At present, the earnings in every annuity grow tax deferred. But there’s a fairness issue here. Why should mutual-fund investors be taxed annually when the same fund, wrapped in an annuity, can be offered with a tax advantage? The administration decided against the tax break for annuities used solely to shelter savings and investments. Deferrals should be granted only to people who eventually “annuitize”-that is, convert their nest eggs into a lifetime retirement income.
The ink was hardly dry on that proposal when thousands of insurance agents leaped for their phones. Their message to customers: buy a tax-deferred annuity, quick, before it melts. But in fact, there’s no hurry. A frantic insurance industry got its lobbyists to work and the Republicans abandoned the idea. Any insurance agent still using a “last chance” sales pitch isn’t giving you the true story.
Whether he knew it or not, however, the president was on to something. Annuities sell briskly, as one of the last tax shelters left. Sales jumped 11 percent in 1990, to a record $45.2 billion. But after tax, annuities could net you less than other investments-that is, unless you listen to the president and annuitize. Fundamentally, it’s a spinach question. You may hate the thought of having to keep your annuity for life, but it’s good for you. Lifetime holders squeeze their annuities for maximum value; short-term holders may pay more in fees than they save in taxes.
An annuity is an investment created by an insurance company and sold by insurance agents, stockbrokers, financial planners and many banks. “Fixed” annuities pay a current rate of interest that isn’t fixed at all; it changes whenever the insurance company says, which may be often. “Variable” annuities let you invest your money in securities and gamble on what the outcome will be. “Single premium” annuities are bought with a lump sum. “Flexible” annuities accept periodic payments. “Deferred” annuities accumulate money for the future. “Immediate” annuities pay you a lifetime income starting from the day you buy. Any annuity will combine three of the above characteristics. For example, it may be bought with a single premium, invested in fixed-rate instruments and tax deferred. (“Qualified” annuities, used in tax-deductible pension plans, are always great buys and not part of this discussion. I’m talking here about “nonqualified” annuities, which you buy with after-tax dollars.)
There’s no dollar limit on an annuity investment. But it costs to come out. You normally pay a 10 percent tax penalty on funds withdrawn before the age of 59 1/2. In most cases, the insurer also charges a penalty if you quit within a specified number of years (usually five to seven). Any earnings withdrawn are also subject to income taxes.
Insurers may levy fees on their annuities, and there’s the rub. If you cash out too soon, the investment won’t be worth the candle. Here’s what buyers need to know:
Annuities make good money only for people who will hold them past the age of 591/2. You also have to hold them past any penalty period the insurer imposes.
Before buying an annuity, stash the maximum the law allows into any tax-deductible plan you qualify for. That includes 401(k) plans, Keogh plans for the self-employed and, for some workers, Individual Retirement Accounts. Even nondeductible IRAs take precedence; they carry fewer fees and are also tax deferred. Then consider municipal bonds. Good-quality 10-year munis yield in the 5.9 percent range today, tax free. That’s more than you’d get from fixed annuities if you cashed out and paid the tax.
Fixed annuities are reasonable alternatives to certificates of deposit, as long as you keep them long enough to escape any surrender penalties, says New York insurance analyst Glenn Daily. Current rates from good companies, on new money put into single-premium annuities: in the 7.25 to 7.5 percent range, reports Joe Rosanswank, editor of Comparative Annuity Reports. Insurers that tempt you with higher rates will doubtless pay less when your contract comes up for renewal. For a list of what the better national companies offer, send $10 to Comparative Annuity Reports, P.O. Box 1268, Fair Oaks, Calif. 95628.
So-called CD annuities, or certificates of annuity, can be moved to another insurance company without costing you a surrender penalty, usually after just one year. But they’re paying only 4.75 to 5.75 percent. That’s better than comparable certificates of deposit but pretty dim when compared with regular fixed annuities.
As for variable annuities, you might have to hold them for 12 to 15 years to equal what you’d get from a comparable mutual fund after tax. That’s because of the variables’ higher fees. Average cost: 2.24 percent a year on a $25,000 investment, according to the VARDS Report on variable-annuity performance. Choose a variable only if you’ll put all your money into its stock fund rather than into bonds or a money-market account. Only stocks have a shot at covering your costs and giving you a decent return.
Buyers of variables need low costs. An extra 0.2 percentage points in expense can make a big difference to your return, says Richard Toolson, who teaches accounting at Washington State University. Two to try: Vanguard’s Variable Annuity Plan (costing 1.2 to 1.3 percent on a $10,000 investment, depending on the fund; 800-552-5555) and Scudder’s Horizon Plan (1.39 to 2.08 percent; 800-2252470). You pay no sales or surrender charge.
But to earn the most from an annuity, you need to convert it to an income for life. That way, your nest egg grows untaxed even while you’re drawing money out. Annuity expert Timothy Pfeifer of Milliman & Robertson argues that savers should not be locked into annuities, in case their circumstances change. And indeed, any law should allow emergency bailouts. But bottom line, Bush’s little fancy serves your interests. A pity that he dropped it. It was one of his few tax ideas that made sense.
title: “The Boom In Annuities” ShowToc: true date: “2022-12-08” author: “William Frederick”
At present, the earnings in every annuity grow tax deferred. But there’s a fairness issue here. Why should mutual-fund investors be taxed annually when the same fund, wrapped in an annuity, can be offered with a tax advantage? The administration decided against the tax break for annuities used solely to shelter savings and investments. Deferrals should be granted only to people who eventually “annuitize”-that is, convert their nest eggs into a lifetime retirement income.
The ink was hardly dry on that proposal when thousands of insurance agents leaped for their phones. Their message to customers: buy a tax-deferred annuity, quick, before it melts. But in fact, there’s no hurry. A frantic insurance industry got its lobbyists to work and the Republicans abandoned the idea. Any insurance agent still using a “last chance” sales pitch isn’t giving you the true story.
Whether he knew it or not, however, the president was on to something. Annuities sell briskly, as one of the last tax shelters left. Sales jumped 11 percent in 1990, to a record $45.2 billion. But after tax, annuities could net you less than other investments-that is, unless you listen to the president and annuitize. Fundamentally, it’s a spinach question. You may hate the thought of having to keep your annuity for life, but it’s good for you. Lifetime holders squeeze their annuities for maximum value; short-term holders may pay more in fees than they save in taxes.
An annuity is an investment created by an insurance company and sold by insurance agents, stockbrokers, financial planners and many banks. “Fixed” annuities pay a current rate of interest that isn’t fixed at all; it changes whenever the insurance company says, which may be often. “Variable” annuities let you invest your money in securities and gamble on what the outcome will be. “Single premium” annuities are bought with a lump sum. “Flexible” annuities accept periodic payments. “Deferred” annuities accumulate money for the future. “Immediate” annuities pay you a lifetime income starting from the day you buy. Any annuity will combine three of the above characteristics. For example, it may be bought with a single premium, invested in fixed-rate instruments and tax deferred. (“Qualified” annuities, used in tax-deductible pension plans, are always great buys and not part of this discussion. I’m talking here about “nonqualified” annuities, which you buy with after-tax dollars.)
There’s no dollar limit on an annuity investment. But it costs to come out. You normally pay a 10 percent tax penalty on funds withdrawn before the age of 59 1/2. In most cases, the insurer also charges a penalty if you quit within a specified number of years (usually five to seven). Any earnings withdrawn are also subject to income taxes.
Insurers may levy fees on their annuities, and there’s the rub. If you cash out too soon, the investment won’t be worth the candle. Here’s what buyers need to know:
Annuities make good money only for people who will hold them past the age of 591/2. You also have to hold them past any penalty period the insurer imposes.
Before buying an annuity, stash the maximum the law allows into any tax-deductible plan you qualify for. That includes 401(k) plans, Keogh plans for the self-employed and, for some workers, Individual Retirement Accounts. Even nondeductible IRAs take precedence; they carry fewer fees and are also tax deferred. Then consider municipal bonds. Good-quality 10-year munis yield in the 5.9 percent range today, tax free. That’s more than you’d get from fixed annuities if you cashed out and paid the tax.
Fixed annuities are reasonable alternatives to certificates of deposit, as long as you keep them long enough to escape any surrender penalties, says New York insurance analyst Glenn Daily. Current rates from good companies, on new money put into single-premium annuities: in the 7.25 to 7.5 percent range, reports Joe Rosanswank, editor of Comparative Annuity Reports. Insurers that tempt you with higher rates will doubtless pay less when your contract comes up for renewal. For a list of what the better national companies offer, send $10 to Comparative Annuity Reports, P.O. Box 1268, Fair Oaks, Calif. 95628.
So-called CD annuities, or certificates of annuity, can be moved to another insurance company without costing you a surrender penalty, usually after just one year. But they’re paying only 4.75 to 5.75 percent. That’s better than comparable certificates of deposit but pretty dim when compared with regular fixed annuities.
As for variable annuities, you might have to hold them for 12 to 15 years to equal what you’d get from a comparable mutual fund after tax. That’s because of the variables’ higher fees. Average cost: 2.24 percent a year on a $25,000 investment, according to the VARDS Report on variable-annuity performance. Choose a variable only if you’ll put all your money into its stock fund rather than into bonds or a money-market account. Only stocks have a shot at covering your costs and giving you a decent return.
Buyers of variables need low costs. An extra 0.2 percentage points in expense can make a big difference to your return, says Richard Toolson, who teaches accounting at Washington State University. Two to try: Vanguard’s Variable Annuity Plan (costing 1.2 to 1.3 percent on a $10,000 investment, depending on the fund; 800-552-5555) and Scudder’s Horizon Plan (1.39 to 2.08 percent; 800-2252470). You pay no sales or surrender charge.
But to earn the most from an annuity, you need to convert it to an income for life. That way, your nest egg grows untaxed even while you’re drawing money out. Annuity expert Timothy Pfeifer of Milliman & Robertson argues that savers should not be locked into annuities, in case their circumstances change. And indeed, any law should allow emergency bailouts. But bottom line, Bush’s little fancy serves your interests. A pity that he dropped it. It was one of his few tax ideas that made sense.
