#43345 - 05/14/08 02:29 PM
Single Premium Deferred Annuity
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MMLL
Registered: 05/14/08
Posts: 6
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My college advisor has recommended that I move money out of my 529 and purchase a single premium deferred annuity. This way I would avoid having to report these assets on the financial aid forms. He also assured me that I would not have to pay any penalty and that the appreciation would not be taxable.
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#43346 - 05/14/08 04:12 PM
Re: Single Premium Deferred Annuity
[Re: MMLL]
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itstoomuch
Registered: 01/01/06
Posts: 768
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Need more information. ie What is the expected EFC. Can you afford the college without going into big debt? What can you expect in merit/need aid if you move the money. What type of guarantee or assurance would you have to enable you to get scholarships, grants, waivers, subsidized loans...and would it be worth the effort in taking on another sales charge (annuity) and higher annual expenses?
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#43347 - 05/14/08 05:39 PM
Re: Single Premium Deferred Annuity
[Re: itstoomuch]
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bwilk
Registered: 05/14/01
Posts: 3287
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Also, there is no guarantee that the school your child is applying to will treat the annuity in that fashion. The Federal methodology does remove annuity assets from the EFC calculation, but if the school uses addl methodology then it may be counted anyway. Also, in my research I have found that not all financial aid officers understand how certain types of assets are supposed to be treated.
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#43348 - 05/15/08 01:48 AM
Re: Single Premium Deferred Annuity
[Re: bwilk]
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anonymous
Registered: 03/29/05
Posts: 1996
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What do you mean by "college advisor"? Is he recommending that you buy the annuity from him? If so, he's not a "college advisor". He is a salesman. Being a salesman is not a negative, but you need to understand this.
Did he inform you of the following things?:
1)If there is a gain in the 529 plan, you will pay taxes and penalties.
2)There may be contingent deferred sales charges when you take the money out of the 529 plan.
3)You may be subject to income tax recapture.
4)If he's the salesman, he'll earn money by making this recommendation. If the money stays in the 529 plan, he won't.
5)The money won't be reported for Federal Financial Aid. It may be reported depending on the specific methodology of a private school.
6)The money in the 529 plan, if used for higher education expenses, will all be tax free.
7)The annuity gain will all be taxed as income to the parent when this money is removed from the annuity.
8)The gain comes out of the annuity first. ex. The annuity grows from $30,000 to $60,000 and then $20,000 is removed to pay for school expenses. This $20,000 would all be gain, thus, you will have increased your taxable income by $20,000.
9)If the college money is moved into an annuity, where will the money come from to pay for school?
10)If the annuity is used to pay for school, the following possibilities exists: a)The annuity may have surrender charges b)The annuity may have a penalty to go along with the taxes on the gain (income and not capital gains) c)Since the annuity withdrawal will increase your income, and income is typically more important than assets in financial aid calculations, the use of the annuity over a 529 plan, can easily decrease the amount of aid that your child will get.
11)The expenses in the annuity may be significantly higher than the 529 plan.
12)Making this move may ultimately make no difference at all in terms of aid.
Keep in mind that this is written by someone who likes single premium deferred annuities... in the right situation.
Despite everything that I have written, I am not saying that the single premium deferred annuity is wrong for you. It's really a question of understanding all of the pluses and minuses and making an informed decision. I'm simply guessing that your college advisor is not giving you a complete picture and has personal incentive to steer you in one direction over another. I hope that I'm wrong.
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#43349 - 05/15/08 03:03 AM
Re: Single Premium Deferred Annuity
[Re: anonymous]
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MMLL
Registered: 05/14/08
Posts: 6
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Thanks very much. Yes, I would be purchasing this annuity thru my college advisor. I'm very skeptical because he is always trying to sell me something (life insurance and other annuities). Originally he wanted me to refinance my house and take out $150K. With the $150K he wanted me to purchase an annuity. He said this annuity would pay for college costs and also pay off my mortgage more quickly than if I didn't have the annuity. I did not take him up on his recommendation.
Is it true that if I were to take money out of the 529 and buy the single deferred annuity premium that there would be no 10% penalty or taxes? He did not mention that any earnings in the annuity would be taxable to me.
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#43350 - 05/15/08 03:17 AM
Re: Single Premium Deferred Annuity
[Re: anonymous]
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Drew
Registered: 01/09/00
Posts: 2513
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My guess is in 96.654% of the cases a 529 works as well if not better bottom line for college funding purposes. In a handfull of cases , especially with folks on the edge as to some parental asset inclusion under FAFSA , to reposition an asset into a bucket which under current FAFSA logic is not counted , may well work. It does work under certain fact patterns! Then again this is an obvious loophole and is subject to rather short revision of rules by folks in Beltway. The person very likley has a hefty self interest commission to sell you an annuity.
In some contexts an annuity is NOT a very tax efficient tool and the IRC thghtened the noose a few decades ago. When you go to get your money out what elsewhere might be long term gains taxed as such is by tax code treated as ordinary income, worse, if you want sums out except for some specific approved schemes you are taxed on first sums out as if they were 100% pure income, no prorata stuff, so access to you money can be a real tax killer. Not to mention some plans have hefty exit or withdrawal charges.
At least one college advisory service I know is essentially designed to sell you annuity solutions and part of the advisors job is to sort out easy to liquidate and move assets......advisor is commissioned on his annuity sales.......
It may work for you--but I strongly suggest you run thru your own anaylsis--with attention to all the points raised by anonymous above.....
There may be lots of other ways to trim down counted assets if thats what you think you need to make your aid picture work. Keep in mind that even if you picture looks perfect as to high aid need, some person on the other side may be of view you can aford it/you have it stashed someplace ---so they offer you a great aid package made up largely of LOANS not grants.
I've met folks on the college side of the aid equation who essentially have the view if you can afford to live in (XXY or YYY section of ABC) then you can afford to pay!
_________________________
Drew
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#43351 - 05/15/08 03:47 AM
Re: Single Premium Deferred Annuity
[Re: Drew]
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bwilk
Registered: 05/14/01
Posts: 3287
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Refinance your house to purchase an annuity? Always trying to sell you some type of annuity or life insurance?
To quote my favorite Monty Python movie, "Run away".
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#43352 - 05/15/08 03:59 AM
Re: Single Premium Deferred Annuity
[Re: bwilk]
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anonymous
Registered: 03/29/05
Posts: 1996
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"Is it true that if I were to take money out of the 529 and buy the single deferred annuity premium that there would be no 10% penalty or taxes?"
That's only true if the 529 plan has no gain. Any gains will be subject to income taxes and a 10% penalty.
"He did not mention that any earnings in the annuity would be taxable to me."
The earnings in the annuity will grow tax deferred. This is very different than being tax free.
It APPEARS as if you are working with someone who cares about his commission and not your well being. I'd venture a guess that he is not securities' licensed and thus can only make money selling fixed products to you.
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#43355 - 05/15/08 09:39 AM
Re: Single Premium Deferred Annuity
[Re: anonymous]
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Dopps
Registered: 01/23/02
Posts: 1187
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Wow! This is possibly the WORST idea we have seen on this message board in quite some time. It has taxes and penalties written all over it, for all of the reasons Anonymous cites above. Why do you stick with this advisor? About the only change you should make right now is to a new advisor!
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#43364 - 05/18/08 01:40 PM
Re: Single Premium Deferred Annuity
[Re: Dopps]
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TexasCFP
Registered: 08/23/01
Posts: 762
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What qualifications does this insurance salesman have to call himself a "College Advisor"? Anything this guy says must be heavily discounted and from some of your comments is probably both wrong and misleading, both violations of sales rules and possibly state laws.
_________________________
David Hollands, CFP
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