Vanguard Variable Annuity as "tax advantaged space?"

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Bongleur
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Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Tue Feb 05, 2019 2:26 pm

You can move investments from one fund to another within the VVA without incurring taxes, right?
So would a VVA be a way to create tax advantaged space when you don't have enough TIRA/ROTH space?
Can anyone give a comparison/contrast of how a VVA differs (good or bad) from IRA space?
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by livesoft » Tue Feb 05, 2019 2:29 pm

I guess why would one think they needed more "tax-advantaged space" since one can invest tax-efficiently in a taxable account without having to pay the extra annuity costs.

Or I can put it another way: If the extra tax from investing tax-efficiently in a taxable account is lower than the extra expense of using a VA, then what is the point?
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Dale_G » Tue Feb 05, 2019 2:52 pm

The Vanguard VA is fine if you need the space for REITs or bonds. No need for any riders. From the tax standpoint, the VA is treated the same as a non-deductible traditional IRA. There is also some asset protection.

I wouldn't be using the VA to hold equities, but your situation could be different than mine.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Horsefly » Tue Feb 05, 2019 2:53 pm

I always cringe when someone talks about a VA being "tax advantaged". It's only tax deferred. When you cash it out, all the gains are taxed at regular income rates. Unlike tIRAs, you don't get a deduction for what you put into a VA. Unlike a Roth IRA, the earnings are all taxable. Also, if you spread your withdrawals out over several years, the original investment is considered to be the last thing you take out. So, say you invest $X and it grows to 5X, and you take it out over the course of 5 years, taking $X out each year. For the first 4 years, the entire withdrawal is taxed as normal income. When you finally take out the last $X it is not taxed, because you paid taxes already.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Cyclesafe » Tue Feb 05, 2019 4:10 pm

As one who made the mistake many years ago. Don't do it.

The experts say that investment annuities are appropriate for some investors, but never say who these people might be. I spend ALL of my time trying to figure out the best tax-effective way of extricating myself from mine. I have been withdrawing every year to the top of a higher-than-I'd-like bracket in order to see my basis again sometime about the year 2036. Annuitizing is costly, both because of crummy returns offered and because of Cali skimming 2.35% off the top. SPIA's can be useful as insurance to avoid running out of money, but not a good investment unless you are lucky to live to over 97. Living to your actuarial death year is sadly, not good enough.

Put your money in index funds in taxable and pay taxes on the modest dividends paid. This will be attractive as long as qualified dividends get favorable tax treatment....
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Tue Feb 05, 2019 4:54 pm

Well, I posted in "theory" since I didn't want to focus answers just on my particular situation.
But it seems I might be one of those who can use it:
1) already retired.
2) only about 10-15% of capital in IRA/ROTH -- the vast majority of it in ROTH.
So a place to accumulate & compound bond dividends without immediate taxation might be good. Maybe also a place to put a "tilt" in Dividend Appreciation or Dividend Growth funds.

The fee (drag) for a VVA is, IIRC, 0.27% . So a 2.5% bond yield is reduced by about 1/10. So net becomes more sensitive to what the inflation is in any year. But it might keep you out of a higher marginal bracket, which is a big savings if 50-75% of your money is in bonds & bond funds. The Vanguard Personal Investor brochure mentions VVAs, so I wonder if they automatically "do the math" to see if a VVA is a good idea.

Can you reset capital gains basis (by moving between TSM and one of the other broad market funds like S&P) ?
So when you do cash out, there is only a small gain ???

Horsefly - delaying taxes IS a "tax advantage." And its the term generally used for IRA etc retirement accounts.

Cyclesafe "Annuitizing is costly, both because of crummy returns offered" -- but the VVA puts you into Vanguard funds. Why are they crummy?
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by staythecourse » Tue Feb 05, 2019 5:00 pm

Dale_G wrote:
Tue Feb 05, 2019 2:52 pm
The Vanguard VA is fine if you need the space for REITs or bonds.
Dale
I did this exact thing early in my career as I didn't have enough room for REITS to go along with my then LT treasury component. Since then I got rid of all bonds which opened up much more space in tax deferred for my REITs so haven't contributed since I opened it. Also, it is a pain because you had to mail in a check to contribute (at least back then).

In addition, I figured I won't be using all my money anyways in my life so I did what Mr. Clement USED to suggest and that is making the annuitant my baby daughter at that time. Great way for tax free growth for her for the next 60 years. No better retirement present for her!

Good luck.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by international001 » Tue Feb 05, 2019 5:03 pm

I confess I didn't know about VA. But it seems like the after-tax 401k.
From what I considered, it's worth it over long term because compounding increases. But its bad because you are taxed at a higher rate. I'm comparing to taxable. So make your numbers and see if you are going to hold it long enough

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by livesoft » Tue Feb 05, 2019 5:22 pm

Bongleur wrote:
Tue Feb 05, 2019 4:54 pm
Well, I posted in "theory" since I didn't want to focus answers just on my particular situation.
But it seems I might be one of those who can use it:
1) already retired.
2) only about 10-15% of capital in IRA/ROTH -- the vast majority of it in ROTH.
So a place to accumulate & compound bond dividends without immediate taxation might be good. Maybe also a place to put a "tilt" in Dividend Appreciation or Dividend Growth funds.
So why not a tax-exempt muni bond fund? That would be more gentle to any heirs as well. There is no stepped-up basis with an annuity nor avoidance of tax on gains if I understand inheriting these things correctly.

In the old days, they were only a remote possibility if one held them for more than 30 years, so not for someone already retired.
Last edited by livesoft on Tue Feb 05, 2019 5:24 pm, edited 2 times in total.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by friar1610 » Tue Feb 05, 2019 5:22 pm

Cyclesafe wrote:
Tue Feb 05, 2019 4:10 pm
As one who made the mistake many years ago. Don't do it.

The experts say that investment annuities are appropriate for some investors, but never say who these people might be. I spend ALL of my time trying to figure out the best tax-effective way of extricating myself from mine. I have been withdrawing every year to the top of a higher-than-I'd-like bracket in order to see my basis again sometime about the year 2036. Annuitizing is costly, both because of crummy returns offered and because of Cali skimming 2.35% off the top. SPIA's can be useful as insurance to avoid running out of money, but not a good investment unless you are lucky to live to over 97. Living to your actuarial death year is sadly, not good enough.

Put your money in index funds in taxable and pay taxes on the modest dividends paid. This will be attractive as long as qualified dividends get favorable tax treatment....
Although I'm not quite as negative as Cyclesafe on my VVA purchase, I wouldn't do it again if I could walk that dog back.

Toward the end of my Navy career in the early-mid 90's I'd begun socking away quite a bit of money and was feeling bad because I had virtually no tax-deferred investments available to me. (The TSP had not yet opened to military folks and limits to IRA contributions we're really low.) So, as a Fido investor at the time, I let a Fido annuity salesman convince me to open a VA with them to get the "advantage" of tax-deferred growth. I subsequently transferred the VA to VG. It has worked out OK for me, has grown nicely and now occupies a spot in my estate planning for my wife if I'm the first to go. But, I would have been better off investing in taxable index funds and not buying the annuity. It's not so awful that I'm trying to liquidate it now and there's always the option to transfer it to an SPIA if a better payout rate is available. But I would caution not to let the lure of tax-deferred growth become the tail wagging the dog.

Also, I'm not sure you have to all the portfolio costs figured correctly. Depending on the specific portfolio, you're looking at upwards of .4%.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Horsefly » Tue Feb 05, 2019 5:50 pm

Bongleur wrote:
Tue Feb 05, 2019 4:54 pm
Horsefly - delaying taxes IS a "tax advantage." And its the term generally used for IRA etc retirement accounts.
My point was it ain't much of an advantage. Your contribution isn't tax deductible (a la tIRA), the growth isn't tax free (a la Roth), and the growth isn't at a reduced capital gains rate (a la taxable investment). Doesn't sound like much of an advantage to me. As long as you recognize that along with all the other reasons to avoid a VA, fine.

I have a VA that my father purchased for me before I even knew what it was. Now I'm trying to liquidate it over the next 9 years before I start RMDs. I'd much rather just have it in a taxable account, but as it is I've got extra income (and taxes) when I don't really want or need it.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Wed Feb 06, 2019 4:56 am

Horsefly wrote:
Tue Feb 05, 2019 5:50 pm

My point was it ain't much of an advantage. Your contribution isn't tax deductible (a la tIRA), the growth isn't tax free (a la Roth), and the growth isn't at a reduced capital gains rate (a la taxable investment).
First 2 objections are n/a since I cannot put any money into them since we are RETIRED.

I don't understand #3. Buying TSM within the annuity is exactly the same as outside it, except for the small ER, but it compounds tax free until I need it -- at which time I'll probably be using it for medical expenses, pushing my tax bracket down. And I can swap it into some other fund without paying capital gains tax, so thats good as I shift my AA to more bonds as I get older.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by mancich » Wed Feb 06, 2019 5:01 am

I wouldn't bother. Better to invest in tax-efficient ETF's, maintain the flexibility to get at your money if needed, and pay capital gains rates on the back end when you sell, rather than ordinary income tax rates like with VA's.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Wed Feb 06, 2019 5:11 am

livesoft wrote:
Tue Feb 05, 2019 5:22 pm
So why not a tax-exempt muni bond fund? That would be more gentle to any heirs as well. There is no stepped-up basis with an annuity nor avoidance of tax on gains if I understand inheriting these things correctly.

In the old days, they were only a remote possibility if one held them for more than 30 years, so not for someone already retired.
Not concerned with what happens to the remainder when we die.

This IS getting more personal, so maybe should move to the other forum...

My mother's LTCI is running out in a couple months, so I'll need to draw about $60,000 a year (& if her health deteriorates, a lot more). That is just about equal to her current income, so using it would move her taxes to a minimal amount. OR I could tap her annuities, since my accountant says I don't want to inherit an annuity - presumably for reasons including what you mention. But seems to me that it requires running the numbers on both options. Maybe tap the annuity until she fills her lowest bracket... OTOH being married filing joint, we have more space to fill if we inherit & spread out the distribution. This is the kind of what-if operations research I expect my accountant to do -- maybe I need a different accountant who also has Personal Financial Specialist (PFS) creds. This guy seems to be a business accountant.

I have no idea how the VVA would calculate the basis on the gains. I believe she bought it in a lump sum with no further investments. She has a second annuity from another source that I know was a lump sum & it pays 3% which is a decent rate for a "no risk" investment.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Wed Feb 06, 2019 5:15 am

mancich wrote:
Wed Feb 06, 2019 5:01 am
I wouldn't bother. Better to invest in tax-efficient ETF's, maintain the flexibility to get at your money if needed, and pay capital gains rates on the back end when you sell, rather than ordinary income tax rates like with VA's.
Oh, now I understand Horsefly's #3. I pay ordinary income rates not cap gains rates on the distribution. OTOH what if I plan to swap it to bonds before withdrawing? Using it as a way to rebalance from stock to bond as we get older, the way people with lots of IRA/ROTH space do.

Right now the family as a whole has lot of cash that needs to go into stocks & bonds. So if equity allocation ought to be 2x % "now" and future equity will be reduced to x, then I should buy x % stock in tax-advantaged space so I can rebalance without paying immediate taxes. And when its utilized, it will be ordinary income since its bonds. So the taxation of the annuity distribution is the same as bonds in taxable space.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Moneybags1 » Wed Feb 06, 2019 6:37 am

What about those of us who prefer over weighting fixed income and want to avoid the ACA and Investment tax credit cliffs? The the extra .27% paid for an insurance wrapper seems inconsequential when $1,000's over time can be saved in ACA costs.. I'm thinking of dumping $100k or so into the VG annuity to avoid the above. I am self employed and max out SEP's HSA's and Traditional IRA/ROTH...The unknown is how long will ACA last in it's present form..

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by FBN2014 » Wed Feb 06, 2019 3:12 pm

The Nationwide Monument Advisor VA has no mortality and expense fees or surrender charges. Its as close to a no load investment that you will ever find. If you have money sitting in a VA and are concerned about the taxes when you die then you can do an annuity rescue plan to convert taxable distributions to tax free distribution using a combination of a SPIA ad life insurance. I did this before my dad passed because he owned several VAs. The result was a tax savings of $260K.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Broken Man 1999 » Wed Feb 06, 2019 3:45 pm

Bongleur wrote:
Tue Feb 05, 2019 2:26 pm
You can move investments from one fund to another within the VVA without incurring taxes, right?
So would a VVA be a way to create tax advantaged space when you don't have enough TIRA/ROTH space?
Can anyone give a comparison/contrast of how a VVA differs (good or bad) from IRA space?
It is unlikely one could find a VA superior to an IRA, unless the IRA had very terrible, high expenses. I wouldn't see a VA as being a substitute for an IRA, except for awful expenses. I believe many people seek out VA because they cannot contribute to a 401k or IRA; or, sometimes their contributions have reached the limits.

I have a variable annuity at Vanguard. I purchased the annuity for two reasons:

1. I had no earned income that could be stashed in a TIRA or Roth IRA. I had already used the spousal IRA, but those IRAs have low limits. Lots of money, no tax-deferred accounts (I also used Series I US Savings Bonds to increase tax-deferred space).

2. Variable annuities have some protection from creditors offered by the various states. Need to check specific state statutes.

When all was said and done, I invested in an annuity that had expenses comparable to some folks 401k fund selections. I currently pay .42% total.
My Vanguard annuity has a cost basis of $65,500.00, and current value as of yesterday of $200,729.80. My purchases were all after-tax, though in reality much of the funds were never taxed at all due to being insurance proceeds

Vanguard annuities are very different. On the building account value side they are great, sub-accounts of many Vanguard Index funds are available (with higher ERs). When actually annuitized , I have read the Vanguard's insurance partner, Transamerica, is not always the best. No worries, just transfer, then annuitize.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Fri Feb 08, 2019 3:23 am

FBN2014 wrote:
Wed Feb 06, 2019 3:12 pm
The Nationwide Monument Advisor VA has no mortality and expense fees or surrender charges. Its as close to a no load investment that you will ever find.

If you have money sitting in a VA and are concerned about the taxes when you die then you can do an annuity rescue plan to convert taxable distributions to tax free distribution using a combination of a SPIA ad life insurance. I did this before my dad passed because he owned several VAs. The result was a tax savings of $260K.
Point me to more info on doing this to avoid taxation of the money. How much of the value do you lose to the SPIA? Is this feasible for a 90-something person, or is that too old to get a SPIA? As I understand them, it would probably be a fixed number of payments, with a minimum number and if she died the balance would be lost. So that's the major risk.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Fri Feb 08, 2019 3:41 am

Broken Man 1999 wrote:
Wed Feb 06, 2019 3:45 pm
Vanguard annuities are very different. On the building account value side they are great, sub-accounts of many Vanguard Index funds are available (with higher ERs).
Broken Man 1999
Are you sure the ERs on the funds within the VVA are higher than the normal rate?
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by FBN2014 » Fri Feb 08, 2019 8:08 am

Bongleur wrote:
Fri Feb 08, 2019 3:23 am
FBN2014 wrote:
Wed Feb 06, 2019 3:12 pm
The Nationwide Monument Advisor VA has no mortality and expense fees or surrender charges. Its as close to a no load investment that you will ever find.

If you have money sitting in a VA and are concerned about the taxes when you die then you can do an annuity rescue plan to convert taxable distributions to tax free distribution using a combination of a SPIA ad life insurance. I did this before my dad passed because he owned several VAs. The result was a tax savings of $260K.
Point me to more info on doing this to avoid taxation of the money. How much of the value do you lose to the SPIA? Is this feasible for a 90-something person, or is that too old to get a SPIA? As I understand them, it would probably be a fixed number of payments, with a minimum number and if she died the balance would be lost. So that's the major risk.
My dad was 82 when we did this. The SPIA was a life SPIA, not a limited term one. He had some health issues so the SPIA was medically underwritten so the payout was more than a one that is not underwritten. The insurance company calculated he would live 6 more years. He died 5 years 8 months later. I doubt you will be able to get life insurance on a 90 year old. Consult a fee only insurance advisor to see if this is feasible.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Broken Man 1999 » Fri Feb 08, 2019 12:01 pm

Bongleur wrote:
Fri Feb 08, 2019 3:41 am
Broken Man 1999 wrote:
Wed Feb 06, 2019 3:45 pm
Vanguard annuities are very different. On the building account value side they are great, sub-accounts of many Vanguard Index funds are available (with higher ERs).
Broken Man 1999
Are you sure the ERs on the funds within the VVA are higher than the normal rate?
Yes. See bolded below. Total Bond Market Index fund Admiral Shares are .05% ER. Same holding in VA is .15%.

I totally get where you are coming from, having no ability to add to IRAs, but still having lots to invest. I don't claim a VA is the best option for everyone, but it was the best option that I saw for me. I had filled up spousal IRAs, and bought more than I was supposed to buy I-bonds. The money I used was never taxed, so I don't care a whole lot about the tax consequences when annuitized, if we ever do.

At the end of the day I have an annuity that has grown nicely, and provided protection from creditors. I had received insurance proceeds, but having seen what could happen in accident litigation I wanted it to have a bit of protection.

I do not like taxable accounts. In our taxable account, we have $27.62. I like tax-deferred, creditor protected accounts. You mentioned changing your investments in an annuity. Zero taxes to change 100% of your VA portfolio, try that in a taxable account!

Annuity Expenses:
Annual Separate Account Expenses
Mortality and Expense Risk Charge 0.17%
Administrative Expense Charge 0.10%
Total Separate Account Expenses 0.27%
Portfolio Operating Expenses (last fiscal year) 0.15%
Grand Total, Separate Account and Portfolio Operating Expenses* 0.42%

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by aristotelian » Fri Feb 08, 2019 12:13 pm

Bongleur wrote:
Tue Feb 05, 2019 4:54 pm
Horsefly - delaying taxes IS a "tax advantage." And its the term generally used for IRA etc retirement accounts.

I don't get it. You are not delaying anything because you are not getting a tax deduction on the funds you are putting in. You are electing to pay income tax instead of capital gains tax on the earnings. The only advantage is being able to rebalance within the account without taxable transactions.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Broken Man 1999 » Fri Feb 08, 2019 12:38 pm

aristotelian wrote:
Fri Feb 08, 2019 12:13 pm
Bongleur wrote:
Tue Feb 05, 2019 4:54 pm
Horsefly - delaying taxes IS a "tax advantage." And its the term generally used for IRA etc retirement accounts.

I don't get it. You are not delaying anything because you are not getting a tax deduction on the funds you are putting in. You are electing to pay income tax instead of capital gains tax on the earnings. The only advantage is being able to rebalance within the account without taxable transactions.
So, you see no value in having an investment in a tax-deferred account, other than being able to deduct the amount of say a contribution into a 401k plan or an IRA from your taxable income in the year you contributed?

I use a VA for deferring taxes, not for lowering my taxable income.* Heck, if I had earned taxable income, I would have preferred using an IRA, or 401k.

Broken Man 1999

* Though, by having Total Bond Market Index in my VA, I don't have to pay at this time any income taxes on whatever yield I receive from my investment.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by aristotelian » Fri Feb 08, 2019 1:06 pm

Broken Man 1999 wrote:
Fri Feb 08, 2019 12:38 pm
So, you see no value in having an investment in a tax-deferred account, other than being able to deduct the amount of say a contribution into a 401k plan or an IRA from your taxable income in the year you contributed?

I use a VA for deferring taxes, not for lowering my taxable income.* Heck, if I had earned taxable income, I would have preferred using an IRA, or 401k.

Broken Man 1999

* Though, by having Total Bond Market Index in my VA, I don't have to pay at this time any income taxes on whatever yield I receive from my investment.
If I did not get a deduction or employer match for 401k, I would not do it. I definitely would not pay higher fees or higher taxes later just to avoid paying tax now. Only exception I can think of is an ACA subsidy threshold as mentioned above.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Broken Man 1999 » Fri Feb 08, 2019 1:22 pm

aristotelian wrote:
Fri Feb 08, 2019 1:06 pm
Broken Man 1999 wrote:
Fri Feb 08, 2019 12:38 pm
So, you see no value in having an investment in a tax-deferred account, other than being able to deduct the amount of say a contribution into a 401k plan or an IRA from your taxable income in the year you contributed?

I use a VA for deferring taxes, not for lowering my taxable income.* Heck, if I had earned taxable income, I would have preferred using an IRA, or 401k.

Broken Man 1999

* Though, by having Total Bond Market Index in my VA, I don't have to pay at this time any income taxes on whatever yield I receive from my investment.
If I did not get a deduction or employer match for 401k, I would not do it. I definitely would not pay higher fees or higher taxes later just to avoid paying tax now. Only exception I can think of is an ACA subsidy threshold as mentioned above.
Well, to each their own. Me, I kinda like enjoying tax-deferred, compounded growth of our investments. I have a bunch of them that I will be very happy to pay tax on a compounded gains. IRAs, VA, US Savings Bonds.

Broken Man 1999
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by aristotelian » Fri Feb 08, 2019 1:34 pm

Broken Man 1999 wrote:
Fri Feb 08, 2019 1:22 pm
Well, to each their own. Me, I kinda like enjoying tax-deferred, compounded growth of our investments. I have a bunch of them that I will be very happy to pay tax on a compounded gains. IRAs, VA, US Savings Bonds.

Broken Man 1999
Fair enough. I do own I Bonds, come to think of it. I should say that I would rather have stocks in taxable than in a non-deductible IRA/401k.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Epsilon Delta » Fri Feb 08, 2019 1:51 pm

aristotelian wrote:
Fri Feb 08, 2019 1:34 pm
Fair enough. I do own I Bonds, come to think of it. I should say that I would rather have stocks in taxable than in a non-deductible IRA/401k.
Would you rather have bonds in taxable or in a non-deductible IRA?

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by aristotelian » Fri Feb 08, 2019 1:58 pm

Epsilon Delta wrote:
Fri Feb 08, 2019 1:51 pm
aristotelian wrote:
Fri Feb 08, 2019 1:34 pm
Fair enough. I do own I Bonds, come to think of it. I should say that I would rather have stocks in taxable than in a non-deductible IRA/401k.
Would you rather have bonds in taxable or in a non-deductible IRA?
Good question! Never really thought of it. I might do the non-deductible IRA if it had no extra fees.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Mel Lindauer » Sat Feb 09, 2019 12:16 am

Bongleur wrote:
Tue Feb 05, 2019 4:54 pm

Can you reset capital gains basis (by moving between TSM and one of the other broad market funds like S&P) ?
So when you do cash out, there is only a small gain ???
Wishful thinking. Sorry, it doesn't work that way. There are no capital gains in an annuity and that's one of the bad things about them; they turn cap gains into ordinary income.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by fsrph » Sat Feb 09, 2019 1:06 am

Moneybags1 wrote:
Wed Feb 06, 2019 6:37 am
What about those of us who prefer over weighting fixed income and want to avoid the ACA and Investment tax credit cliffs? The the extra .27% paid for an insurance wrapper seems inconsequential when $1,000's over time can be saved in ACA costs.. I'm thinking of dumping $100k or so into the VG annuity to avoid the above. I am self employed and max out SEP's HSA's and Traditional IRA/ROTH...The unknown is how long will ACA last in it's present form..
Thanks for posting this. This is the exact reason I am considering a VVA. I thought it can be useful if you were slightly over the ACA cliff.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Broken Man 1999 » Sat Feb 09, 2019 9:38 am

Mel Lindauer wrote:
Sat Feb 09, 2019 12:16 am
Bongleur wrote:
Tue Feb 05, 2019 4:54 pm

Can you reset capital gains basis (by moving between TSM and one of the other broad market funds like S&P) ?
So when you do cash out, there is only a small gain ???
Wishful thinking. Sorry, it doesn't work that way. There are no capital gains in an annuity and that's one of the bad things about them; they turn cap gains into ordinary income.
Yeah, they are like TIRAs in that respect. Too bad they aren't like Roths when money is coming out.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by JohnDoh » Sun Feb 10, 2019 3:05 am

fsrph wrote:
Sat Feb 09, 2019 1:06 am
Moneybags1 wrote:
Wed Feb 06, 2019 6:37 am
What about those of us who prefer over weighting fixed income and want to avoid the ACA and Investment tax credit cliffs? The the extra .27% paid for an insurance wrapper seems inconsequential when $1,000's over time can be saved in ACA costs.. I'm thinking of dumping $100k or so into the VG annuity to avoid the above. I am self employed and max out SEP's HSA's and Traditional IRA/ROTH...The unknown is how long will ACA last in it's present form..
Thanks for posting this. This is the exact reason I am considering a VVA. I thought it can be useful if you were slightly over the ACA cliff.

Francis
I would suggest taking a more generalized approach to VAs: they can be useful in a variety of ways in controlling the timing of taxable income, and therefore of influencing all kinds of things that flow from the amount of taxable income in a given year. This is true over an entire investing lifecycle.

In the accumulation phase (which seems to get by far the most attention here), VAs can potentially reduce current taxable income, thereby facilitating a range of taxable-income-based benefits, including:
  • increased income-tested benefits, such as ACA subsidies, etc. (as already noted)
  • lowering one's current marginal tax bracket (in favor of, hopefully, a lower future marginal tax bracket; i.e. tax bracket arbitrage)
Assuming the VA is not annuitized ...

In the distribution phase, VAs can allow for considerable control on the timing of current taxable income, which can have a range of benefits (especially for early retirees), including:
  • increased (!) current taxable income to get above the ACA income floor (that would otherwise push one onto Medicare)
  • exploiting income tax bracket arbitrage by taking sufficient VA distributions to fill the low income tax bracket(s).
Broken Man 1999 wrote:
Sat Feb 09, 2019 9:38 am
Mel Lindauer wrote:
Sat Feb 09, 2019 12:16 am
Bongleur wrote:
Tue Feb 05, 2019 4:54 pm

Can you reset capital gains basis (by moving between TSM and one of the other broad market funds like S&P) ?
So when you do cash out, there is only a small gain ???
Wishful thinking. Sorry, it doesn't work that way. There are no capital gains in an annuity and that's one of the bad things about them; they turn cap gains into ordinary income.
Yeah, they are like TIRAs in that respect. Too bad they aren't like Roths when money is coming out.

Broken Man 1999
Of particular importance for the distribution phase is that a VA really consists of two components: VA-BASIS (the amount contributed) and VA-TAXABLE (the increase (one hopes)), where VA-BASIS + VA-TAXABLE = VA-TOTAL.

As several folks have noted, VA-TAXABLE is essentially a non-deductible IRA. But it's also important to recognize that VA-BASIS is essentially a ROTH (i.e. never taxable), but one that can only be tapped once VA-BASIS has been distributed. The ultimate trick/strategy, then, is to arrange the distribution of VA-TAXABLE in low marginal bracket years to be followed by distribution of VA-BASIS in high-marginal bracket years. It turns out the latter are years in which one receives Social Security. (There have been threads here about the high marginal tax rate incurred as SS becomes taxable.) In short, distribute VA-TAXABLE in post-retirement-but-pre-SS years (when there is little other taxable income) and VA-BASIS in post-SS years (when there are also likely to be RMDs, especially if one defers SS until age 70, as one "ought").

Of course, all this will only make sense with certain numbers for account balances, income, expenses, etc. in combination with particular asset allocations.* Thus, YMMV.

* As has been noted here and elsewhere, because VAs convert capital gains into ordinary income, they are generally not useful for tax-efficient assets (unless an extremely, and perhaps unseasonably, high value is placed on the ability to re-allocate without tax consequences). They are, however, useful for tax-inefficient assets such as bonds and REITs, especially over long time horizons.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by FBN2014 » Sun Feb 10, 2019 8:20 am

Here is a book that I have found useful. A new edition was recently published that I purchased. The author will even talk to you on the phone if you have specific concerns. "The Truth About Variable Annuities – Debunking the Myths" by John Huggard.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Cyclesafe » Sun Feb 10, 2019 9:27 am

@JohnDoh,

Yes, it is indeed possible to imagine scenarios where factor combinations could make a VA useful. Such is the stuff of salesmanship as the verb "could", easily ignored, is the most important word in that statement. Dazzled by tax deferral for the short term and the miracle of compounding for the long, investors commit for the surrender period and until they breach age 59 1/2 to suffer high(er) fees in the interim and the horror of paying, upon withdrawal, full income tax at their highest future marginal rates all for all equity gains that would have, in a taxable account, been granted favorable federal tax treatment. Granted, fixed asset gains would be taxed the same, taxable account equity dividends would incur an annual tax drag, and favorable federal tax rates for qualified dividends and LTCG are presupposed for the distant future.

John, the points you made overwhelm, not enlighten, the reader. Lots of shiny object "hand waving" since actually running the numbers for a specific investor's situation is hard. the financial advisor won't do it because he doesn't know how, it would regardless take up far too much of his time, and it's not in his best interests. And the investor almost certainly doesn't have the spreadsheet skills, the clairvoyance, and, frankly, the band-width to do the job properly. See this thread: viewtopic.php?f=10&t=272058

John, please do not construe this post as an ad hominem attack. :beer

The VA-BASIS is nothing like a Roth. It is held hostage until all gains are withdrawn and taxed, and thanks to inflation, with buying power severely diminished. Furthermore, anyone holding a VA also holds a t-IRA, the balance of which should be declining due to higher priority Roth conversions filling up lower brackets. There just isn't also room for VA withdrawals.

Annuitization is of value when there is a fear of running out of money or being ripped off in one's dotage. Financially speaking, however, my calculations show that the survivor of a joint life SPIA bought between ages of 80-85 must live to age 97 plus. This is also reflected indirectly in IRS Publication 939 Table VI which gives exclusion ratio factors for joint and several annuity payments. Just living past your actuarial life expectancy is not enough. Insurance, yes, financially sound, sadly no.

The only conversation worth having about investment variable annuities is how to extricate oneself from them.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Bongleur » Sat Feb 23, 2019 5:51 am

Cyclesafe: In my case, I do NOT have much in TIRA. And given the current 12% bracket, I am considering converting it all to ROTH by filling up the 12% space. I am considering the VVA for bonds not equities. And everyone is 60 or over. I need to research the minimum time the money would be tied up. No intention of annuitizing, so also need to nail down the rules for partial withdrawals. Looks like the major issue is how much higher the expense ratio might be.

For now, a short term bond fund seems to make as much as intermediate term, without taking the term risk. So being able to swap without tax consequences looks good to me.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by petulant » Sat Feb 23, 2019 7:53 am

OP, you shouldn't take the plunge unless you have detailed spreadsheet models showing that specific cliffs (for ACA, Medicare, etc.) can be controlled or that there are significant tax savings by having the yield from bond funds be tax deferred to be taken at your choosing. Cyclesafe is right that this is a tall order, and you should not move forward too quickly or too lightly.

Further, right now is not an ideal environment for considering VAs. Think back to 1996--then, most bonds were well over 5 percent. There were no qualified dividend rates. The long-term capital gains tax was higher. Certain kinds of tax advantaged accounts like HSAs did not exist yet. It was probably easier for the numbers to work out back then. Today, long-term capital gains tax rates are low, interest rates are low--it has to be a very specific set of numbers for it to make sense.

For OP, it seems like you should review municipal bond funds as closely as you are reviewing variable annuities.

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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by CyclingDuo » Sat Feb 23, 2019 8:30 am

Bongleur wrote:
Tue Feb 05, 2019 2:26 pm
You can move investments from one fund to another within the VVA without incurring taxes, right?
Correct.
Bongleur wrote:
Tue Feb 05, 2019 2:26 pm
So would a VVA be a way to create tax advantaged space when you don't have enough TIRA/ROTH space?
Here's how Fidelity markets their variable annuity:

Investors who want to increase their tax deferred retirement savings beyond the contribution limits of an IRA or 401(k), with the ability to invest in a wide range of investments including equity, bond, and asset allocation funds.

Vanguard's marketing is similar:

The Vanguard Variable Annuity is a deferred variable annuity, which means you can defer taking income—and paying taxes on that income—for as long as you choose. A variable annuity may provide you with the tax advantages, savings, and income options that are a good fit if you're seeking additional tax-deferred savings because you're already contributing the maximum to an IRA, 401(k) plan, or other retirement plan at work.

We only got involved with the Fidelity Personal Retirement Annuity as we lived and worked abroad for a number of years. Due to the IRS rules on FEIE (our salaries were paid by foreign entities), we were not allowed to contribute to any of our normal tax deferred vehicles in the US, so our only choices were taxable and the deferred variable annuity. So we used both for those years.
Bongleur wrote:
Tue Feb 05, 2019 2:26 pm
Can anyone give a comparison/contrast of how a VVA differs (good or bad) from IRA space?
No RMD's at age 70 for the VVA. No IRS contribution limits for the VVA.

Although the lowest cost providers for the retirement variable annuities are Fidelity and Vanguard, the fees you pay for the variable annuity are higher than what you will pay within your IRA. Fidelity has an administrative wrap fee of .25% on account balances less than $1M for their variable annuity, and .1% on accounts over $1M. The classic three fund portfolio is available at both if so desired. Fidelity recently added their low cost total stock (ER .12), total international (ER .17), and total bond (ER .14) in addition to the long running low cost S&P 500 (ER .1) that they have had for many years.

With the wrap fee on accounts under $1M...

Fidelity Total Stock Market (ER .37)
Fidelity Total International Stock Market (ER .42)
Fidelity Total Bond Market (ER .39)

And with the lower wrap fee on accounts over $1M...

Fidelity Total Stock Market (ER .22)
Fidelity Total International Stock Market (ER .27)
Fidelity Total Bond Market (ER .24)

Vanguard is about the same.

Total Stock Market with the wrap fee (ER .42)
Total International Stock Market Index with the wrap fee (ER .38)
Total Bond Market with the wrap fee (ER .42)

All in all the administrative wrap fees are not unlike what many face in our 403b/457b plans.
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Re: Vanguard Variable Annuity as "tax advantaged space?"

Post by Cyclesafe » Sat Feb 23, 2019 9:23 am

petulant wrote:
Sat Feb 23, 2019 7:53 am
OP, you shouldn't take the plunge unless you have detailed spreadsheet models showing that specific cliffs (for ACA, Medicare, etc.) can be controlled or that there are significant tax savings by having the yield from bond funds be tax deferred to be taken at your choosing. Cyclesafe is right that this is a tall order, and you should not move forward too quickly or too lightly.

Further, right now is not an ideal environment for considering VAs. Think back to 1996--then, most bonds were well over 5 percent. There were no qualified dividend rates. The long-term capital gains tax was higher. Certain kinds of tax advantaged accounts like HSAs did not exist yet. It was probably easier for the numbers to work out back then. Today, long-term capital gains tax rates are low, interest rates are low--it has to be a very specific set of numbers for it to make sense.

For OP, it seems like you should review municipal bond funds as closely as you are reviewing variable annuities.
Thanks for the reminders about circa 1996. I either never knew or have forgotten about the tax environment of that time. Perhaps I really shouldn't be regularly flagellating myself for having committed to variable annuities after all. One must regularly commit funds not knowing the unforeseeable.

As it is, in order to recover my basis in time to actually spend it at age 80, I will have to incur federal taxes at the 35.8% marginal rate (plus Cali at 9.3%) for the next 16 years. My ongoing "income stack" is already occupied with higher priority future RMD's and even Roth conversions, so in my view, these VA withdrawals must be matched up to the most punishing marginal rates. And if 2017 rates resume in 2026 as planned (and NIIT is still in place), my top federal rate will increase to 36.5%.

OP, ensure that you have considered all other alternatives before pulling the trigger on investment annuities. Simulate the results on your tax software because it is very easy to forget about one of the many moving parts in the code.
"Plans are useless; planning is indispensable.” - Dwight Eisenhower

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