Tax-Deferred Annuity Not a Pension
QUESTION: Seven years ago I bought a $100,000 annuity paying 11.75% interest. It matures in March, 1990, and I will have interest earnings of $117,000 on which to pay taxes. I am 86 years old and in the 38% combined federal and state tax bracket. Can I treat my interest earnings to 10-year income averaging?--R.D.L.
ANSWER: No. A tax-deferred annuity is not a qualified pension plan. So despite your age, you cannot take advantage of the 10- or five-year averaging available to senior citizens when they withdraw funds from their pension plans. Even if you were participating in a 403(b) annuity plan, typically popular among teachers for their pension funds, you would not be eligible for the averaging because this type of annuity is not covered by the averaging.
In a nutshell, the special 10-year income averaging on pension fund withdrawals is available to those who turned age 50 before Jan. 1, 1986. Those who turn 50 after that date are entitled to average the distribution over five years.
Based on what you’ve told us, your investment is simply a common annuity where taxation on the accumulated interest is deferred until the instrument matures. It looks as though you will owe taxes on your $117,000 return.
New Look at Mortgage Interest Payments
Can we start all over on the answer to last week’s question on mortgage interest payments? As you may recall, the questioner wondered why she should be required to begin repaying in full her second trust deed on Dec. 5, just nine days after receiving the loan proceeds. We responded that mortgage interest payments are typically made in advance and that she was prepaying for the month of December.
We spoke too hastily. While some lenders are switching to prepaid mortgage interest, we received numerous calls from members of the escrow, real estate and lending industries saying that our questioner was probably the victim of a mistake by her lender. In fact, these people said, in the vast majority of real estate loans, interest payments are made for the prior month, not the coming one. For example, a payment due Dec. 1 would cover interest for the month of November, not December.
Here’s how a typical loan repayment schedule would work. Let’s say you are getting a $100,000 loan and the funds are being delivered to you on the 20th of December. Interest on the $100,000 for the remainder of December would be deducted from the loan proceeds, but you would be required to repay the full $100,000. Now, your first payment on the loan would not be due until Feb. 1, and it would cover January interest.
So, although we can’t be 100% sure, it is probable that our questioner should not have been required to make a mortgage payment until Jan. 5, and that the request for a payment on Dec. 5 was an error. Says Susan Heidenreich, a financial reporting manager at Downey Savings & Loan: “Everything points to the fact that the lender made a mistake and the loan officer didn’t know any better. It happens more often than you would think.”
A Widow’s Options on Social Security
Q: If my husband dies before me, may I switch over to his Social Security account and receive benefits as his widow? I am 67 and have been collecting benefits on my own account since age 62.--C.A.
A: Yes, since you are already over age 65, when your husband dies you may automatically switch to receiving benefits as his widow. You will receive 100% of what he had been receiving. You are entitled to make this switch regardless of whether you had been receiving benefits before turning 65 either as a spouse or on your own account.
However, if you were under 65 when your husband died, your widow’s benefits would be less than 100% of what your husband had been receiving. The exact amount of these benefits would be based on your age at the time of his death.
