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Life Health > Annuities

The skinny on taxes and annuities in 2014

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For high-net-worth customers, taxes are now officially an issue.  

One possible help: Individual municipal bonds and muni-bond funds should be good in 2014–the yields are good, and everyone is so spooked by the “bond” word that munis seem to be hiding in the investment closet.

Variable annuities are an ever-present possibility. Allianz, AXA, Nationwide, Jefferson National and Symetra all have what I think of as trading annuities, products without living benefits and with decent sub-account choices and low fees. Jefferson, one of the granddaddies of the class, has almost 400 sub-accounts. It is only available as an advisory annuity, whereas AXA and Nationwide offer both advisory and C-share models (C-share versions typically may have a 1% surrender fee during the first year; some have no surrender fee at all).

The need for C is easy to explain—if one has a non-qualified VA and he or she is less than 59-1/2, the advisory fees become taxable distributions, that, adding insult to injury, have 10% tax penalties. Qualified advisory annuities have no such problem, making one wonder if Congress and/or the IRS was asleep at the switch.

There can be some tax control for variable annuities, although there’s not much discussion on the subject. An example would be this: Annuity-owner Smith retires the last day of October. He wants to take a withdrawal from his annuity, which he purchased so that he would have a lower tax rate before retirement, but 2013 was a year of mostly work and high pay. So, Smith borrows the amount he wished to withdraw from the annuity from his local bank on November 30th. On January 2nd of 2014, he makes a withdrawal from the annuity (remember, Smith is in a lower tax bracket in 2014, which will be his first full retirement year). He uses the withdrawal to repay the bank, giving him “control” the tax year and rate.  

(Warning: Do not ever use an annuity as collateral for a loan; such will mostly have disastrous consequences.)

Have a great week, and remember that taxes, inside or outside of annuities, may be controlled by planning.


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