<p>H and I met with our financial advisor today. In response to a question on minimizing our current taxes (primarily AMT), he suggested that we look at a tax deferred annuity. As I understand it, you put in the amount you want and any earnings grow tax free. You pay taxes on the earnings when you withdraw it (hopefully, you are in a lower tax bracket then). Withdrawals have to be after 59 1/2 or there is a penalty.</p>
<p>Sounds similar to the 401K/IRA. Any thoughts on these?</p>
<p>What is your return?</p>
<p>I would not buy anything unless you understand what you are buying.</p>
<p>I never liked the idea of annuities much. In the end, it seemed to boil down to a bet on whether you would outlive the actuarial tables that they use to calculate the annuity amounts. Most of those tables, I think, are up to date now for the modern life spans. And if you die immediately after purchasing an annuity, You and your heirs lost the bet. Maybe a deferred annuity is different…I’m not sure. You also have the risk of an aggressive company quoting returns that they can’t make. </p>
<p>You can get some pretty good discussions of these types of issued on Bogleheads. </p>
<p>So earnings grow tax free, but the contribution is or is not tax deductible? If not, it won’t reduce your AMT, of course. Are you maximizing your Roth, and if not eligible for a Roth, are you both doing a back door Roth? Though that could be a small amount if you’re talking about a very high income.</p>
<p>Fees are usually high for tax deferred annuities.</p>
<p>You might want to check that.</p>
<p>Yep. Sometimes the fees will negate the tax advantages.</p>
<p>I am not a fan</p>
<p>Seems like the use case would be for those who have already loaded the usual tax-deferred accounts (401k/403b/IRA/etc.) to the maximum, and would like additional tax-deferred accounts. Even then, the usually high fees and lower transparency on the investments can make them relatively unattractive.</p>
<p>Some mutual fund companies offer funds wrapped in the minimum allowed insurance contract to make them into annuities at the minimum possible cost, but they are still more expensive than those same mutual fund companies’ regular funds.</p>
<p>It always sounds like they are one of those things that will be very beneficial to your financial advisor. So of course he would highly recommend it. It seems like the only way to do it was to be in a low/no cost one by Vanguard, or some such reputable organization, to minimize the fees.</p>
<p>Here is an interesting site: <a href=“How The Smart Money Uses Tax-Deferred Annuities”>http://www.forbes.com/sites/baldwin/2011/05/17/how-the-smart-money-uses-tax-deferred-annuities/</a></p>
<p>I have to wonder why your advisor would have you seek out a tax deferred solution to your question about minimizing AMT. As far as I understand, this is not tax deductible, and won’t lower your AMT a cent. It just gives you the advantage of paying taxes on the growth later on. This sounds like the wrong answer to your specific question.</p>
<p>And why not a Roth or backdoor Roth first, where you never pay taxes? Unless you’ve already done that or are talking large amounts of money.</p>
<p>What is the value of tax savings if your earning will be negligible in an annuity? A decade ago, I had some 401k to rollover. A close friend pitched a certain tax-deferred annuity. I didn’t trust it but the person was a close friend. I decided to put half in a no-fee Health Sector mutual fund and the other half in the annuity. As of today, the mutual fund investment tripled in value. Compare that to the annuity’s measly 5% return after a decade. Well, it was negative during 2010 to 2011 but thanks to QE it now passed break-even. The upside is your heirs are supposed to get the highest market value of the annuity so no need for you to worry if you die during a market crash.</p>
<p>I suggest max out your 401ks, IRAs, Health Savings Account and scale in some money in good dividend stocks and/or ETFs as long as it doesn’t have a bubbly P/E.</p>
<p>An annuity like many other investments can have a placed in your portfolio. Much like you should not put a majority of your portfolio in a single asset allocation, an annuity fits in the same category. However, after reviewing the fees and depending on what the guaranteed rate of return is, it can be a useful part of a balanced portfolio. It is a hedge against market experience and along with social security provides a consistent stream of income. Someone posted that you lose everything if you should die. Not true as there are numerous benefit options to choose including joint and survivor options.</p>
<p>h</p>
<p>I do need to do more research on this. But for some basic background, we max out our 401K accounts and cannot do a ROTH due to income levels. We were looking for another vehicle - the annuity seems like one where earnings would grow tax deferred. Yes, it most likely won’t change anything in terms of AMT - I think he recommended it only cause it was tax deferred. And this advisor doesn’t make anything off of us - he’s our personal advisor at one of the top brokerage firms, assigned primarily because our balance exceeds a certain amount 
He has occasionally pitched their hands-on financial advising - but he knows we won’t bite :)</p>
<p>As I understood it, the annuity offered by the firm lets you pick from several mutual funds, including one that tracks the S&P 500 (just as an example). The fees are higher on these - I haven’t looked into exactly how much higher. You can also set up the annuity to auto-balance so it stays as a 60-40 allocation amongst the funds you pick. I don’t believe there was anything in there about losing it all if you die …but then again, I do need to do more research. First glance, it appeared as just another tax deferred vehicle, similar to the 401K plans except that the money you put in there was after-taxes.</p>
<p>Depends on how much money you’re working with. You can do a backdoor conversion Roth IRA when you make too much for a deductible Roth IRA (just search the web for more info). </p>
<p>I’d consult your tax planner and CPA if you want to optimize income and assets in the way best for you instead of an anonymous board, where none of us know details relevant to the options appropriate to you and your unique situation. </p>
<p>Annuities can be good–with a solid company for the right client. Keep in mind that you will likely want to be collecting for decades and need to be sure the business will still be in operation and solvent. </p>
<p>COLA increases can be a very important thing to consider as well, especially when inflation kicks in over the years. Guaranteed payout, whether the annuity is for one person’s life or a joint life expectancy, all of these factors affect the cost of the annuity. </p>
<p>FWIW, we did have the opportunity to convert some of H’s accounts into annuities when he retired. We opted not to because to US the interest rates were too low and we were fine just taking the RMDs from these accounts. H also has a pension, scheduled to pay for the rest of his life and at a lesser amount for my lifetime. </p>
<p>If we were worried about lifetime cash flow, would have considered annuities more carefully. </p>
<p>Post your question on bogleheads.org.</p>
<p>IMO, the only annuity worth considering is a SPIA (single premium immediate annuity). The others remind me of vacation timeshares; ask anyone who has ever tried to extricate themselves from either. You literally can’t give them away. </p>
<p>“I do need to do more research on this. But for some basic background, we max out our 401K accounts and cannot do a ROTH due to income levels.”</p>
<p>Yes, you do need to do some research. Do a backdoor Roth before you do an annuity! Doesn’t matter how high your income is, at least you can do 6.5K/person tax free first (if you’re over 50). Why look at tax deferred first when you can do tax free? Then do tax deferred.</p>
<p>" I’d consult your tax planner and CPA if you want to optimize income and assets in the way best for you instead of an anonymous board, where none of us know details relevant to the options appropriate to you and your unique situation."</p>
<p>This may be one of the first times I’ve disagreed with HImom. We here, have plenty of experience and information (some are professionals, some very wealthy), and we aren’t getting any monetary gains from steering you wrong. Sure, you may have the most awesome CPA and tax planner in the world, who know all your details. On the other hand, you may have people looking at their own interests or too busy to really pay attention to your issues, and just giving you generic advice. Definitely need to listen to them, research on your own, and listen to people here… and do what makes sense. Which sounds like exactly what you are doing!</p>
<p>If your income is high enough you may consider defined benefit. You can shelter upto $2 for $1 earned income. However, the cost of creating such instrument is high and every year you have to pay few thousand $ to maintain. It is for the real high income person, maybe in the 500k or above.</p>
<p>I guess I should talk about financial advisors, since I rarely ever consult with financial professionals and even more rarely take any advice they give. I do my own research and just try to get confirmation. We have a backdoor ROTH IRA for 2013 for me (can’t do it for H, since he is over 70). I am pretty aware of their interest in making a profit from MY money, so I do take any thoughts they have with a HUGE lump of salt.</p>
<p>Basically, it is a REGULAR non-deductible IRA (which anyone can take as long as they and/or their spouse earned at least the $5500–or $6500 if you’re 50 or older). You can then convert it to a ROTH IRA and let the investment grow tax-free. You are funding the IRA with money that has already been taxed. There are a few wrinkles to be aware of–the main one is that you can’t have any other regular IRAs around if you want to rollover the IRA into a ROTH IRA. </p>
<p>I’d carefully read up about backdoor ROTH IRAs and consider whether this might be a good vehicle for you. Have decided it is great for me at this time, but had to roll my traditional IRA into my 403 plan before starting this process so I had no unconverted traditional IRAs. It should work out fine–my broker was surprised I new about it and mentioned it and said that she’s considering it for her & her H.</p>
<p>
@straightshooter, I think you misinterpreted what dadx said. He is not saying one loses everything if the owner dies. I believe, what he is saying is beneficiaries receive less than the investment amount if you die in year 1 or 2 of the contract. For example, if you invested $100K in a tax-deferred variable annuity and you die in Year 1, your beneficiaries receive the current contract value which, in this brochure example I’m looking at, is $97K and in Year 2 is $98K.
This sounds like the same one I bought. I would do what IxnayBob advises. Goggle bogleheads and the tax deferred annuity products you are considering.<br>
No, don’t do the auto-balance. If you decide to go ahead and purchase this product, due your own diligence, and do the rebalancing yourself. What if the auto-balance is done when the mutual funds you’re exiting from is priced at 52 week low and the mutual fund you’re exchanging into is at 52 wk high? You just did a sell low, buy high transaction.</p>
<p>Also check out the company’s rating. <a href=“What Are Financial Strength Ratings (And Why Are They Important)? | Annuity FYI”>http://www.annuityfyi.com/safety_ratings.html</a></p>
<p>OP you said your advisor won’t receive any commission. Ok but for others here is something good to know. WSJ’s Jason Zweig recently wrote an article and said:</p>
<p>“One adviser recently forwarded me two emails he had received from Table Bay. The first offered a Maserati to advisers who sell at least $7.5 million in annuities in 2014 and a BMW, Range Rover or Porsche for at least $6 million in sales. The second email linked to a flier for a seminar featuring an index annuity paying a 9% commission. The flier promised that the seminar would help convert “shoppers” and “plate-lickers” into customers, producing “HUGE commissions."</p>
<p>Could awarding Maseratis and other luxury cars encourage advisers to favor high-fee products that might not be ideal for clients?”</p>
<p>IMO, here are the pros and cons of tax deferred annuity products that have mutual fund like investments.</p>
<p>Pros:
• The guaranteed death benefit less withdrawal charges (usually $0 after x number of yrs). The product I have guarantees my beneficiaries the highest contract value w/c is roughly the highest market value of your portfolio of mutual fund at any point in time.</p>
<p>• Depending on the funds you pick, most likely the returns are better than an IRA CD.</p>
<p>Cons:<br>
• If you decide to close the account, the highest contract value doesn’t apply. You receive the current portfolio balance less withdrawal charges. You don’t really want to close the account during a market crash since most likely the portfolio balance is less than your original investment amount . I believe the best time to receive the highest contract value is when you die in the contract year with no surrender charges. In my case, it is year 9 or later. So, IMO, this product benefits your beneficiaries rather than you and only if you die at the correct time. Feel free to enlighten me if I am wrong.</p>
<p>• I believe annuity gains distribution will be taxed as ordinary income compared to the long-term capital gain tax break you get when you redeem mutual funds/ETFs/stocks. </p>
<p>• Limited mutual fund choices vs the numerous options you have with a brokerage IRA.</p>
<p>• The fees, the fees. Like administrative charge, mortality and expense risk charges. Let’s take my case as an example. Recall [my</a> post]( <a href=“Tax deferred annuity - pros/cons? - #10 by Krlilies - Parent Cafe - College Confidential Forums”>Tax deferred annuity - pros/cons? - #10 by Krlilies - Parent Cafe - College Confidential Forums). I don’t pay any annual fee with that particular IRA invested in a mutual fund and yet it tripled in value whereas about x% is deducted annually from my annuity with measly returns and yes, even in 2010 and 2011 when the returns were negative! </p>
<p>There may be other annuity products which offer the pros I cited without the negatives. I’d love to hear about them….with free lunch or dinner. 8-></p>
<p>
Good for you Himom. I wish I had guts to do the same - my IRA has both pre- and post-tax money, and if I move all my pre-tax money into a 401(k) in a reverse rollover, technically, I should be able to convert the amount which has already been taxed into a Roth, presumably with no tax implications, and all future earnings will be tax free. I think this is the case, but since I’m already over 60, I’m just procrastinating.</p>