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Private Portfolio Management

   


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We work with some very high quality "no load" variable annuities. No load means no sales charge to get in and no redemption fees to get out. We are not heavy believers in annuity products but a lot of people have money in one or more annuities. Through what is called a tax free 1035 exchange we could work with you to combine or transfer existing annuities into a low-cost, high-quality provider.
 

Some background

Annuities are designed by insurance companies to provide a guaranteed income either for the life of the annuitant or for some specified period. The word annuity means income stream. The income stream could be based on one life or more than one life.
 
While the money is sitting in the annuity, the interest or capital gains that are earned are tax deferred until it is withdrawn. The IRS does not mandate when money has to be withdrawn. There is, however, usually a date inside the annuity contract where the insurance company requires the contract to either be redeemed or annuitized. Sometimes this option is automatic. If you are in your 80's, it is important to take a look to see how this provision is stated.

Fixed Annuities


The terms fixed and varible annuity have technical definitions and "street" definitions. We will use the "street" talk for now. A fixed annuity pays “interest” on the investment deposits. The interest rate calculations can be complex and should be scrutinized. Although the term “fixed” may be used, the interest rate may only be fixed for one year, after which it floats in accordance to an index or policy. Also, if multiple deposits are being made, there may be various rates for various deposits. Finally, some annuities offer a “cash surrender” return and a annuitization return. The annuitization return would only be used if that number is plugged into the formula that calculates the income streams upon withdrawal. These can be complex formulas. The general rule is to stick with formulas that are easy to understand. The more complex the formula, the more the returns benefit the insurance company underwriting the product and the sales people involved. 

Variable Annuities

Variable annuities hold a number of mutual funds inside an “annuity shell”. Fees are paid for the tax benefit of the “annuity shell” and then fees are paid for the funds inside the annuity. The variable annuity does not normally offer guaranteed or “fixed” returns but is designed to take advantage of the markets.
 
Upon withdrawal, the interest or earnings are withdrawn first and is fully taxable as ordinary income – not as a capital gain. After the earnings are exhausted, the principal is withdrawn and is tax free because it is simply the return of your after tax principal.

Death

Upon death, the beneficiary will be taxed on the earnings. The cost basis of the annuity will be the amount of the original investment. Unlike a stock or other property, the beneficiary does not receive a “stepped up” basis.
 
If the owner elects to receive a guaranteed income from the annuity, they almost always forfeit the principal. To get the maximum payout, the annuity will pay income on only one person's life (over one person's lifetime). If the recipient of the income would like a guarantee for, say, ten years, (dead or alive) then the monthly payout would be reduced. If upon their death the annuitant  would like the spouse or another survivor to receive income for their life, the income would also be reduced. All of this is based on the age and in most cases, sex, of the annuitant and their beneficiaries. An investor could obtain this information from the insurance company that holds the annuity contract. 


Annuities in Retirement Plans

It is very common for employers and individuals to put annuity products into  retirement plans. The attractive selling point is in many cases the guarantee. In general, those guarantees come at a very high price. For most investors, it does not make sense to pay for the tax sheltered benefit of an annuity if the account is already in a tax shelter such as an IRA, 401k, 403b or another type of retirement plan. 

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