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A big tax break for hybrid annuities

Pay for long term care without paying taxes on an annuity withdrawal.

A tax perk that needs to be publicized. In 2010, you will be allowed to withdraw money from a certain kind of annuity without paying taxes as long as you use it to pay for qualified long term care coverage. All baby boomers – especially those in the highest tax bracket – can thank the Pension Protection Act of 2006 for this new, fortunate development.1

New popularity for an obscure annuity. In the mid-2000s, a new kind of non-qualified deferred annuity emerged – the “hybrid” annuity, structured to provide either a long-term care benefit or a death benefit. It was designed as a less expensive alternative to a traditional LTC policy. So far, these hybrid annuities with long term care riders have been little publicized – but all that is about to change.

Before 2010, you could make a withdrawal from these hybrid annuities without facing penalties or surrender charges – but part of the withdrawal could be subject to tax. Starting in 2010, any withdrawal from such an annuity will be income tax free if the money goes toward qualified long term care. So in 2010, if the $100,000 you initially put into a hybrid annuity with an LTCI rider has grown to $250,000, you can pull the entire $250K out without a tax hit if that $250K will be used to pay for qualified LTC coverage. You wouldn’t even pay taxes on the $150,000 gain of the annuity.1

If you are simply withdrawing small amounts from a hybrid annuity annually to help pay for LTC, those tax-free withdrawals will be taken from the principal of the hybrid annuity and not the gain of the annuity. That is by law under the new tax treatment.2

A tax-sheltered exchange into a hybrid annuity? Sure. The Pension Protection Act also allows you to make a 1035 exchange into a hybrid annuity starting in 2010. So you can exchange an annuity you have now for one with an LTC rider that would permit you to withdraw the entire value of the annuity to pay qualified long term care costs – tax-free and penalty-free.2

2010 is the time to learn more. Could these hybrid annuities prove useful to you in paying LTC costs? Are they suitable for your overall financial picture? You might want to contact your insurance or financial advisor to take a closer look at them and the potential tax break they could offer you.

Guarantees provided by life insurance and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. This material has been prepared for informational and educational purposes only.  It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.  Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

These are the views of the author. and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. 11739 – 2011/6/1

Citations.

1 www.thecompletelawyer.com/financial-matters/retirement-planning-financial-matters/new-laws-mean-important-changes-for-long-term-care-4333.html?nomobile [4/20/09]

www.financial-planning.com/bic_issues/2009_11/the-new-wave-in-ltc-hybrids-2664417-1.html?ET=financialplanning:e907: [11/1/09]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

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For more than 14 years our mission at West Financial Group has been to guide our valued clients to financial security. We strive to address all of your concerns, ensure you understand the products we recommend and take pride in knowing you’re comfortable with the direction and strategy we provide you.

Our goal is to provide a “WOW” experience at every client interaction! We want every meeting, phone call and event to be an interaction worth talking about. We want our clients to be able to say, “WOW, what an experience! I can't wait to tell my friends about our financial professional.”

Whether it’s financial, retirement, legacy planning or optimizing your future wealth, our approach includes understanding your unique situation, exploring your goals and discovering the best way to make the REST of your life, the BEST of your life. By getting to know you and your family, we serve as financial guides who keep your best interests in mind throughout the entire process.

Skip West | Financial Planner | West Financial Group

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