Take Advantage of Today’s Tax Laws

By Michael J. McGlothlin, CLU,ChFC,CFP,LUTCF posted 07-27-2017 08:22


Looks can be deceiving. Nowhere is that more true than in retirement planning. The client who drives a modest car, wears jeans and eats at Bob Evans ends up being the millionaire next door, while the flashy dresser with the fancy watch has a pile of debt and little to no nest egg to fall back on.  


Looks can also be deceiving when it comes to investments. All too often, clients get caught up in seeking the highest rate of return they can find in an investment. Unfortunately, many don’t always walk away with the best net return because of what’s hidden underneath: taxes and fees.  


Just like a fancy watch, those attractive, high interest rates do not tell the whole story. Within many typical, non-annuity-type investments, there are certain pieces of drag embedded in the total return. 

  • There are sales charges with the purchase or redemption of the asset
  • There may be annual fees for overall investment and planning 
  • Perhaps the most harmful are capital gains and ordinary income taxes – those can cost clients more than a third of return on an annual basis


So the initial high interest rate that enticed the client ends up being irrelevant after taxes and charges eat into it.    


Don’t Miss Out by Misunderstanding

Like I said, sometimes you will find the modest, jeans-wearing client ends up having the highest net worth. In the same vein, annuities are plain and simple but offer surprisingly essential benefits. One of the strongest reasons to position part of a portfolio with annuities is to take advantage of the tax-deferred growth. During the accumulation phase, the asset grows without the drag of either capital gain or ordinary income tax. 


Now, some will argue that the deferral creates a larger tax bill at distribution. But, that’s only true if you completely liquidate the annuity. If the goal is to live off the annuity with just interest and systematic withdrawals during retirement, you will have created a much larger nest egg during accumulation rather than paying taxes annually. After all, “It’s not what you earn – it’s what you keep,” and annuities are instrumental in helping the client do just that.


Build a Bridge

Additionally, the low interest rate and favorable tax treatment of annuities creates a unique planning opportunity to help maximize Social Security benefits. By bridging early income at age 62 with a non-qualified single premium immediate annuity (SPIA) rather than starting Social Security, as much as 96 percent of the client’s income is tax-free. This bridge allows the client to minimize tax drag on their income and wait to maximize their Social Security benefits at age 70.  


The difference in Social Security income at age 62 versus age 70 might be as high as a 50 percent. That increase might translate to more travel, more time with family, or a larger cushion for necessities like medication. More importantly, this strategy affords the client to have more of their money linked to income that keeps pace with inflation. And, inflation might be the cruelest tax of all. 


Today, the average younger baby boomer (aged 50-59) has only saved $130,1001, so it’s critical to create as much asset value as possible in the future. Tax laws are always changing – in fact, there have been 31 changes in U.S. tax rates in the 34 years between 1979 and 2013.2 So you have to take advantage of what's available now. It’s important to help your clients remove their “interest rate blinders” and see the many benefits of annuities – benefits they might miss on first glance. 


Winning Strategy

Many people do not realize the powerful tax advantages of annuities. Plan how you can help your clients seize the opportunity of the current tax laws governing annuities. The disparity between annuities and other investments may not last long.  


Learn More

1LIMRA, “Fact Book on Retirement Income 2016”: https://www.limra.com/bookstore/item_details.aspx?sku=23518-001


2Tax Policy Center, Statistics: http://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-household