What’s the Word on Tax Deferred?

Tax-deferred annuities could be an alternative for your portfolio holdings if you’re looking for a tax-advantaged product that delays the annual ordinary income taxation on policy earnings. It also offers multiple crediting methods using fixed interest rates, equity subaccounts and indices both domestic and foreign. Selecting a crediting method is based on your risk tolerance in your financial profile.

If your ordinary income tax bracket is high, the odds are so is your capital gains tax bracket (20 percent). In fact, many affluent Americas may be paying as much as 23.8 percent in capital gains because their investment earnings threshold triggers the additional Obamacare surtax (3.8 percent). For high-tax-bracket individuals, there may be a tax arbitrage over time between the annual payment of their capital gains tax and their tax deferral of their ordinary income tax using an annuity. If the arbitrage favors the annuity, then a positive economic value can be applied to the overall net returns during its distribution.

Fixed annuities are offering 3 percent guaranteed interest for five years for large deposits. The average bank CD jumbo rate is around 2.25 percent for five years. The fixed annuity pays 75 basis points more than the CD and isn’t taxed during the accumulation period. The tax bracket of the CD or annuity owner dictates the annual ordinary income on the CD and the ordinary income tax on the annuity at the end of the five-year period. The basis point spread between the CD and annuity rate is argument enough, but the delay of ordinary income taxes for five years exhibits the power of deferral. Depending on your risk tolerance, crediting indices or equity subaccounts in a tax-deferred annuity would also enhance the net return over time.

Watch the interview with popular platform speaker, best-selling author and PBS host Tom Hegna, who delivers a great introduction into annuities. [URL] Hegna is known to say, “Annuities are older than you think! In A.D. 225, a Roman judge named Ulpianus produced the first-known mortality table for “annua,” which were lifetime stipends made once per year in exchange for a lump-sum payment.” 1

Maybe even older than that! Archeologists reveal the legal codes of Egypt provide evidence an annuity was purchased by a Prince ruling in Sint, in the Middle Empire2, before the Roman Empire, so the concept of an annuity is older than two millennia!

1 Annuities, Power Point Presentation January 2016 Tom Hegna
2 Annuities 101, www.looktowink.com Sheryl J. Moore (dated 02/18/16)

Syndicated financial columnist and talk show host Steve Savant interviews Tom Hegna, popular platform speaker; best selling author and retirement expert. Tom hosted the PBS Television Special “Don’t Worry Retire Happy.” The television special was designed after Tom’s latest book, “Don’t Worry Retire Happy.” Tom’s first book, “Playchecks and Paychecks” drew critical acclaim from financial advisers and insurance professionals.