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IRS alert: The tax advantages of annuities

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A recent report by The Insured Retirement Institute shows what many of us already knew: There are tax advantages to annuities — duh. The basics of that statement is not the insider information; it’s the little details the study uncovered.

For instance, “the report found that the tax deferral of annuity earnings is of greatest benefit to middle income Americans, who comprise the largest segment of annuity owners. With 80 percent of annuity buyers having incomes less than $100,000 and 64 percent earning less than $75,000, insured retirement strategies clearly play a significant role in the retirement income planning of middle class Americans.”

I spoke with IRI President and CEO Cathy Weatherford to get a read on how advisors can take advantage of that information.

“Advisors work with clients and talk about risks and retirement,” Weatherford said. “Right now, this week, everyone has one thing on their minds: taxes. Everyone is thinking: How do I reduce that tax liability in the future? Here’s what advisors can do: Meet with your clients. Talk about tax risks in retirement planning as a key part of the overall plan.”

Here are some other takeaways from the report.

  • Fifty-six percent of annuity owners in the research said deferral of taxes on that inside buildup was one of the key reasons they chose the annuity in the first place.
  • Because of this tax status, it encourages Americans to move toward long-term saving.
  • “Insured retirement strategies are designed with the goal to help provide guaranteed retirement income for all consumers who seek to ensure a stable and secure financial future.”
  • “The report proves these products are indeed serving those whom need them most – hard working middle class Americans.”
  • “Today, the personal responsibility attached to retirement income is at an all-time high. Millions of Americans are looking for ways to provide themselves with the ‘mailbox money’ that will give them a guaranteed paycheck for life. Annuities, and their tax deferred status, are uniquely poised to provide middle class Americans with the retirement peace of mind they seek.”
  • The removal of the tax-deferred status of annuities would not necessarily increase the tax revenue generated by the products. Yet it might result in the reduced use of annuities among the population that has come to rely on them most, the middle class.
  • There is a strong tie-in between tax deferral and retirement income, as the removal of tax deferral would require investors to tap other personal assets to pay for taxes on the annual build-up within the annuity, resulting in a lower level of funds available for retirement.
  • The tax-deferred treatment of the inside build-up within an annuity can amount to a significant sum over a period of many years, often resulting in a higher level of savings available at retirement compared to a similar investment that incurs income taxation every year.


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