Retirement Planning/Annuities

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Question
Hello:

Are variable annuities or any annuity a good investment?  Most if not all money that is used to fund an annuity has already been taxed from taxes on a person's paycheck, federal taxes and state taxes, etc.

If this money is invested in an annuity and later withdrawn, it is taxed again, not just the amount that it earns.  So, it appears that the money is double taxed.

I thank you for your reply and comments.

Answer
Dear Kenneth,

It appears that you may have gotten a particular marketing piece that I got last week. Its intent was good, but it was poorly written. As a result it was inaccurate.

There are annuities within Qualified Plans, such as IRAs. Money contributed to these plans has not been taxed. Therefore, all distributions would be taxed.

Other annuities receive contributions with earnings that have already been taxed. Withdrawals from these are taxed on a LIFO basis. LIFO means Last In First Out. Thus the gain would be taxed. Any withdrawal in excess of the gain would be recapture of cost basis, and not subject to income tax.

There are basically three types of Deferred Annuities being marketed.

In order of their creation: Fixed, Variable, and Fixed Indexed (originally called Equity Indexed). Fixed and Fixed Indexed protect the participants' contributions from stock market losses. Variable Annuities do not.

Because of the VA's vulnerability to stock market downturns, I do not encourage participation in them. The others are okay. But there is another consideration.

If you expect to be drawing down your annuities for lifetime income, this is what they are designed for. However, if your intent is to permanently avoid income taxes on the gains, and pass those funds to your heirs, a Modified Endowment Contract would be better. Were you to take distributions from a MEC, your tax and penalty considerations would be the same as with annuities, however the MEC benefit to your heirs would be entirely income tax free.

For more information on annuities and MECs, as well as other life insurance ideas, please e-mail me at willardbrumbaugh@yahoo.com. Or, I would be happy to speak with you.

Willard R. Brumbaugh, LUTCF
CA License 0374776
(888) 792-2379  

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Willard R. Brumbaugh, LUTCF

Expertise

I have answered many questions regarding 401ks, IRAs and annuities as well as life insurance. I have been counselling against most Qualified Plans since 1994.

Experience

Ranked in the top 5 in retirement catagories at Askme.com most of its last 2 1/2 years. Organizations I belong to: National Association of Insurance and Financial Advisors-California
Inland Empire Estate Planning Council


Education/Credentials
Life Underwriters Training Council Fellow

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