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When Your Annuity Becomes a Tax Time-Bomb

Tax Deferred Annuities issued by life insurance companies have been wildly popular for the last 20 years but never so popular as they have been since the stock market tumble in the year 2000.  Annuities for years have been a popular alternative for people who want high interest and tax relief for their savings. Over the last 20 years, billions of dollars have been invested into these contracts by savers seeking safety, predictability, competitive interest rates and favorable tax treatment.  However,  If you own a tax deferred annuity or are contemplating investing in one, there is something you should know.

One of the  important features of a tax-deferred annuity is that it enables you to compound yearly interest earnings free of current tax. By eliminating the current tax, you can build a much larger account value than with an interest bearing account such as a bank CD.  It is this  feature along  with a slightly higher interest rate than that found in bank savings CD's  that make it is easy to see why tax-deferred annuities are so popular.

Annuities are great so long as you understand that when you begin to withdraw money from the annuity, you must then pay taxes on your gain. The manner in which you chose to take income will determine the method used to calculate taxable income. A simple partial withdrawal  is treated as interest first, which often means the entire withdrawal will be taxable. Only if you set up a systematic annuity income payment, will you get some tax relief by spreading out the taxable gain over the anticipated number of years that annuity payments will be made. This does not reduce the amount that will ultimately be taxable, but it does spread it out the tax burden.

The Potential  Tax Trap
It is at the time of the total withdrawal of funds, (most often occurs upon the death of the annuitant/owner), that the tax trap occurs.

A deferred annuity is the only asset you can own that does not get a “step-up in basis” at the time of your death.  Real estate and stocks that have been owned for years and that have appreciated many fold can be passed on to heirs upon the death of the owner with no income tax whatsoever. But not an annuity. Specifically excluded from the step-up in basis rule, the entire gain in the annuity is subject to income tax when received by the beneficiary.

Since most of the $Billions$ now residing in annuities will end up being passed on to the children of the annuitants, the tax bills will come as a tremendous shock. It is likely that proceeds from an annuity that has been accumulated and tax deferred in a relatively low tax bracket (15% or 25%), incur taxes of 36% or more when added to the existing income of the beneficiary. This clearly was not the intent of the annuity owner.  It occurrs because of a failure to recognize the ultimate disposition of the money on deposit in the annuity.

The Alternative Strategy
There is an alternative to the annuity that will satisfy the objectives of saving money for an emergency and passing any unused balances to our heirs. This alternative provides tax deferral, safety and immediate liquidity. It has the same tax provisions for partial withdrawals as annuities but when it passes to a beneficiary upon the death of the owner, the entire tax-deferred accumulation passes income tax-free.

The product is a special life insurance policy designed not only for maximum cash value growth to duplicate the level of accumulation of an annuity, but to pass significantly more money to the beneficiary when compared to an annuity. The after-tax benefits will be substantially higher if the money in this life insurance policy compared to  an annuity at death. Not only does it include the money which accumulated in the cash value account, but an additional amount of life insurance benefit that is paid to the beneficiary. This combination, paid income tax free, is the most desirable way to pass savings to named beneficiaries.


Call us toll free @  (1-888-456-1858/504-456-1858) for a complete comparison and  analysis of your specific situation,  or  simply   click  Tell me more about the Time Bomb Alternative and we will provide you with a FREE detailed Illustration/ Evaluation via email, fax or U.S. Postal Service, to help you determine if this  right for you:
 

Getting From the Annuity To The Life Insurance Contract
Most people realize the benefit of using life insurance, as  the most efficient way to transfer assets from one generation to another without income taxation.  Unfortunately, there is no way to make a tax-free transfer of the gain from an annuity to a life insurance policy.  The tax has to be paid. The sooner you recognize the income, the less deferred tax, the sooner you have defused the Tax Bomb.

The decision to move the money as soon as possible is the best decision. The sooner this transaction occurs, the less taxes will be paid. It’s acceptable to pay these taxes now because they will ultimately be recouped by the life insurance that will be paid to the beneficiary in addition to the cash value.

Assume a lady (Shelly) who is 70 years old owns a deferred annuity into which she originally deposited $50,000 and it is now worth $70,000. If it continues to accumulate until she is 78 years old when she dies, it will have a value of approximately $111,569. But when her beneficiary receives it, income taxes will be due on $61,569 ($111,569 - $50,000 original deposit). At 33% the taxes would be $20,318 leaving a final balance of $91,251 for the heirs. State income taxes will further reduce this amount.

          ANNUITY    VS     LIFE   INSURANCE  PROCEEDS

WHICH WOULD YOUR HEIRS PREFER?

$91,251 OR $135,000

Retain the Annuity

Purchase Life Insurance Policy

    after paying taxes on the gain.
Original Deposit $  50,000 Surrender Annuity $  70,000
Current Balance $  70,000 Taxable Gain $  20,000
Accumulated @ 6%   Tax @ 33% $    6,600
Value @ Age 78 $111,569 Annuity Proceeds: $  70,000
Death Benefit $111,569    $70,000-$6,600= $  63,400
Tax @ 33% $  20,318 Premium Deposit $  63,400
    Initial Death Benefit $135,000
Proceeds to Heirs: $91,251 Proceeds to Heirs: $135,000
$111,569-$20,318= $91,251 $123,000-$0 Tax = $135,000
  Increase to Heirs ++ $  43,749
Total Paid in Taxes $  20,318 Total Paid in Taxes $    6,600

By canceling  the annuity now, the taxes of approximately $6,600 or less, leaves $63,400 to deposit into a life insurance policy. The death benefit would be approximately $135,000. If she dies at age 78, her beneficiary would receive $135,000 instead of $91,251.  A GAIN OF  48%........

The additional benefit from the life insurance policy much more than compensates for the current taxes Shellie must pay to cancel her annuity and move the money. The money in the insurance policy continues to grow tax deferred  and is available should it be needed for an emergency.

Due to current health, and other factors benefits could be greater or less than this example.  Special riders on these policies that also provide benefits to cover nursing home and convalescent care by making the death benefit available to the insured (prior to death) for these event to help pay for these costs.

Your tax advisor can evaluate your options to determine if this is better  for you than an annuity, or in addition
 to an annuity.  The life insurance alternative could be  very valuable for you as well as your loved ones.


Call us toll free @  (1-888-456-1858/504-456-1858) for a complete comparison and  analysis of your specific situation,  or  simply   click  Tell me more about the Time Bomb Alternative and we will provide you with a FREE detailed Illustration/ Evaluation via email, fax or U.S. Postal Service, to help you determine if this  right for you:

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