The Internal Revenue Service has announced that billing advisory fees from an annuity in a non-qualified account will not trigger a taxable distribution.
Columbus, Ohio-based Nationwide announced on Friday that it, along with seven other insurers, received a private letter ruling from the IRS stating that the payment of advisory fees from variable, fixed-indexed or hybrid non-qualified annuities would not cause a taxable distribution.
“It’s a big win for our industry,” said Craig Hawley, head of Nationwide Advisory Solutions. “Over the last decade, we’ev been focused on building out in the fee-based advisory space, and one of the biggest friction points has been the ability to pull an advisory fee out of a non-qualified annuity. We’re excited that we’ve gotten this accomplished.”
The IRS’s ruling only applies to fee-based, non-qualified annuities where the advisor receives no commission related to the sale.
Nationwide, citing the IRS letter, said that to avoid a taxable distribution, the advisory fees for the non-qualified annuity, the advisory fees can’t exceed 1.5% of the annuity’s cash value.
“The IRS didn’t want the contract to become a source of payment for fees outside the of the contract,” said Hawley.
The fee would be paid for investment advice to the contract owner specifically related to the non-qualified annuity, according to Nationwide.
Hawley explained that previously, in annuities funded with non-qualified money, advisory fees were taxed like any other distribution of funds from the plan. If the fees were withdrawn before the client turned 59½, the money distributed to pay advisory fees could also face a 10% early withdrawal penalty.
The taxation and penalty issues led some advisors to take their asset-based fees out of other accounts in lieu of taking them from the annuity, which ultimately led to advisory fee “double dipping,” from a non-annuity account to pay for the fees associated with managing the annuity said Hawley.
The ruling aligns the tax treatment of properly structured advisory fees from non-qualified annuities with those from annuities in qualified accounts like IRAs, 401(k)s and 403(b)s.