Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I understand the rules about partial annuitizations of nonqualified deferred annuities (NQDAs) have changed.  Can you explain what has happened?

Answer: The taxation of partial annuitizations was changed as part of the Small Business Jobs Act of 2010.

Under prior rules, an attempt to annuitize part of an NQDA usually meant that the amount used to fund the annuity payments was considered a taxable distribution to the taxpayer in the year the partial annuitization started.  If the taxpayer was younger than 59 ½, the taxable distribution was also potentially subject to the 10% premature distribution penalty tax.

The new law permits, for tax years 2011 and beyond, the partial annuitization of nonqualified annuity, endowment, or life insurance contracts, provided the annuitization period is for ten years or more, or is for the lives of one or more individual. The annuity payments will get exclusion ratio tax treatment, and the penalty tax will not apply.

Basis will be allocated on a pro rata basis between the portion of the contract from which annuity payments are made and the portion of the contract from which amounts are not received as an annuity. A separate annuity starting date will be applied with respect to each portion of the contract from which amounts are received as an annuity.

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