Annuities in an IRA

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May 22, 2006 1:16 pm

[quote=lawsucks][quote=iconsult100]

I think you are coming at this from the wrong angle.  An annuity inside an IRA has no impact on a client's tax situation whatsoever. 

[/quote]

Sure it does.  Assume the client I described above wanted half his money in an annuity with a GMIB and half in stocks.  If I use the non-qualified money for the annuity and the qualified money for the stocks, every dollar pulled out during retirement will be taxed as income.  If I flip the scenario, and us the non-qualified for the stocks, half of his money will be taxed at the capital gains rate.  It seems to me that the first scenario makes more sense for the client, but I thought I would post here to see if there was something else I wasn't considering.

[/quote]

Incorrect-only withdrawals that exceed the basis of the investment in the annuity will be taxed as income.  Too, until you withdraw, taxes on any gains will be deferred.  If you invest the money outside of an annuity, one cannot assume that all(or most)l of the gains will be taxed at the favorable long-term capital gains rate.  Some of the money will likely be taxed at short term capital gains(income rate) and some may also be taxed as income if some of the money is invested in bonds, as would be expected in a balanced portfolio.

We cannot draw concrete conclusions or even make reasonable predictions/estimates with the information given.

Consider, too, the following 'technique' to reduce the tax burden.  Take the taxable money that would be put into VA's.  Split it between two different VA's-preferably from two different carriers.  Make all the withdrawals from ONE of them, but based on the total value invested in VA's.   You will get into the 'basis' amount for the 'withdrawal' annuity more quickly, and as mentioned before any withdrawals of principal are not taxed.  The other will grow tax free.  Obviously you need to run your own calculations to see if this works for you, but it may help with overall tax efficiency of your distribution plan.
May 22, 2006 1:23 pm

[quote=san fran broker][quote=bankrep1]

"One of the major benefits of an annuity is its tax sheltered nature. The reason why the practice of placing them in an ira is frowned upon is that there is essentially double tax deferral on the investments"

Are you a moron?  A stock (with no dividends) is tax deferred too.  Should we not buy a stock in an IRA, because it's essentially double tax deferral. 

That's just plain stupid.  An annuity is a risk management tool not a gain maximizer/minimizer start using it for what it was inteded for transferrring risk.

Remember risk -  Retain, avoid, transfer = (annuity w/riders)

[/quote]

Calling me a moron because you disagree with what I have to say? Very classy.

Eventually you may sell a stock and reinvest the proceeds. This means that there could be taxes if you have made money on it (this may not be a concern for your clients). So, yes, there are substantial benefits to holding stocks in IRAs.

The variable annuity option component includes both a life insurance risk and market / asset class risk. By definition, the risks are distinct and thus, cumulative. There are other alternatives to managing asset class and market risk - particularly these mysterious things called "Portfolio Management", "Duration Risk Management" and "Asset Allocation". Depending upon the asset, futures contracts, forwards, options or other derivatives typically cost substantially less to use than a variable annuity to accomplish a risk management objective.

But you would have to have a Series 3 to do that and your firm would have to allow you to use futures and options, wouldn't you?

Of course, you can't get an upfront commission of 7% on a futures contract transaction, can you? And, isn't that what it's really all about?

[/quote]

He didn't call you a moron, actually.  He ASKED you if you were a moron.  You didn't answer the question.

Personally I think you seem to be pretty smart.  However, I also think you're trying a little too hard to prove it to the rest of us.....
May 22, 2006 2:51 pm

I'm late to the argument, but count me among those that think the argument against putting annuities in IRAs is silly.  My experience with annuity clients is that the tax benefit ranks way down the list compared to guarantee of their principal, guaranteed minimum returns, and guaranteed income stream, with the possibility of significant capital appreciation.  When I mention tax deferral, I usually get an "oh, that's nice".  My whales generally don't care about the guarantee and prefer cap gains rates, which can be largely deferred anyway.

Sure, annuities are more expensive.  Absolutely the tax deferral is redundant in an IRA.  For certain, if a guaranteed annuity is the only way I can get a timid client to expose their retirement account to the stock market, that's what I'll do...every time.

May 22, 2006 4:07 pm

[quote=Indyone]

I'm late to the argument, but count me among those that think the argument against putting annuities in IRAs is silly.  My experience with annuity clients is that the tax benefit ranks way down the list compared to guarantee of their principal, guaranteed minimum returns, and guaranteed income stream, with the possibility of significant capital appreciation.  When I mention tax deferral, I usually get an "oh, that's nice".  My whales generally don't care about the guarantee and prefer cap gains rates, which can be largely deferred anyway.

Sure, annuities are more expensive.  Absolutely the tax deferral is redundant in an IRA.  For certain, if a guaranteed annuity is the only way I can get a timid client to expose their retirement account to the stock market, that's what I'll do...every time.

[/quote]

Couldn't of said it better.....

Are you going to call an annuiyt to expensive and use managed futures in it's place... On the expense argument you are a moron.

May 23, 2006 2:57 am

[quote=joedabrkr]

Personally I think you seem to be pretty smart.  However, I also think you're trying a little too hard to prove it to the rest of us.....
[/quote]

Nope. I'm not working that hard....

May 27, 2006 1:10 am

Joe da broker

Try and use covered calls, synthetics, puts to protect a $500,000 IRA rollover? Go ahead and good luck. Time decay, slippage, transaction costs, POA, it is a nightmare and none of these derivatives are guaranteed to do anything for the client.

Another reason to use annuities is to generate a guaranteed income stream, and if you get caught up in compliance on this one you are barking up the wrong tree. What do most boomers not have? A pension. How can you create one? An annuity. And no, systematic withdrawals are not the answer.

Think about this, there is a sea change coming and you better get versed on immediate annuities both variable and fixed.

May 27, 2006 1:35 am

Ignorence? That’s a rather combative and unnecessary word…



As I understand it, an insurance contract is the only vehicle that IRS

regulations give tax deferral to other than the retirement accounts (401k,

IRA, Roth, etc).



While I am generally of the opinion that annuities are not the best

retirement vehicle, the reality is that the official rulings only allow for tax

deferral on these contracts unless they are legitimate life insurance

vehicles (as I recall, all of the “private placement” policies of a few years

back were invalidated if the IRS found that they were not legitimate

insurance contracts.)



So, if someone wants to save in a tax deferred way and has already

maxed out their retirement plans, then they would have to use an annuity

or VUL or some insurance - type vehicle. Right?



The question appears to be whether tax deferral is worth the cost of

the insurance…

[/quote]



You’re focusing on just one (the most insignificant at that) benefit

annuities provide.
May 27, 2006 4:30 am

[quote=bigdad75]

Joe da broker

Try and use covered calls, synthetics, puts to protect a $500,000 IRA rollover? Go ahead and good luck. Time decay, slippage, transaction costs, POA, it is a nightmare and none of these derivatives are guaranteed to do anything for the client.

Another reason to use annuities is to generate a guaranteed income stream, and if you get caught up in compliance on this one you are barking up the wrong tree. What do most boomers not have? A pension. How can you create one? An annuity. And no, systematic withdrawals are not the answer.

Think about this, there is a sea change coming and you better get versed on immediate annuities both variable and fixed.

[/quote]

I don't know what you're getting at here, buddy.  I never said anything about covered calls, puts or other derivatives on this thread.

News Flash! People have been talking about your predicted "sea change" for a long time now.  It's hardly a big new idea....
May 27, 2006 5:16 am

[quote=joedabrkr] [quote=bigdad75]

Joe da broker

Try and use covered calls, synthetics, puts to protect a $500,000 IRA rollover? Go ahead and good luck. Time decay, slippage, transaction costs, POA, it is a nightmare and none of these derivatives are guaranteed to do anything for the client.

Another reason to use annuities is to generate a guaranteed income stream, and if you get caught up in compliance on this one you are barking up the wrong tree. What do most boomers not have? A pension. How can you create one? An annuity. And no, systematic withdrawals are not the answer.

Think about this, there is a sea change coming and you better get versed on immediate annuities both variable and fixed.

[/quote]

I don't know what you're getting at here, buddy.  I never said anything about covered calls, puts or other derivatives on this thread.

News Flash! People have been talking about your predicted "sea change" for a long time now.  It's hardly a big new idea....
[/quote]

joedabrkr, you really are a horses' behind.  How old are you, anyway?

May 27, 2006 5:47 am

[quote=remotecontrol][quote=joedabrkr] [quote=bigdad75]

Joe da broker

Try and use covered calls, synthetics, puts to protect a $500,000 IRA rollover? Go ahead and good luck. Time decay, slippage, transaction costs, POA, it is a nightmare and none of these derivatives are guaranteed to do anything for the client.

Another reason to use annuities is to generate a guaranteed income stream, and if you get caught up in compliance on this one you are barking up the wrong tree. What do most boomers not have? A pension. How can you create one? An annuity. And no, systematic withdrawals are not the answer.

Think about this, there is a sea change coming and you better get versed on immediate annuities both variable and fixed.

[/quote]

I don't know what you're getting at here, buddy.  I never said anything about covered calls, puts or other derivatives on this thread.

News Flash! People have been talking about your predicted "sea change" for a long time now.  It's hardly a big new idea....
[/quote]

joedabrkr, you really are a horses' behind.  How old are you, anyway?

[/quote]

Wow man, that's original!
May 27, 2006 2:56 pm

Sorry Joedabroker, message intended for bank reps comment on protecting portfolios.

May 28, 2006 3:43 am

I see what you mean, if the client only wants the annuity for the income and immediately withdraws it from the IRA, then it would be treated the same from a tax standpoint as a non-qualiifed account.

So use the NQ funds to buy stocks and Q funds to buy the annuity. It wouldn’t make sense to do it the opposite.