As negotiations in the nation’s capital heat up over how to reform the tax code, lower the deficit and avert a plunge off the so-called fiscal cliff, might the tax-deferred status of annuities be rescinded?
According to Judi Carsrud, director of Federal Government Relations, at the National Association of Insurance and Financial Advisors (NAIFA), “everything is on the table,” meaning any tax expenditure is being reviewed to see if it is truly necessary or it can be cut in an effort to slash the deficit. “And annuities, with the tax deferral nature of the growth and the way income is paid from an annuity, puts them, not in the top 10, but on the list of things that could be changed by the time tax reform is completed,” Carsrud says.
At this point in time, with fiscal cliff negotiations ongoing and both sides still in the posturing stage, Carsrud says it is too soon to predict an outcome. “We do know it is being discussed and it was discussed in the past and it was decided to leave it the way it is currently taxed,” she says. “But because they are so desperate for money and because they are looking at other things that are even more cornerstone to our tax code and how we grow an economy, it certainly is a possibility. If we get through the lame duck [Congress] and they resolve some part of the fiscal cliff and they get onto tax reform, we might be able to make a better estimate in the spring.”
If changes are enacted, the effect would be “ridiculously dramatic,” and far reaching, Carsrud says. “It is the [tax] deferred nature of annuities and life insurance that makes them attractive and affordable over a long period of time, and if we lose that treatment I think that the amount of interest at the consumer level will dwindle and therefore, the number of agents making a living in the industry will dwindle and the way the insurance companies price their products will change to still make them profitable,” she explains.
Therefore, any alteration would blunt economic and job growth, “which is what we are hoping Congress will recognize before they do any cutting,” Carsrud says.
As politicians delve deeper into modifying the tax code, a cap on deductions is another possibility being discussed. Again, such a shift would be a similarly harmful blow to annuities and life products, Carsrud says.
“If there is a deduction limit that includes exclusions and deferrals that could negatively impact life and annuity sales by virtue of a consumer choosing to keep his mortgage interest deduction first, for instance, and running out of deductions or hitting the cap,” she explains. “Then, life insurance and annuity products would then fall outside of that cap and become a taxable issue.”
Kim O’Brien, president and CEO of the National Association of Fixed Annuities (NAFA), says she is “optimistic” the industry can convince legislators that revoking the tax-deferred nature of annuities would have a detrimental effect on the retirement savings of future retirees, especially those without access to an employer-sponsored retirement plan. Further, it is so embedded in the tax code that unwinding it would be a massive undertaking, she adds.
“I really don’t think they will rescind the tax deferral of annuities,” O’Brien says. “And more persuasive, this is just a drop in the bucket of what they need” to cut the deficit.
Though he is not privy to legislative wrangling in Washington, Douglas Dubitsky, vice president, product management and development for retirement solutions, at Guardian Life Insurance Co. of America, says his believes the beneficial tax treatment of retirement savings vehicles like annuities and 401(k)s will be preserved. “There will be changes to the tax code,” he says, “but I do believe there will still be tax advantages to personal savings for retirement.”
A more likely regulatory change, he says, is that annuities will be required to have more in-depth disclosures, similar to what is occurring in the 401(k) industry. “You are going to see a push for transparency in products, marketing materials, and product management post-sale,” Dubitsky says. “I welcome that. I do think regulation will become more focused on transparency, more focused on helping people understand the true nature of their benefits and ensuring that consumers get a clear picture of what they are purchasing.”
But tell us what you think. Will the tax-deferred status of annuities be saved from the fiscal cliff?