Fidelity Personal Retirement Annuity vs Taxable

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Topic Author
itworks
Posts: 150
Joined: Sat Jan 15, 2011 2:20 pm

Fidelity Personal Retirement Annuity vs Taxable

Post by itworks »

I have been thinking about buying 50K Fidelity Personal Retirement Annuity (with the index 500 option, http://fundresearch.fidelity.com/annuit ... mary/FXVLT), as part of my retirement portfolio, to replace the 50K Vanguard total stock in my taxable account.

The main motivation is the yearly cost, because FPRA cost less compared to a taxable account:

FPRA with S&P 500 (FXVLT): ER + annuity charge: 0.35%
Taxable account with Vanguard Total Stock Admiral: ER: 0.05% + tax on 2% dividend = 0.55% - 0.65% (assuming tax rate is 25% or 30%)

In fact, a 15% tax rate would break it even.

Drawbacks on FRRA, and counter-arguments:
1. less flexible compared to taxable account
[counter: I do not need the money for a long while]

2. no chance to do TLH
[counter: ?]

3. earnings will ultimately be taxed as ordinary income
[counter: alleviated by controlling how much to withdraw each year]

4. heirs do not get step-up cost basis
[counter: I will use it up myself in retirement years.]

So only #2 is a roadblock. Should I pull the trigger?
Topic Author
itworks
Posts: 150
Joined: Sat Jan 15, 2011 2:20 pm

Re: Fidelity Personal Retirement Annuity vs Taxable

Post by itworks »

up for ideas.
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SpringMan
Posts: 5422
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Fidelity Personal Retirement Annuity vs Taxable

Post by SpringMan »

It may be better to use such taxable money to delay SS, if possible until age 70. Maybe you have that intention and still want to invest in the annuity. Since annuities are contracts with insurance companies, it is hard to cast judgment with reading the contract.
Best Wishes, SpringMan
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nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Fidelity Personal Retirement Annuity vs Taxable

Post by nedsaid »

The problem with the annuity is that your gains will be taxed as ordinary income rather than at the more favorable capital gains rate. The better solution tax wise is to use index funds. I would consider the US Total Stock Market Index and the Total International Stock Index for the stock portion. For the bond portion, I would consider a Municipal Fund depending on your tax bracket. You will have to do the calculation to tell if you are better off in taxable vs. tax free funds. If it is advantageous to use tax free funds, I would split the bond portion 50/50 between a Federal Tax Free fund and a Double Tax Free Fund for your State if a low cost fund is available. Federal Tax Free Municipals are still taxed by your state if it has an income tax. If you have a low cost fund available that invest in Municipals in your state, you get the double tax free benefit.

Another reason to consider Municipal funds is the effect of the new health care taxes on investment income for higher income individuals.
A fool and his money are good for business.
dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Fidelity Personal Retirement Annuity vs Taxable

Post by dhodson »

itworks wrote:I have been thinking about buying 50K Fidelity Personal Retirement Annuity (with the index 500 option, http://fundresearch.fidelity.com/annuit ... mary/FXVLT), as part of my retirement portfolio, to replace the 50K Vanguard total stock in my taxable account.

The main motivation is the yearly cost, because FPRA cost less compared to a taxable account:

FPRA with S&P 500 (FXVLT): ER + annuity charge: 0.35%
Taxable account with Vanguard Total Stock Admiral: ER: 0.05% + tax on 2% dividend = 0.55% - 0.65% (assuming tax rate is 25% or 30%)

In fact, a 15% tax rate would break it even.

Drawbacks on FRRA, and counter-arguments:
1. less flexible compared to taxable account
[counter: I do not need the money for a long while]

2. no chance to do TLH
[counter: ?]

3. earnings will ultimately be taxed as ordinary income
[counter: alleviated by controlling how much to withdraw each year]

4. heirs do not get step-up cost basis
[counter: I will use it up myself in retirement years.]

So only #2 is a roadblock. Should I pull the trigger?

number 3 is not alleviated by that method. Frankly it puts you more in a bind bc you will be attempting to do so and further reduces your liquidity. Unless you plan on living on very little, im not seeing it happening. Unless you have no money coming from other sources which seems unlikely.
MN Finance
Posts: 1926
Joined: Sat Dec 22, 2012 9:46 am

Re: Fidelity Personal Retirement Annuity vs Taxable

Post by MN Finance »

By using the annuity you just locked in two certainties: 1. You just secured a 10 or 15% increase in taxes on your gains, and 2. Ongoing higher expenses. In exchange you get the advantage of compounding. If you use an annuity only for fixed income and REITS you eliminate 1 but still have 2. Over many years compounding beats 2, but it's decades (prob 3 or 4) at today's interest rates. By using stocks compounding probably never beats both 1 and 2 over any time period, but you can probably put together a simple spreadsheet to test this.
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