Annuities Can Be A Solution To The Most Taxing Of Situations
Its hard to have a discussion about annuities without talking about taxes. That shouldnt surprise anyone. Tax advantages are high on the list of reasons why people buy annuities.
Interestingly, however, tax deferral is not usually the top reason. In todays environment, the number one reason for buying a fixed annuity is safety. But theres no doubt that tax deferral is a consideration in every non-qualified annuity sale. Thats where I want to focus this article.
I dont think it is possible to understand tax motivation without understanding our tax system. Most people think that they pay taxes on April 15 and they are done for another year. Thats not quite right. According to the Tax Foundation, every dollar we earned from January 1 to April 27 went to pay taxes. Thats the bad news.
The good news is that, thanks to the Bush tax cut, it is four fewer days than it was last year. That, however, is all the good news.
On average, Americans pay a total effective tax rate of 32.1%. The average American pays more in taxes than for food, clothing, and shelter combined.
Taxes are so complicated that 56% of Americans pay someone else to do their taxes. Since 1986, there have been about 7,000 changes to the federal tax code, which is now 14,368 pages long.
A government audit of IRS answers to taxpayer questions found the answers inaccurate 73% of the time. The IRSs own audit found its answers wrong 50% of the time. My favorite audit showed that the IRS calculations for interest owed on back taxes are wrong 27% of the time.
The IRSs defense on this issue is that they have to do these calculations manually because their computer system does not have the capability to compute, assess, and store all the necessary tax law rules that will allow for complete and accurate systemic interest calculations. You try that argument! Is it any wonder that people hate paying taxes?
In the IRSs defense, they dont write the laws, Congress does. The IRS just vigorously enforces them.
Okay, weve covered tax amounts and tax complexity. But were not done. What about tax fairness? Have you ever noticed, in national polls on tax cuts, it is fairly evenly split between people who support them and people who oppose them? Why would anyone oppose a tax cut? Some might think we are undertaxed; some might think we need more government programs and are willing to pay up; and some might think the government should control everything and take 100% of our money.
Does 50% of our population fall into these categories? That doesnt seem right. Theres one other possibility. How about the people who dont pay any taxes? Our tax structure (according to the IRS) is such that the top 50% of income earners pay 96% of the federal income taxes. The top 25% of income earners pay 35% of the federal income taxes. The top 10% pay 66.5%, the top 5% pay 55.5%, and the top 1% pay 36.2% of federal income taxes.
Many would argue that this isnt fair. Again, is it any wonder that people hate paying taxes? Is it any wonder that 50% of the people favor tax cuts? Its no wonder when you know 50% of the people pay virtually all the taxes.
What does this mean for annuities? Well, it means that your clients are anxious to find ways to gain some control over this taxing albatross. This is a large part of what any accountant, planner, tax attorney, or agent will be doing; that is, finding ways for people to keep more of their hard-earned money for their retirement years, and for their children and grandchildren.
Annuities arent the answer for every person or every situation. But they do represent a phenomenal way to save for retirement with much more tax efficiency. The tax-deferred nature of annuities allows your client to control when taxes are paid. This is a huge advantage, as you not only earn interest on principal and interest on interest, you also are earning interest on what you would otherwise have paid in taxes, had you not been in an annuity.
Annuities have many attributes. Take the time to understand all of them. Pay particular attention to tax advantages and your clients motivations surrounding taxes. If you take the time to understand this and position annuities appropriately, your clients will have a better retirement and so will you.
Thomas F. Streiff, CFP, CLU, ChFC, CFS, is a partner of NxtStar Ventures, LLC in Chicago, Ill. He can be reached at: firstname.lastname@example.org
Reproduced from National Underwriter Life & Health/Financial Services Edition, May 13, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.