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Want
an Annuity Split Funded
Annuity
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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 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 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.
Getting From the Annuity
To The Life Insurance 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.
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. 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
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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Please
notify me when my CD matures so that I can earn more in an annuity |
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