|
Posted by DFIGTREE on October 12, 2006, 5:01 am
The first question about variable annuities is BUY or DON'T BUY? I am
57, married and retired with one child in college as a senior(ita). The
second question is where should I buy, tax favored accounts (IRA) or
non-tax favored accounts? The TV and radio financial jocks tell you
emphatically DON'T BUY, but are they right? The roll up per centage is
6%, and there are plenty of ratchets and resets, enough to confuse a
blind roofer, but to this blind roofer they look pretty good. BUY or
DON'T BUY?
|
|
Posted by rick++ on October 12, 2006, 9:46 am
> The first question about variable annuities is BUY or DON'T BUY? I am
> 57, married and retired with one child in college as a senior(ita). The
> second question is where should I buy, tax favored accounts (IRA) or
> non-tax favored accounts? The TV and radio financial jocks tell you
> emphatically DON'T BUY, but are they right? The roll up per centage is
> 6%, and there are plenty of ratchets and resets, enough to confuse a
> blind roofer, but to this blind roofer they look pretty good. BUY or
> DON'T BUY?
First, it sounds like you are mixing up two different kinds of
annuities.
The ones with ratches and resets are [equity-] indexed annuites EIA and
considered different than general variable annuities VA.
Avoid the kind salesmen push, because they are likely to have high
commissions
and penalties.
Buying them inside a tax account (401k) is silly, because insurance
products are
already tax deferred.
The conventional wisdom is a little off. It used to be VAs had large
management
fees 3-4% (this includes the mandatory insurance fee which gives it tax
status).
Plus they used to have early withdrawal penalties up to 10%.
Newer VAs sold by Fidelity, Vangauard, etc. have fees as low as .32%
and no
penalty. They contain Fidelity's regular mutual funds, but arent as
liquid. Fidelity
only allows a limited number of trades a year and dont execute
immediately.
Not for market timers.
I havent heard of cheap EIAs yet. If they have a charge larger than
0.25% and
any penalty, stay away.
Although annuities defer taxes, you pay earned income tax rates, e.g.
15, 25, 28, 33% on
the withdrawals depending on your tax brackets.
A capital investment like stock is taxed at 10 or 15% held longer than
a year.
(These rates yo-yo depending on presidential tinkering.)
|
|
Posted by joetaxpayer on October 12, 2006, 10:04 am
DFIGTREE wrote:
> The first question about variable annuities is BUY or DON'T BUY? I am
> 57, married and retired with one child in college as a senior(ita). The
> second question is where should I buy, tax favored accounts (IRA) or
> non-tax favored accounts? The TV and radio financial jocks tell you
> emphatically DON'T BUY, but are they right? The roll up per centage is
> 6%, and there are plenty of ratchets and resets, enough to confuse a
> blind roofer, but to this blind roofer they look pretty good. BUY or
> DON'T BUY?
VA downside;
1) A mortality charge that is often 10x the true cost.
(500K of 10 yr term insurance might cost you $13-1400/yr. This is .28%.
But consider, even after a bad crash, the stock market will not go to
zero. You can safely insure yourself by having term insurance for 1/3 to
1/2 the value of your portfolio. And when you die, it will pay off even
if the market is up). Check the mortality charge on the annuity you are
looking at.
2) Most annuities have surrender fees, starting at 10% the first year,
declining over a ten year period.
3) The initial fee to the seller is likely near 5%.
4) The gains on the annuity do not get stepped up basis on your death,
it's just like inheriting an IRA.
5) The investment choices within the annuity are limited.
6) The gains at withdrawal are taxed at ordinary income rates, while an
investment in a taxable account are taxed at favorable dividend and long
term cap gain rates.
7) Even if you choose a no-surrender fee, low cost, fund (say one
offered by Fidelity), the effect of (6) above negates any tax deferral
advantage over time.
8) even after the surrender fee has passed, there are pre-62 penalties
for early withdrawal. (This wouldn't apply to you, as you'd be 62, I
include for sake of completeness.)
I'm still compiling my list, for sake of an FAQ I hope to author, but
this is it so far.
See http://home.earthlink.net/~elle_navorski/id11.html for further
comment. And google ["scott burns" annuity] for his take on this topic.
VA upside;
1) The seller receives a huge first year commission, and good annual
commissions for the life of the product. (For most VAs)
JOE
|
|
Posted by rick++ on October 12, 2006, 11:22 am
> 2) Most annuities have surrender fees, starting at 10% the first year,
> declining over a ten year period.
OUTDATED.
>
> 3) The initial fee to the seller is likely near 5%.
OUTDATED.
>
> 4) The gains on the annuity do not get stepped up basis on your death,
> it's just like inheriting an IRA.
GOOD POINT.
>
> 5) The investment choices within the annuity are limited.
JUST LIKE MOST 401KS
>
> 6) The gains at withdrawal are taxed at ordinary income rates, while an
> investment in a taxable account are taxed at favorable dividend and long
> term cap gain rates.
TRUE. However if one is investing in ones 30s for income in ones 80s,
there arent many stocks that will turn into dogs in the meantime that
you'll
have to sell early, take gains and pay taxes. Plus gains were taxed
same
as income until 1978 and from 1986 to 1994 and may again.
>
> 7) Even if you choose a no-surrender fee, low cost, fund (say one
> offered by Fidelity), the effect of (6) above negates any tax deferral
> advantage over time.
See explanation for 6.
A VA or EIA might be viable for a late saver or a high income saver
where
current deferred amounts are too paltry. I wouldn't put more than a
fraction
of ones savings solely in one investment vehicle because tax laws and
economic conditions change with time, especially over decades. So a VA
could be a 20% solution for some people, but not a 50% or 100%.
I am very pleased with the tax deferrals in received in one of the
these
"almost free" VAs in the current four year bull market.
|
|
Posted by joetaxpayer on October 12, 2006, 11:50 am
rick++ wrote:
> A VA or EIA might be viable for a late saver or a high income saver
> where
> current deferred amounts are too paltry. I wouldn't put more than a
> fraction
> of ones savings solely in one investment vehicle because tax laws and
> economic conditions change with time, especially over decades. So a VA
> could be a 20% solution for some people, but not a 50% or 100%.
> I am very pleased with the tax deferrals in received in one of the
> these
> "almost free" VAs in the current four year bull market.
Rick, Elle and I exchanged spreadsheets some time back, assuming a .25%
cost (as Fidelity has). Over time, that extra cost was enough to negate
the gains from tax deferral. Can you provide the assumptions you make
when saying that the VA is a solution? If you maintain that the buyer is
in this for the long term, then the only deferral is on the reinvested
dividends or cap gain distributions, no? If we assume the long term 7%
growth, 3% Dividend or near that, the VA buyer is paying .25% for sake
of deferring 3%, that kind of looks like an 8% annual cost (.25/3.00),
the way I look at it.
I am still reviewing prospectuses which include high costs and surrender
fees, I hope those are fewer in number as time goes on.
JOE
|
| Similar Threads | Posted | | Variable annuities not so bad? | October 22, 2008, 8:14 pm |
| Guarantees In Variable Annuities? | July 9, 2008, 4:06 pm |
| variable annuities in an IRA (tiaa-cref) | January 3, 2007, 12:13 pm |
| Variable Annutieis: The truth? | December 5, 2006, 5:00 am |
| Variable Annuity Questions | March 5, 2007, 4:51 pm |
| variable annuity inside 401k | December 19, 2006, 5:31 am |
| Roth 401K versus variable annuity | January 11, 2007, 9:24 am |
| How important is a Variable Annuitys Insurance Company Rating | August 9, 2007, 6:06 pm |
| Annuities | August 10, 2007, 8:14 am |
| annuities question(s) | October 24, 2006, 8:33 am |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap