Deferred variable Annuity or Roth IRA Conversions?

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Topic Author
cashmeout
Posts: 14
Joined: Sun Oct 12, 2014 7:02 am

Deferred variable Annuity or Roth IRA Conversions?

Post by cashmeout »

I am 55 and retired. My wife is 54 and looking to retire in about 3 years. We both plan to begin collecting our pensions at 62 which should just about pay all our monthly expenses. Muni bond income, RMD's from Trad. IRA's , and Social Security will add to our income in later years. Plus we are currently maxing out Roth IRA's ( both of us) until she retires. In order to pay expenses between 58 and 62, we have more than enough in cash to do so.

My question is this....Would purchasing a deferred variable annuity thru Vanguard make sense as a vehicle to further generate tax deferred growth until age 70 1/2 when RMD's kick in on our Trad IRA's? I feel that 15 years is still long enough to do so and I am looking at the Vanguard Balanced portfolio Variable Annuity where the only expense is 0.57% ( Total operating Expense). Quite a bit lower than other firms and no surrender charges. I was thinking of investing $100,000 and if annual returns hold true at above 9% (return since inception Sept. 1991) ....$100,000 invested today would total $364,000 in 15 years.....even a 6% return would yield a portfolio value of about $ 239,000. And if we don't need the money we could let it ride into our 80's. The Balanced Portfolio has an AA of 67/33 Equities/ bonds is aggressive but so what .....it's purpose is to grow thru retirement and bet inflation. Our current AA is 50/50 and the $100,000 proposed for the annuity would represent only 2.5% of total investable assets.

My only concern is that it IS an annuity and one is dependent on the survivability of the insurance company in this case Transamerica. Then again in dire circumstances (aka AIG) there is always a govt bailout if needed :happy .

Another option would be to use the $100,000 to pay for ROTH IRA conversions to reduce future taxable income via reduced RMD's from Trad IRA's. And this would leave a greater legacy for our children. But then again proposed tax changes to non spousal beneficiaries ( i.e. disallowing stretch IRA's over the beneficiary's lifetime) as well as requiring account owners of ROTh IRA's to take mandatory distributions at 70 1/2 may make this scenario unattractive.

So what would yo do? Anyone purchased a variable annuity thru Vanguard? Happy with the decision to do so? Thanks!!
kenner
Posts: 3128
Joined: Sat Mar 01, 2008 7:45 am

Re: Deferred variable Annuity or Roth IRA Conversions?

Post by kenner »

cashmeout wrote:I am 55 and retired. My wife is 54 and looking to retire in about 3 years. We both plan to begin collecting our pensions at 62 which should just about pay all our monthly expenses. Muni bond income, RMD's from Trad. IRA's , and Social Security will add to our income in later years. Plus we are currently maxing out Roth IRA's ( both of us) until she retires. In order to pay expenses between 58 and 62, we have more than enough in cash to do so.

My question is this....Would purchasing a deferred variable annuity thru Vanguard make sense as a vehicle to further generate tax deferred growth until age 70 1/2 when RMD's kick in on our Trad IRA's?

In part, this begs the question - what are your current and future anticipated income tax brackets? There may be less expensive ways to achieve your financial goals.

I feel that 15 years is still long enough to do so and I am looking at the Vanguard Balanced portfolio Variable Annuity where the only expense is 0.57% ( Total operating Expense). Quite a bit lower than other firms and no surrender charges.

Agreed.

I was thinking of investing $100,000 and if annual returns hold true at above 9% (return since inception Sept. 1991)

You cannot count on this, IMHO.

....$100,000 invested today would total $364,000 in 15 years.....even a 6% return would yield a portfolio value of about $ 239,000.

This is more realistic.


And if we don't need the money we could let it ride into our 80's. The Balanced Portfolio has an AA of 67/33 Equities/ bonds is aggressive but so what .....it's purpose is to grow thru retirement and bet inflation. Our current AA is 50/50 and the $100,000 proposed for the annuity would represent only 2.5% of total investable assets.

My only concern is that it IS an annuity and one is dependent on the survivability of the insurance company in this case Transamerica.

This is always a risk with insurance companies, but many states offer guarantees to cover, at least in part, insurance company insolvency. What does your state provide? Google your state's "insurance guaranty association" or similar.

Then again in dire circumstances (aka AIG) there is always a govt bailout if needed :happy .

I wouldn't count on that.



Another option would be to use the $100,000 to pay for ROTH IRA conversions to reduce future taxable income via reduced RMD's from Trad IRA's. And this would leave a greater legacy for our children. But then again proposed tax changes to non spousal beneficiaries ( i.e. disallowing stretch IRA's over the beneficiary's lifetime) as well as requiring account owners of ROTh IRA's to take mandatory distributions at 70 1/2 may make this scenario unattractive.

So what would yo do? Anyone purchased a variable annuity thru Vanguard? Happy with the decision to do so?

Unsure as yet. Yes and yes. But there still may be a better solution. Any way you look at it VAs, are higher cost than some alternatives.

Thanks!!
Topic Author
cashmeout
Posts: 14
Joined: Sun Oct 12, 2014 7:02 am

Re: Deferred variable Annuity or Roth IRA Conversions?

Post by cashmeout »

Thanks for your reply kenner. You mention a key to this decision is estimating future anticipated income tax brackets. That is the $64,000
question...isn't it? We all would like to think and even expect that our income will drop in retirement, but with RMD's from Trad. IRA's; Social Security, Pensions, etc. some of use could find ourselves in the same or even higher tax bracket as when we worked. My CPA keeps telling me that even the lower tax brackets will see an eventual erosion of current deductions that we take for granted today.

Plus the fact that most annuities allow for the latest permissible annuity date to be 85....this would delay having to take income approximately 15 years beyond the age that current RMD's are in place for Trad IRA's. Another thought that came to mind was that at age 85, one might need long term care and any income derived from an annuity taxed at ordinary income rates would be reduced by high medical expenses ( assuming of course that the medical deduction on Schedule A of Form 1040 still exists!!)
kenner
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Joined: Sat Mar 01, 2008 7:45 am

Re: Deferred variable Annuity or Roth IRA Conversions?

Post by kenner »

cashmeout wrote:Thanks for your reply kenner. You mention a key to this decision is estimating future anticipated income tax brackets. That is the $64,000
question...isn't it? We all would like to think and even expect that our income will drop in retirement,

I assume you meant to say "income tax bracket" will decrease in retirement? ...

but with RMD's from Trad. IRA's; Social Security, Pensions, etc. some of use could find ourselves in the same or even higher tax bracket as when we worked.

Sure, that's a possibility. But, as best we can, we have to separate the known future from the unkowable future. Presumably, you have a pretty good read on your future RMDs, SS and pension benefits, etc.

My CPA keeps telling me that even the lower tax brackets will see an eventual erosion of current deductions that we take for granted today.

No way of knowing the accuracy of this prediction.

Plus the fact that most annuities allow for the latest permissible annuity date to be 85....this would delay having to take income approximately 15 years beyond the age that current RMD's are in place for Trad IRA's.

Not sure what you mean - are you referring to annuitization date or something else?

Another thought that came to mind was that at age 85, one might need long term care and any income derived from an annuity taxed at ordinary income rates would be reduced by high medical expenses ( assuming of course that the medical deduction on Schedule A of Form 1040 still exists!!)
Not sure how to evaluate this. Apparently your CPA thinks that some income tax deductions may be reduced in the future. Has he/she identified which ones?

One thing seems sure, the more money you have, the more secure your future will be. Over some things we have an element of control, over some other things we do not.
dhodson
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Joined: Mon May 24, 2010 3:03 pm

Re: Deferred variable Annuity or Roth IRA Conversions?

Post by dhodson »

You are trading capital gains rates to income rates for tax deferral.
You lose step up basis at death.
Although you are looking at a "cheap" VA, the costs are still more.
You can't tax loss harvest like you could in a taxable account.
There is some reduced liquidity with the VA.
The use of money for long term care could still result in deductions if from taxable.
LongerPrimer
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Re: Deferred variable Annuity or Roth IRA Conversions?

Post by LongerPrimer »

Shop, shop, and SHOP.
Enjoy the coffees and dinners.
Before you buy or get sold, know the product good enough to explain it to someone else. :beer :annoyed
http://www.bogleheads.org/forum/viewtop ... 1&t=149225
LongerPrimer
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Re: Deferred variable Annuity or Roth IRA Conversions?

Post by LongerPrimer »

I've recently given something like this more thought.
Should we do tIRA to ROTH conversions to minimize RMD? I am coming to the conclusion to keep things as is. Take the RMD even if it in excess to our needs. The excess money from the RMD will be reallocated to something that will either postpone new gains/div/int taxes or gift to heirs.

We may get a small to large sum in an inheritance, Again in excess of needs. SOME thinking on this on VG/Fidelity/Jackson, low cost, low featured Variable annuity. Still thinking on this. We don't particulariy need any more deferrals but the insurance features may be important ?

Really not much help. I am mulling this too. :dollar
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Dale_G
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Location: Central Florida - on the grown up side of 85

Re: Deferred variable Annuity or Roth IRA Conversions?

Post by Dale_G »

cashmeout, you didn't provide enough info about your present investments or present and expected tax rates for anyone to provide a definitive answer. The future tax rates are only a guess anyway.

I owned Vanguard Variable annuities for more than 20 years, and annuitized at age 76. BTW, Vanguard assured me that no distributions would be forced at age 85. I annuitized simply to make things a little simpler for the heirs.

I don't regret the annuity. I avoided tax rates of about 40% on investment income from a taxable account for a long period, and now take the profits out at 25/28%.

That said, depending on your current tax rate and the rate you expect in the near term, I think a Variable Annuity is a much tougher call today. If you were to invest the $100,000 in a taxable account (67%equities and 33% munis) you would have a taxable dividend income of about $1,300. If most of the dividends are qualified and you pay a 15% tax rate on the dividends, you would end up paying about $200 in federal taxes + whatever state taxes are applicable.

I would prefer to have the instant liquidity in a taxable account rather than deferring a small amount of taxes in an annuity.

I guess that is why I annuitized to remove money from the annuity rather than adding more!

Dale

edited to approximately fix math
Volatility is my friend
Topic Author
cashmeout
Posts: 14
Joined: Sun Oct 12, 2014 7:02 am

Re: Deferred variable Annuity or Roth IRA Conversions?

Post by cashmeout »

YEs....I agree Dale....the liquidity of investing the $100k in current index funds in my taxable account makes more sense. Also the fact that heirs will get a stepped up basis when I pass on is a plus. Think I will pass on the annuity. Thanks to all who responded! :sharebeer
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