Accountant, taxes, 1040

Currently, your clients are facing the stress of tax season. They’re gathering documents, filing forms and hoping that, in the end, they get a refund. Throughout the whole process, clients are also getting a reminder of how much tax they are paying on the income produced by their investments. This combination creates the perfect environment for bringing up the tax-deferred nature of annuities.

Here are three reasons why now is the perfect time to bring up the idea of annuities to your clients and tips for how to help them understand the tax benefits:

1. Appreciation for Tax Deferral

After going through this year’s taxes, clients will appreciate learning that there is a financial product – an annuity – that can help them to pay less in taxes next year. Unlike many other financial products which produce taxable income every year, an annuity isn’t taxed until a client makes a withdrawal or starts taking regular distributions. As a result, for a client who is simply letting his or her money grow with interest, the money continues working for the client instead of for Uncle Sam.

2. Tax Savings Plus Compound Interest

Not only will clients see tax savings, but they also can let that savings compound, meaning an annuity can make a client’s money work harder for them. That’s because clients can earn interest on the principal, interest on the interest, and interest on the tax savings. This triple-compounding process is great because the interest from an annuity is not subject to current income tax until it is withdrawn — meaning 100% of your clients’ interest can continue to compound instead of being used toward taxes.

3. Tax-Free Transfers

Clients can look at this year’s taxes and assess where money should be reallocated. And with reallocation to an annuity, they don’t have to worry about taxes. For example, if your client has money in a corporate retirement plan — such as a 401(k), 403(b) or 457 plan — or in an existing IRA, those funds can be transferred into an annuity tax-free. This can be done without any tax implications, as long as the annuity is designated on the application as an IRA. This also applies to general savings, which typically have already been taxed, and Roth funds. For Roth funds, simply designate the annuity on the application as a Roth IRA.

With a Roth IRA annuity, there is an additional benefit. As long as your client keeps the money in the annuity for at least five years before taking a withdrawal, and doesn’t take any withdrawals before age 59½, the withdrawals and interest credits can be completely income-tax-free.

If you have previously dismissed annuities as offering too little earnings potential, consider two facts. The first is that your clients likely haven’t earned as much as you would expect on their existing investments. A recent study by Dalbar indicates that the average mutual fund investor’s annual earnings were only 3.64% in equity funds, 1.78% in asset allocation funds, and 0.40% in fixed-income funds over the past 10 years. The second fact is that with the Federal Reserve increasing interest rates this year, the interest rates available on annuities have increased as well, so you might be surprised at how high the interest rates available today are on many annuities.

One of the most significant rules for you to explain to your clients is that any withdrawal amount taken prior to age 59½ is subject to a tax penalty. This penalty is assessed on a client’s federal income tax return — not by the company that issued the annuity. As the withdrawal amount is subject to a 10% penalty, it’s important to counsel a client that if they put money in an annuity before age 59½, they shouldn’t plan on making a withdrawal until they reach that age.

Tax season is a stressful time. It can be made worse when clients have to watch their savings vehicles take a hit from taxes. That’s why this is the perfect time to talk to your clients about the advantages of annuities. They’re sensitive to what tax implications they’re facing and may be more open to solutions like annuities that can help save them from feeling the pain next tax season.


Chris Conklin

Chris Conklin is vice president of individual annuities at The Standard, where he has full profit-and-loss responsibility for the individual annuities line of business. He is a Fellow of the Society of Actuaries, has sold insurance and annuities, and has co-owned a national marketing organization.