FIxed Annuity

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Jul 25, 2007 1:03 pm

Is there any reason to own one with Non-qualified funds?


Situation: Perspective client has 600kNQ 450kQ.


Pension and social security for him and wife totals 9k a month.


He doesn't need income from his investments.  He is not really comfortable with munis and the fixed annuity is the last thing that comes to mind to keep his taxable income from increasing.  However, the tax hit in the end really negates the tax deferral. 


Any Ideas?


Jul 25, 2007 1:21 pm

How does the tax hit negate the tax deferral? What is his effective tax rate? Qualified money is taxed at the ordinary rate, too. Does the tax hit in the end negate the tax deferral of an IRA?


You shouldn't be advising in favor of or against products that you don't know much about.

Jul 25, 2007 1:25 pm
the word:

Is there any reason to own one with Non-qualified funds?


Situation: Perspective client has 600kNQ 450kQ.


Pension and social security for him and wife totals 9k a month.


He doesn't need income from his investments.  He is not really comfortable with munis and the fixed annuity is the last thing that comes to mind to keep his taxable income from increasing.  However, the tax hit in the end really negates the tax deferral. 


Any Ideas?




Did you mean to ask, "Is there any reason to own one with QUALIFIED funds?"?


I hope so.


The reason to own one with non-qualified funds is to gain the advantage of tax-deferred growth (as in qualified money).


He can still GROW his non-qualified money in a VA.  Why not use a VA to get the growth he'd like, downside protection, death benefit, and tax-deferral?

Jul 25, 2007 1:33 pm

Does the tax hit in the end negate the tax deferral of an IRA?


Sometimes.  It often means trading income tax for capital gains tax.  It is also very possible for someone to be paying more taxes in the future.

Jul 25, 2007 1:38 pm
anonymous:

Does the tax hit in the end negate the tax deferral of an IRA?


Sometimes.  It often means trading income tax for capital gains tax.  It is also very possible for someone to be paying more taxes in the future.



Did you know that absolutely NO DOLLAR is EVER taxed at the TP's highest marginal rate?

Jul 25, 2007 1:52 pm

No, i asked the right question.  I understand tax deferred growth, rather question the value.


It does not negate tax deferral, but the value in the end is less.


Annuity:  600k @ 4.5% for 5 yrs = 747,709-600,000=147k x .65 = 95,550 + 600k = 695,550 


CD:  600k @ 3.43% for 5 yrs = 710,205



Jul 25, 2007 1:54 pm
Jul 25, 2007 1:56 pm
the word:

No, i asked the right question.  I understand tax deferred growth, rather question the value.


It does not negate tax deferral, but the value in the end is less.


Annuity:  600k @ 4.5% for 5 yrs = 747,709-600,000=147k x .65 = 95,550 + 600k = 695,550 


CD:  600k @ 3.43% for 5 yrs = 710,205





Where are you getting .65 from, his marginal tax rate? See my post above. Use his effective tax rate. Also, you may want to tax that CD every year, like the government will.

Jul 25, 2007 1:59 pm
joedabrkr:
Bobby Hull:
anonymous:

Does the tax hit in the end negate the tax deferral of an IRA?


Sometimes.  It often means trading income tax for capital gains tax.  It is also very possible for someone to be paying more taxes in the future.



Did you know that absolutely NO DOLLAR is EVER taxed at the TP's highest marginal rate?




That's an interesting assertion.  Care to explain that?


Standard deduction. Everybody gets at least that much, off the top. Effective rate. I'm surprised you asked.

Jul 25, 2007 2:02 pm

What would you do, BH?  I got to keep this money out of the bank, if possible and prudent.

Jul 25, 2007 2:06 pm

Excuse me, let me clarify, the NQ is going into a VA.


Any ideas for the NQ.

Jul 25, 2007 2:08 pm

Let me clarify my clarification.


Qualified is going VA.  Any ideas for NQ

Jul 25, 2007 2:17 pm
the word:

What would you do, BH?  I got to keep this money out of the bank, if possible and prudent.


What's the money for? What can he handle in terms of risk?

Jul 25, 2007 2:22 pm
the word:

No, i asked the right question.  I understand tax deferred growth, rather question the value.


It does not negate tax deferral, but the value in the end is less.


Annuity:  600k @ 4.5% for 5 yrs = 747,709-600,000=147k x .65 = 95,550 + 600k = 695,550 


CD:  600k @ 3.43% for 5 yrs = 710,205



No way to answer you without more information.


Is he going to withdraw the annuity in a lump sum at the end of 5 years or just begin withdrawing income annually?  Is he still going to be in the same tax bracket in the future as now?  Your assumptions of income taxes seem a bit out of wack.


When does he need his money back or access to his funds?  Does he plan to leave a lump sum to beneficaries?  Is he insurable?  Age? What does he plan to do with this money? 


What's wrong with a AAA muni bond portfolio?

Jul 25, 2007 2:32 pm
Dust Bunny:
the word:

No, i asked the right question.  I understand tax deferred growth, rather question the value.


It does not negate tax deferral, but the value in the end is less.


Annuity:  600k @ 4.5% for 5 yrs = 747,709-600,000=147k x .65 = 95,550 + 600k = 695,550 


CD:  600k @ 3.43% for 5 yrs = 710,205



No way to answer you without more information.


Is he going to withdraw the annuity in a lump sum at the end of 5 years or just begin withdrawing income annually?  Is he still going to be in the same tax bracket in the future as now?  Your assumptions of income taxes seem a bit out of wack.


When does he need his money back or access to his funds?  Does he plan to leave a lump sum to beneficaries?  Is he insurable?  Age? What does he plan to do with this money? 


What's wrong with a AAA muni bond portfolio?



DB,


THere's nothing wrong with muni's except the guy isn't comfortable with them. No use trying to force them down his throat when there's other stuff to sell him.

Jul 25, 2007 2:37 pm

The VA with the NQ is about as much as he wants to put at risk.  He told me that he wanted an FDIC insured product for the other 600k.  And this is the right level of risk b/c he doesn't really need the funds to produce income for him to live. 


Now we know that this isn't the best idea, so i thought of the FA b/c of tax deferred growth.  But questioned its value on the earlier analysis.  He will not annuitize.


I agree about the Bonds.  And that is the answer.  I've got to get him to wrap his head around it.  Thanks!

Jul 25, 2007 2:39 pm

Did you know that absolutely NO DOLLAR is EVER taxed at the TP's highest marginal rate?


You are correct as long as we look at it as one pot of money.  So what?   This still doesn't change the fact that tax deferral is not always a good thing.  

Jul 25, 2007 2:45 pm

THere's nothing wrong with muni's except the guy isn't comfortable with them. No use trying to force them down his throat when there's other stuff to sell him


I meant, why doesn't he like AAA muni bonds?  How about Treasuries or even GNMAs?  Not GNMA bond funds but the actual thing.


I didn't mean to annuitize the annuity. I was asking if he would be taking income after 5 years (assuming that is the end of the surrender period)


Lots of times what clients say they want and what they really want and NEED are different.  Its our job to explain the investments, educate them and steer them to the right products.  Don't just roll over and give the guy CDs without a fight anyway

Jul 25, 2007 2:50 pm
the word:

He doesn't need income from his investments.  He is not really comfortable with munis and the fixed annuity is the last thing that comes to mind to keep his taxable income from increasing.  However, the tax hit in the end really negates the tax deferral. 


Any Ideas?





As an inexperienced person I am not commenting directly on the investment options, but from what you said it seems that you think and you expect that others would say Munis might be best. If that is true the only reason for not putting him in munis is his discomfort.


In my experience, in every profession I have worked, people are uncomfortable with things they don't understand. Question him to determine the true reason for his discomfort, and if it is not a valid reason help him understand why you, as the professional, would recommend munis and how they would best benefit him. It sounds like your biggest concern is keeping the money out of the bank not doing what you believe is best. CDs do nothing to decrease taxable income and increase it annually. Solidify your position as the pro by making him see the mistake involved in his thinking.

Jul 25, 2007 2:50 pm

Fixed Annuities are not a bad way to go.  The Hartford CRC Select is paying 5.15% on 5 years (I believe).  Too bad it is a measly 2% GDC...