Show #280, Airing Sunday, January 16, 2005
Last week, our tax expert Tony Mercuri from Ta-Check Tax Service told us about some helpful tax incentives that annuities offer. Tony’s back today to talk about the tax disadvantages to annuities. You won’t hear much about these elsewhere, but we bring you the complete, balanced picture here on Golden Opportunities. Welcome back Tony.
Question: Last week we spoke about the tax advantages of annuities. What are some of the disadvantages of owning an annuity?
Answer: When buying an annuity, you must consider your current tax situation. You are putting off the taxes now and paying them at a later date. That may not be attractive if you are currently in a relatively low tax bracket, because tax rates could rise sharply by the time you retire or by the time you need this money.
You also lose the capital gain treatment on this growth. Last year, capital gain taxes were lowered. This makes it more advantageous to pay capital gains tax as opposed to income tax.
Question: What about your beneficiaries?
Answer: When you have a non-qualified annuity, you are deferring the income tax to your heirs. For many retirees, their children are in a higher tax bracket then they are. If this is the case you have deferred this income into a higher bracket, which means Uncle Sam gets more of your money. So it actually costs you more in taxes as opposed to less.
Question: At your death, don’t they get a step-up-in-basis?
Answer: No. If you passed away and left your heirs stocks or mutual funds, they would pay no income tax on them. They would get a step-up-in-basis, meaning they could even sell them with no or very little capital gain tax. By leaving them the non-qualified annuity, they lose that step up and have to pay income tax—again causing more money to go to Uncle Sam. Last year, capital gain rates were lowered and made more attractive for us, and by leaving the money in the annuity you lose that benefit.
Question: Are there any other disadvantages?
Answer: Two last important issues. First of all, annuities work like IRAs, which means if you cash them in prior to age 59 ½, the government imposes a 10% penalty in addition to the taxes. So if you need the money before that, it may not be the right investment for you.
Secondly, all annuities are not created equally. Many have very long surrender charges which can also have a negative impact on how you or your heirs receive the money.
Question: Where can our viewers get more information?
Answer: If they give me a call, I’ll be happy to try to answer their questions. And if they’d like, we’ll analyze the tax situation with their existing annuities.
To invest in an annuity, or to avoid annuities like the plague. That is the question. The answer is complicated. For more information, give Tony Mercuri a call.
