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How to Categorize Fixed Index Annuity "Index Earnings"?

Wayne Cole

I hold several FIAs in an brokerage account set up as individual holdings (like a stock). Quicken doesn't have various annuity types as investment instrument choices, so it can't "look inside" the FIAs and add the index earnings when paid to each individual FIA. So I have to manually enter them so the overall value of the brokerage account in Quicken tracks with broker statements.

There is no "Index Earnings" available from the Transaction pull-down, so the best I came up with is "Income Reinvested", setting shares and dollar amount for the transactions to equal each other. THE PROBLEM: Those transactions show up as a taxable event and I believe the point of the annuity is that you are not taxed on the growth, but the income when you withdraw or annuitize cash from the contract.

QUESTION: is there a choice in the transaction pull-down list that I can use to increase the value of the FIA by the "Index Earnings" without it showing up as taxable income in the tax reports?

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Pat Sills

I have three variable annuities. I treat each as an account with online services disabled. I occasionally log into the providers, get the current asset value, and update the annuity account.

Monthly, when I receive annuity distributions, they get classified with a distinct category that is included in taxable income reports.

This isn't elegant but it works.

You are correct. Changes in annuity asset value are not taxed until you cash in the annuity and have a taxable long term capital gain/loss. Distributions are taxed as ordinary income unless the annuity is in a qualified account like an IRA.

Sceptic

@Wayne Cole since the annuities are set up as securities, is it possible to update the values by updating the price?

Wayne Cole

When I made the initial entry for the annuities, I used shares=dollars, and when I enter the "reinvest income" transaction for the index earnings I do the same - show increase in shares @ $1 per share.

I just tried the "Add Shares" transaction (at $1 per share) instead and it appears not to generate a taxable income line for the year. However it does seem to capture the "cost" - I guess for later LT / ST capital gains calcs? Anyway, using "Add Shares" seems to be the way to keep the annuity value in line with that reported in the brokerage account WITHOUT showing a taxable income event for the "Index Earnings" payment. After using this method Quicken's account overview for the brokerage account that holds the annuities still matches the statement from the brokerage firm, so at least for now (not annuitizing / withdrawing funds) all seems correct.

Sceptic

@Wayne Cole when you update the value of the annuity by changing the price, there is no transaction entry necessary. When you need to update the value of the annuity, all you need to do is update the price.

Boatnmaniac

@Wayne Cole - It is my understanding that all FIAs are tax deferred annuities. If that is true, then you might want to make sure your account is set up as tax deferred. You can do this on the General tab of Account Details. And after doing that you might want to convert the account from a brokerage to an IRA account. Doing this will ensure that whatever transactions you have in the account register will not be captured as taxable events until the annuities starts to pay (transfer) out benefits from the account.:

If you have other taxable securities in this brokerage account then changing the account is not feasible. Instead, add a new manual IRA account and move your FIA transactions from the brokerage account to this new IRA account.

BTW, I had a FIA until last year that I had set up like this: Created a manual security for the FIA. The initial investment was for XXX of shares @ $1/share. Then each month I would enter an Income Reinvested transaction @ $1/share (I entered them as Dividends but entering them as Interest would work, too). It sounds like that is pretty much what you are doing or want to do. For me the process worked quite well in tracking the value of the FIA without causing any adverse tax implications in Quicken.

Wayne Cole

The problem with this approach is that the FIAs are held in a non-tax deferred brokerage account, and their values are downloaded with other stocks, ETFs and mutual funds AND appear on the monthly statements from the brokerage firm.

So it seems that classifying the FIAs as "Other" in the "Securities Detail" view, then adding shares while keeping price at $1 keeps everything in sync without causing Quicken to generate a taxable event for the "Index Earnings" payments.

Sceptic

FIAs are tax-deferred investments. However, they can be held either within an IRA or as a non-qualified annuity outside an IRA. Because of that, I would verify how the account is actually registered with the financial institution before changing the Quicken account type. The fact that an account holds an FIA does not necessarily mean it should be classified as an IRA in Quicken.

Boatnmaniac

The purpose for holding the FAIs in an IRA in Quicken is so that Quicken properly handles it as a tax deferred account. How it is set up in Quicken has no bearing on how it is actually structured/recorded outside of Quicken and there are no legal issues for doing this. If @Wayne Cole wants the FAIs structured in an investment account holding them in an IRA account rather than in a taxable brokerage account, even though they might not actually be an IRA, is a viable method for managing them.

Or what kind of non-qualified annuity account do you think would be best suited for this?

Sceptic

@Boatnmaniac That's a reasonable workaround if the objective is to have Quicken treat the FIA as tax-deferred. However, since Quicken allows accounts to be designated as tax-deferred without necessarily changing them to IRA accounts, I would probably prefer that approach so the account structure more closely matches how it is held at the financial institution.

Boatnmaniac

Good point. I've never tested out how well Quicken will manage the tax implications if the brokerage is tax deferred and not an IRA. Perhaps @Wayne Cole try that route first and let us know if it will properly manage the dividends/interest as tax deferred and not as taxable income?

Boatnmaniac

Sorry, I'd misunderstood that these FIAs were manual securities. Given that you are downloading them then perhaps the way you are doing it might be the best solution.

The only other option I can think of is to go to Edit Security Details for each of the FIAs and check the box for "Tax Free". That is different from tax deferred but it would stop Quicken from capturing the earnings as taxable events.

q_lurker

QUESTION: is there a choice in the transaction pull-down list that I can use to increase the value of the FIA by the "Index Earnings" without it showing up as taxable income in the tax reports?

Caveat: I've never dealt with a FIA, so take this with a grain of salt.

If all you think you need to do is NOT have your Reinvest transactions show up as taxable, I'd identify the Quicken security as 'tax-free' (Edit Security Details as @Boatnmaniac already mentioned). Now you may still find that reinvestment shows up as income other places that you don't care for; it should be showing up now in those places as (likely) interest income. It may show up same places as simply Interest income rather than tax-free interest income. But the tax reports should keep it 'right' (per your stated desire) as tax-free interest income.

My $0.02 worth.

Wayne Cole

It seems that if I set the FIA security type to "other" (security detail view page), show the initial purchase as shares costing $1 per share then make index earnings a "Add Shares" transactions with cost $0, then the index earnings DO NOT show up in tax reports as taxable income. Further, the "Security Detail View" maintains my initial investment as the cost basis so that if I start taking withdrawals I can easily see (and set) which will be taxable on the "LIFO" treatment of gains (withdrawals take the taxable gains out first before the non-taxable return of principal) and which will be tax-free return of principal.

With y'alls help I was forced to go digging through parts of Quicken I don't frequent and find a solution that works both for the brokerage account reporting and tax reporting rules. IOW I think I found a workaround that allows Quicken to manage an FIA as a security in a non-qualified account.

Thanks.

Sceptic

@Wayne Cole sometimes it can take a few steps forward and backward, but I think your troubleshooting and investigating have led you to a good and workable solution.