Self Funded Non Qualified joint survivor annuity purchased with $100,000 in 2011

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Nationwide Insurance sent us a 1099R  with box 1 showing $10,500 (Gross Distribution), box 2a showing $10,500 Taxable amount! Also, box 9b is left blank (not showing our $100,000 Contribution)!

I called them and asked why none of our initial investiment of $100,000  is used to reduce the taxable amount in box 2a. Their response was they use Last in/First our and not the exclusion Percentage that IRS Pub 575 does.

Was I right in telling them they had to reduce the taxable amount in box 2a by calculating the exclusion % using the table VI (both my age and my wife's age) per "THE GENERAL RULE"?

If possible, please cite any other items in Pub575 or US Code I can use when they call me back.

This has become very frustrating for us since we thought Nationwide knew the tax laws concerning self funded non qualified joint suvivor annuities!

Thank you for the help.

[dmertz]

It has nothing to do with LIFO.  A nonperiodic distribution, which is what your Form 1099-R represents, comes first from taxable earnings.  Not until all of the taxable earnings are distributed do nonperiodic distributions begin to tap the investment in the contract.

(Of course if you established the annuity with a single payment, distributions would look like LIFO with earnings being considered to be added to the account after the single payment.)

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Does Nationwide have to use the "General Rule" as stated in Pub575 where an exclusion % must be determined so that a portion of our initial inventiment of $100,000 will be deducted to reduce its taxable amount of Box 1 (1099-R) and show that amount in Box 2a?

Lastly, can they, as they stated to me, use LIFO so no portion of our initial will be used to reduce the taxable amount in box 2a?

I hope you can clairify this for me. Getting old is hard!!

Thanks

[dmertz]

Not for a nonperiodic distribution.  The General Rule only applies to periodic distributions after annuitization begins the payout phase and is no longer being deferred.

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My annuity contract states the the first distribution began on my wife's 65 birthday (11/04/1958) as I am 70. Payments are to continue annually on her 11/04 birthdate until her or my death since we have a joint suvivor annuity.

So as described above, we will receive periodic distributions (annually) on the 11/04 date which means Nationwide has to use the General Rule in calculating the exclusion % that applies to our initial investment of $100,000 back in 2011.

Please let me know if I am reading this right as I have a call coming from Nationwide tomorrow morning. I want to be prepared as much as possible for this call.

Thanks again. My wife and I really appreciate all your help!!!

[dmertz · Accepted solution]

This does sound like the contract has been annuitized which would require the use of the General Rule to determine the taxable amount.  Annuitized contracts are most commonly paid monthly rather than annually, but nothing prohibits an annuitized contract from being paid annually.  The contract might also permit establishing a schedule for taking distributions at regular intervals such as annually without annuitizing, in which case the distributions would not qualify as periodic distributions even though they might happen at regular intervals.