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Deferred Variable Annuities?

I'm 33 with substantial retirement savings and I max out my ROTH 401 and ROTH IRA yearly but am looking for other retirement vehicles to invest in...one I've read is deferred variable annuities. I'll have no need for any funds I tie up in this (if I were to go this route) until 59 1/2 but I'm wondering what things should I consider? Obviously there will be the cost and whether it exceeds any tax savings I'll have gained but anything else? Are my contributions done in installments or lump sums? Generally any minimum/maximum I can contribute each year? Any benefit to going w/ a fixed rather than variable (aside from the market risk exposure of variable investments)? Transferability if I were to die?

Jul 07, 2014 by Colin from Oak Creek, WI in  |  Flag
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7 votes
Peter C. Karp Level 20


As you are maximizing your ROTH contributions, an annuity is a great way to set aside the most for retirement. With an annuity, you can put away after-tax dollars to grow tax-deferred and supplement your IRA retirement savings. Annuities typically have lockup periods, but seeing as how you aren’t looking to use the funds for quite some time they’re not a hindrance. You can add to your annuity savings in lump-sum deposits or installments. Since you will be contributing after-tax dollars, there is not a limit on how much you can contribute annually. (some policies may have limits based on product features.) You will not have to pay taxes on the gains until you withdraw the funds. You can indeed set up the policy to transfer to your beneficiaries in the event of your passing.

With today’s current low rates, you don’t want to lock-up your funds in a fixed-income policy. The benefits of a fixed annuity are lost in such a low interest rate environment.

The cost of annuities vary based on the product and the many varying features each product offers. Some features will be right for you, some won’t have benefits that outweigh the cost. With all the different options and associated costs it is important to consult with a financial advisor that understand your investment goals and risk tolerance. Let us know if you have additional questions.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Jul 09, 2014 from San Francisco, CA

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Colin you are 33 years old and sounds to me like you are looking for a product where you can put some extra $$ aside for retirement grow it tax deferred have full unrestricted access to it at 59 1/2 and if you pass way have it go to your beneficiaries. I would also assume that keeping your cost low is important as well. I don't believe that life insurance is an investment vehicle for many reasons, so what i would recommend you consider is setting up a Variable Annuity with either Fidelity of Vanguard. They are just like IRA accounts the only difference is your contributions are not deductible you have access to great low cost no commission funds and your annual for for this annuities are under 20 basis points. 0.20% in my opinion that is the best option to explore. Here is the link to Vanguard site https://investor.vanguard.com/annuity/deferred here is one for Fidelity https://www.fidelity.com/annuities/FPRA-variable-annuity/overview Best of Luck let me know if you have any questions. Sincerely Michael www.VisionaryWealthMgmt.com

2 Comments   |  Flag   |  Jul 07, 2014 from Farmington, CT

I agree Michael...my dad is a retire MD and never bothered with life insurance and I see it as a huge waste (first because I'm unmarried & childless and second because even if I did what I do have saved would be more than enough). My focus is tax free growth on money I don't need now or anytime in the next few decades. I'll likely pursue annuity options thru Vanguard.

Flag |  Jul 07, 2014 near Oak Creek, WI
Michael V Mezheritskiy

thats a great call Colin, I see life insurance as protection not an investment vehicle. Now one thing i want to be clear on in Variable Annuity the growth is tax deferred not tax free. The earning will be taxable to you when you take it out. However you will most likely be in a lower tax bracket plus you can control how much you are distributing as well. Vanguard is a great choice, they will provide you with some very good low cost investment choices. Best of luck to you and let me know if you have any questions or need any help. All the Best Colin, Sincerely Michael

Flag |  Jul 07, 2014 near Farmington, CT

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2 votes

Hi Colin, first congratulations on being so diligent in planning for retirement. It is wonderful that you are able to max out your 401(k) and IRA. Your next step as you asked is how can you do more? I assume that you have plenty of cash reserves - 6 months of expenses - and that you have taken care of the risk to you and your family of premature death or disability through life insurance and disability insurance. If not you should review your protection program with your financial advisor. I also assume you have no consumer debt or student loans. These would be things to review before you begin another savings plan for retirement. In your question you seem to understand the pros and cons for retirement savings. One of the cons is the penalties of premature distributions. Those penalties exist for an annuity also. Often when you focus on retirement and being tax efficient in savings, you can overload the tax free component or the tax deferred component of retirement savings. There is another area of savings that you did not mention. That is the taxable component of a retirement savings plan. You could for example set up an regular account and use that for retirement savings. There are advantages to this approach. First of all there are no limitations to your contributions. Second, you avoid the early withdrawal penalties and all of the rules around 401(k)'s, IRA's, and tax deferred annuities. Suppose you want to retire prior to 59 1/2 or start you own business in your 40's? You would need to have access to your money to do that. With proper planning you can design a growth oriented portfolio that is tax efficient as it grows. Further when you sell the investments you pay capital gains taxes not ordinary income taxes as you would with a tax deferred annuity. With a non-qualified annuity someone is going to pay the tax on the gains as ordinary income. It may be you or your beneficiary. True you can stretch out the tax liability over time but it is still taxed as income. A tax efficient portfolio would be one that grows without throwing off dividends or unwanted capital gains. There are tax efficient mutual funds, there are ETF's you can use or you can use individual stocks or municipal bonds. Third, for estate planning a regular non-retirement portfolio goes to your heirs on a stepped up basis. They do not have to pay taxes on your gains. So, rather than getting into a high cost variable annuity or low cost low return fixed annuity, I would examine using a regular investment portfolio. You should review your options with your financial advisor and weigh all of your options.

Comment   |  Flag   |  Jul 07, 2014 from Carmel, IN

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Rich Winer Level 20

With non-qualified variable and fixed annuities, you can contribute as little as much as you like, whenever you like. Initially, there may be a minimum investment, but you can sometimes get around that if you set up automatic deposits. The decision as to whether to go with a fixed or variable annuity (or a combination of both) will depend on your growth and return objectives, risk tolerance, time horizon and interest in various living benefits, death benefits, guarantees, bells and whistles associated with various products that are available.

You may also want to consider a properly structured and managed variable or indexed life insurance policy as an supplemental retirement plan. Although there are some complexities, life insurance can be an even more effective retirement investment vehicle and provide tax-free growth as well as tax-free distributions. If you go this route, you will want to work with an experienced advisor who knows how to help you grow your money using life insurance and take tax-free withdrawals at the appropriate time without making any mistakes.

View all 8 Comments   |  Flag   |  Jul 07, 2014 from Woodland Hills, CA
Theodore Michael Jenkin

Well, I have to applaud you. Maxing out Roth401k, Roth IRA, and HSA. You are quite a good saver!! One other potential thought would be to look at an exchange traded stock fund that has no to low dividend paying investments and you could hold for the long term. This would not be quite as good as the tax-deferral from annuities, but it would allow for long-term deferral of gains and ultimately long-term capital gain tax down the road.

Flag |  Jul 07, 2014 near Alpharetta, GA

I don't max the HSA, just a couple hundred in a yr. just trying places to put my post tax dollars

Flag |  Jul 07, 2014 near Oak Creek, WI

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Hi Colin! Rich's answer covers most of your questions, but I'll throw in a few more thoughts. If you decide to purchase an annuity, be sure to really dig into the fees and costs. There are several low-cost annuity providers that are great for accumulation, but fall down when it comes time for distributions. They could be OK for now, but you would want to revisit the contract before taking distributions. You could exchange your annuity for another one that would give you different guarantees you may want at retirement.

Given your age, it could be a good idea to consider life insurance. The annuity will tie up your funds, however you may find that as you acquire more property and if your family grows, life insurance can be a very flexible way to meet a variety of needs. Obviously it serves as income protection for your family if you should pass early, but it can also be used to help fund college and serve as cash reserves. Be sure to work with an advisor who can help you think through your future needs and not just any insurance salesman. Finding the right type of policy for your needs is important.

1 Comment   |  Flag   |  Jul 07, 2014 from River Hills, SC
Rich Winer

Adding on Pam's comments: If you consider a life insurance policy, it should be designed specifically or primarily for accumulation as opposed to family income protection. This means you would want to keep the death benefit as low as possible relative to the amount of the premium (i.e. your investment). Doing so with reduce your insurance cost and allow you money to grow quicker and more effectively. Again, work with a good financial advisor who, as Pam said, is more than an insurance salesman.

Flag |  Jul 07, 2014 near Woodland Hills, CA

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