Annuities Take Another BlowCategory: Finance
Article added by: Cathy Pareto
Congress just landed a right hook on the face of variable annuity companies. The recent
Jobs and Growth Tax Relief Reconciliation Act of 2003, reducing dividend tax and capital
gains rates to 15%, infused fuel to an already heated debate on the value of owning annuities.
Furthermore, President Bush’s new tax law, failed to give dividends paid on stocks held in
annuity sub-accounts the same favorable treatment afforded to stocks held in mutual funds.
Many industry experts have long considered variable annuities to be sub standard products.
High fees, embedded costs, inflexible surrender periods, and poor investment choices are
some common traits that make most variable annuity products undesirable.
Stiff Penalties
Annuity salespeople glorify the tax deferral feature of this product as a selling point. It’s true, during the life of the annuity, earnings and dividends are deferred until distribution. That’s a positive. But at distribution, the growth in the account is taxed at ordinary income rates as high as 35%!
Compare that to a 15% tax on earnings outside of an annuity. Furthermore, contributions are not tax deductible and deposits are made with after tax dollars.
Distributions of earnings before age 59 ½ face an ever-stiffer 10% penalty on top of the 35%
tax already imposed. Ouch! And from an estate planning perspective, annuities do not
qualify for a step up in basis, unlike securities in taxable accounts.
If tax efficiency is what an investor seeks, why not consider and indexed mutual instead?
Granted, unless you own it in a retirement account, there is no tax deferral as there is with an annuity. But by their nature, passive investment strategies generate very little in income and gains. And, if held over one year, the proceeds are taxed as long-term gains.
No doubt the new tax law makes tax-deferred annuities less attractive. You now have to
balance the benefit of tax deferral against converting gains that would otherwise be taxed at
15% into income taxed at ordinary rates. When you factor in other disadvantages — the
upfront costs that often apply to these investments, the ongoing expenses and the possibility
of surrender charges and early distribution tax penalty, annuities have to overcome huge
obstacles.
Okay for asset protection
While other tax deferred vehicles may be more practical, variable annuities may be
appropriate in certain circumstances.
One of the few legitimate uses for an annuity is asset protection. For example, in the state of
Florida, annuities are protected from creditors under statutory law. A physician practicing
medicine in the state may find variable annuities an indispensable component of their overall
financial plan if all other asset protection strategies have been exhausted.
Ninety nine percent of annuity products being sold are garbage! Not all annuities are created
equal. Most carry hefty surrender charges, unconscionable operating expenses, pay huge
commissions and offer limited and unsatisfactory investment choices.
Steer clear of salespeople pimping annuities that, on top of their hefty commissions, generally cost investors an additional 2-3% in internal fund expenses. That’s creates a 2-3% drag on your profits every year! And watch for contingent deferred sales charges that attempt to cage you to the product for several years.
As with any other investment, if you are in a situation that warrants the need for an annuity,
look for a product that has your best interest at heart (not the broker’s).
Note: This article was first published in the 9/9/03 edition, "Your Money” section of
Florida Medical Business Newspaper.
Posted By: Cathy Pareto
Web: http://www.cathypareto.com
Contact: e-mail
| About the Author: |
| Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. Money management does not have to be an intimidating and mystifying process. Cathy's belief is that there is more
to investment management and financial planning than just the numbers. It takes commitment, clear communication and trust between the Advisor and the Client to plan out a strategy, and it requires the experience of a competent Advisor to execute that strategy.
For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally,
she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.
Educational Background
Cathy earned her BA in Finance and later her Executive MBA at Florida International University, graduating in the top 20% of her class and as a result she was inducted into the prestigious Beta Gamma Sigma Graduate Business Honors Society.
In the Media
Cathy Pareto’s articles have been published in periodicals and websites, including Women in Business,Investopedia.com, Miami Medicine, Florida Medical Business, AccountantsWorld.com, My Financial Advisor, Indexfunds.com, and Fundsinteracctive.com. Her media contributions include quotes in BusinessWeek, The Wall Street Journal, The Sun Sentinel, CNNfn, Latina Magazine, Hispanic Trends, AARP's
Segunda Edad, and many other financial publications. She has appeared on television and radio shows including CNBC’s “Power Lunch”, WLRN/NPR’s “Topical Currents", “Wealth & Wisdom”, Total Picture Radio, Landed Radio and more.
www.cathpareto.com
Professional Memberships
Greater Miami Estate Planning Council - Current Member of the Board of
Directors
United Way of Miami Dade Young Leaders - Current Member
NAPFA National Association of Personal Financial Advisors - Current South
East Region Board Member
Florida International University Executive MBA - Current Member of
Professional Advisory Board
Financial Planning Association - Current Member |
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