How to Fix a Costly, Broken Annuity

Hello, I’m David Bennett and I’m here to help you plan your annuity strategy.

A deferred annuity, unlike an immediate income annuity, is not a buy and hold investment. Most important, it’s not an investment you should buy and ignore.

The market, economy, and tax laws are in a constant state of flux.  And your financial circumstances change as well.

If you own an annuity, it’s a smart idea to get a professional review by an experienced fiduciary advisor, preferably a fee-only (non-commission) Certified Financial Planner and Chartered Financial Analyst professional. Myself, for example, David Bennett, CFA, CFP.

You might be able to boost your annuity income by eliminating costly, unneeded riders and by avoiding underperforming sub accounts (VA) or participation rates (EIA).

Ever wonder why your annuity doesn’t keep up with returns in the stock market? Many annuities,  including VAs and EIAs, have high all-in expenses, over 3% per year is not uncommon.  In comparison, a low-cost stock market ETF can be as little as .04%. Lower expenses mean higher returns for you the investor, all else equal.

What’s more, and what you might not learn from an insurance agent, is that the taxation of annuities can be unfavorable for investors. Annuity distributions are not eligible for favorable long-term capital gains and qualified dividend tax rates.  And at death, the step-up in basis provision in the tax code means most investors won’t pay taxes on stock market gains at death. Not so for investors in deferred annuities.

It’s also worth noting that unlike stocks or bonds, you cannot borrow money using your annuity as collateral. To do so could create an immediate taxable event.

Sometimes it pays to “annuitize” your deferred annuity. This might help you reduce your taxes and avoid a ticking tax time bomb whereby future annuity distributions force you or your heirs into higher marginal tax brackets. Minimizing the tax on your annuity withdrawals requires planning. There’s no way around it.

The ugly truth about riders is they cost money, sometimes a lot of money, and if you are not using rider guarantees, their cost will reduce your returns. Likewise, the ugly truth about tax deferral is it will only save you money if, in the future, you can take withdrawals at a lower tax rate than the present.

A complete review and plan for your annuity should include the following:

  1. An evaluation of any riders, including their costs.
  2. Determine the total annual expense ratio, all in, on your annuity.
  3. Who is and who should be your annuities’ owner, annuitant, and beneficiary?
  4. What are the tax cost basis, surrender value, death benefit, and other values on your annuity?
  5. What, if any, surrender charges apply to your annuity?
  6. Does the current asset allocation of your annuity sub-accounts make sense, given current market conditions and your current financial circumstances?
  7. What’s your strategy for minimizing the taxes on distributions from your annuity?
  8. Are there better alternative annuities available in a non-taxable 1035 exchange? Or can you do a non-taxable, roll-over of your qualified annuity to a conventional IRA at a low-cost brokerage, for example, Charles Schwab or TD Ameritrade?

At Successful Portfolios, we offer a no-risk, personalized, written annuity review and plan. If you’re not satisfied with your plan, we’ll waive your planning fee.

Call me, David Bennett, CFA, CFP, at (727) 316-6800 or send me a text, and let’s get started!



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