In this article we outline thoughts and questions to consider with your tax and financial advisors if you are considering a withdrawal from your Annuities to pay for your Entry Fee in a CCRC or Life Plan Community.
Please note: While this page is not tax or financial advice, it is meant to give you a good baseline for a conversation with financial professionals who specialize in tax and retirement account management. A few hours of time with a tax or other licensed financial professional could save you a lot of money in unexpected tax consequences.
Annuities Overview
If you are thinking of ways to pay for your Entry Fee to a Life Plan Community or CCRC, you may be considering accessing the funds you have accumulated within your Annuities. Often, the year you move into a retirement community you may consider a larger than average withdrawal to cover your Entry Fees, Purchase, or Deposits. This may create more taxable income. Reviewing the below questions and thoughts with your financial advisor can help you get a head start to smart planning!
Is what I have an Annuity?
An Annuity is an insurance contract issued by a financial institution with the intention of providing a stream of payments to you at some time in the future.
What kind of Contributions did I make into my Annuities?
With an Immediate Annuity, you make a lump sum investment in return for guaranteed payments for life or for a set period of time.
With a Deferred Annuity, you make a lump sum investment or periodic investments in return for a guaranteed income stream at some point in the future.
Nonqualified annuities are funded with after-tax dollars.
Qualified annuities are funded with pre-tax dollars.
Things to Consider when it comes to your Annuities and funding your Entry Fee in a CCRC:
With a Deferred Annuity, earnings within the account are tax-deferred until they are withdrawn. Withdrawals are taxed as capital gains first and then return of principal after the gains are.
Some deferred annuities have surrender penalties for taking withdrawals too soon. Therefore, you want to be careful to not take any withdrawals without reading the exact details and terms of allowed withdrawals and penalties of early withdrawals.
Many annuities allow you to surrender the annuity or withdraw a portion of the value if income payments have not yet started, but a surrender charge may apply.
Some annuities allow a limited annual withdrawal, such as 10% of your contract value, without a surrender charge
Qualified annuities are purchased within certain retirement plans and are subject to the same rules as IRA’s and other qualified plans such as 401(k)’s. Refer back to https://secondact.com/lifeplan to review a helpful summary on each retirement plan. If you have an annuity within a plan, look at that plan’s specific details for the various tax, timing of withdrawals, and Required Minimum Distribution dates.
Eight questions to ask your tax or financial Advisors before I access my Annuities:
1. What kind of an Annuity do do I have?
2. Was my Annuity part of an existing retirement account? If so, in what retirement account is my Annuity? What are the specific conditions of accessing cash and making withdrawals in that specific account?
3. Can I make a lump sum withdrawal? If I do make a lump sum withdrawal, will I pay any surrender charge or penalties? And, how much can I withdraw without going into a higher income tax bracket?
4. If I do go into a higher income tax bracket what is the likely:
(a) additional federal or state income tax?
(b) Medicare surcharge?
(c) additional portion of my social security income that could be taxed?
(d) higher capital gains taxes if I sell stock during the year because I am in a different tax bracket?
5. If I am under 59 ½, do any of the exceptions to the 10% penalty apply?
6. Does my community determine an annual ratio of medical expenses to total expenses that I can share with my accountant? If so, can I use this information to deduct a portion of my entrance fee and/or monthly fee from my income as a medical or other expense?
7. Can I take advantage of this deduction if I do not itemize and simply take the standard deduction? Or do I have to itemize and is it worth itemizing?
8. Do I have more tax-efficient ways to fund my move into my CCRC or Life Plan Community and pay for my Entry Fee?
A Bridge Loan could be another financing option if withdrawals from retirement accounts are not recommended by your financial advisors.
If after consulting with your tax or financial advisor withdrawing from retirement accounts or selling your securities is not something you want to do, there are other funding options. Second Act provides a Home Equity Line of Credit that can act as a bridge loan to help you pay for your CCRC or Life Plan Community Entry Fees so you can move in first and have the time you need to list and sell your home for the best possible price.
With fast approval, competitive rates, and a special focus on serving seniors, we could help because we understand. Contact us today to learn more about how we can help you navigate your journey to a rewarding retirement.
Important Disclaimer
The information in this page is not meant to serve as financial, tax, or personal financial planning advice. No decisions should be made from reading the information on this page. Decisions should be made after careful analysis and consultation with your financial, tax, accounting, or other professional advisor licensed to provide retirement advice.
Second Act is a Division of Liberty Savings Bank, F.S.B. Member FDIC. Lending and loan services provided by Liberty Savings Bank, F.S.B. NMLS # 408905. Equal Housing Lender. All other services provided by Second Act Financial Services, LLC. This information is current as of 1/01/2023. Subject to credit and loan approval. Conditions and limitations apply. Information, rates and terms are subject to change without notice. © 2023 Second Act Financial Services, LLC. All Rights Reserved.
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