn't even kick in until you are over $250K per year (Which could be really $250K or a considerably higher number depending on if that means all-source total gross income, gross income per the tax code, adjusted gross income, or something else yet).  I just don't see it getting a lot of traction with anyone outside certain creaky parts of Florida, Arizona, and California. 

Based on the amount of views and posts on this thread you appear to be correct, there are few interested in this topic.  Insurance policies and annuities are pretty boring stuff until you are need them, fraught with lots of sales commissions and mis-information, yet these financial products, generate many so called institutional investors ,  that control a sizable chunk of 'change' in the market.

As Thomas Jefferson once wrote regarding the "general Welfare" clause:

To take from one, because it is thought his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, "to guarantee to everyone a free exercise of his industry and the fruits acquired by it."

Of course folks can always live on Social Security in their later years.

[The Village Idiot]

My BIL had an electrical accident that cost him his lower right arm. He survives on the settlement annuity.

[zeitgeist]

My BIL had an electrical accident that cost him his lower right arm. He survives on the settlement annuity.

Every time I think of annuities I hear the ad, It's my money and I want it now..... but you notice they never mention the cost of that conversion from any taxes or fees which might apply.

Here is a bit of interesting information on other uses of an annuity which I was talking about earlier.

Whether you are planning to shift jobs or have already moved to a new one it is a wise option to opt for a 401k rollover annuity. One must keep in mind that a 401k rollover annuity must be completed in 60 days after receiving the distribution so that you do not incur any tax on the amount that has been rolled over or on any earnings generated by the amount. So instead of withdrawing cash from your current 401k plan, you may opt for a 401k rollover option so that you do not incur tax and penalty.

 

You may convert your 401k plan into a 401k rollover annuity so that you incur a number of benefits. Firstly you avoid the 20% federal tax as well as the 10% penalty if you are withdrawing below the age of 591/2. When you invest in a 401k rollover annuity your principal amount is guaranteed which is not the case if you are dealing with mutual funds, stocks or bonds. The interest rates are considered to be considerable higher when one deals with 401k rollover annuities.

 

One must also note that 401k rollover options are many and you may change your investments as desired and manage them well. Another advantage is that with most of the 401k rollover annuity plans offers loans. While opting for a 401k rollover annuity it would be good if you could take advice from a financial planner who would be able to chart out a strategy that is tailor made to your specific needs. By getting help you can ensure that you do not make any mistakes during the rollover and you do not lose any money in the process.

 

It is not necessary that you need to change jobs to consider a 401k rollover option, you can also think of it if you are moving into retirement. You can consider moving your 401k plan to 401k rollover annuity so that you can maximize growth through tax deference in the future. One must note that several types of annuities would be beneficial from a 401k rollover like indexed annuities, fixed rate annuities and even immediate annuities for income generation.

 

While considering about opting for a 401k rollover annuity, one must consider several things like selecting the right mutual fund, variable annuity, fixed annuity, indexed annuity etc. Always make sure to get a detailed prospectus from the company you are investing with and check all expenses and charges before you invest

 

A 401k rollover annuity is a great idea if you are shifting jobs as you end up saving taxes as well as penalties. If you are in a transition in your career consider 401k rollover annuity.


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Once the camel gets his nose under the tent as they say...


Disclosure:

I am not now nor have I ever been involved in the sale or marketing of insurance or annuities.  I do own both insurance and annuities.

[The Village Idiot]

Every time I think of annuities I hear the ad, It's my money and I want it now..... but you notice they never mention the cost of that conversion from any taxes or fees which might apply.

They went to the other group (Peachtree), the ads you mention are obnoxious.

[DumbAss Tanker]

My BIL had an electrical accident that cost him his lower right arm. He survives on the settlement annuity.

Is his annual income over a quarter mil?

[The Village Idiot]

Is his annual income over a quarter mil?

lol. nope. But how long before this applies to every annuity?

[DumbAss Tanker]

Well, if they tried that, they probably would run into a real brick wall, because it would affect very large numbers of people.  I'd expect them to try something like means-testing Social Security first, so they could try to sell it as more 'Soaking the rich,' but considering the unquenchable thirst of Democrats for other people's money, about anything is possible.

Their whole approach to taxation is divide-and-conquer; they are trying to hunt down numerically-small sources to screw over, and not from among their own key sacred cows, so that they won't pay a price in pissed-off voters (The actually-living part of their constituency that has a choice about voting Democrat, that is) come election time.  Sometimes their greed outpaces their careful parsing of the electorate, which seems to be where they are headed lately.