A recent private letter ruling (“PLR”) offers tax relief for the annuity-owning clients of registered investment advisors. Issued by the IRS in August, the ruling allows fee-based advisors who manage client assets in non-qualified annuities to bill from them directly without creating a taxable event.
Because of the positive impact on client experiences, many financial experts consider this a landmark ruling. These experts also predict that RIA adoption of advisory annuities will increase as a result.
Historically, when fee-based advisors billed fees directly from these accounts, the money was treated as a distribution to the client and taxed as ordinary income.
Taxes weren’t immediately assessed, so a client only felt the sting in the following year, when a 1099 arrived. Essentially, they received a tax bill for money they never actually received or physically paid out to their advisor. And that tax bill arrived well after the fact.
This terrible user experience is worse for folks under the age of 59½. They pay an additional 10% penalty. This threat of annual 1099 headaches presents a tremendous barrier to the adoption of annuities by IARs of RIA firms. Offering significant relief, the August private letter ruling changes all of that.
Private Letter Ruling Restrictions
Note that the private letter ruling comes with restrictions:
- The advisory fee must not exceed 150 bps.
- The annuity must be a non-qualified contract.
- The annuity must be a commission-free annuity.
- Only the contracts/policies of those carriers who received the private letter ruling qualify for this tax treatment.
- Many of our platform partners are among the group of insurance companies who received the original PLR from the IRS. Those who weren’t have hired outside counsel and begun to file for a PLR of their own.
Currently, some insurance companies restrict direct fee-billing to specific advisory products. Be sure to reach out to your RetireOne Relationship Manager for specific details and book some time to review.