Prescribed annuities great way to cut seniors tax
If you’re a senior age 65 plus looking for a low risk way to reduce taxes on retirement income while boosting your monthly cash flow, you might want to consider prescribed annuities.
The word annuity can scare off a lot of people because in the past, most annuities die with the person setting them up. Today insurance companies hungry for retirees business offer a range of flexible annuities, some having guarantees for beneficiaries for ten and fifteen years of payments. The plan is simple. You lock away a fixed amount of money in return for income for life. You can set up individual or joint annuities with your spouse. If you die, you set a guaranteed beneficiary payment period, say five or ten years from the start date of the annuity.
The key here though often overlooked is taxation. If you’re getting clawed back old age pension and see your income diminish and your quarterly income tax installment bill rising, then consider an annuity for part of your income. The annuity reduces the amount of taxes payable because it amortizes the investment income over the life of the annuity. If your spouse is in a high tax bracket and generates a lot of interest income, annuities can be a way of reducing the tax bill.
Most professionals recommend annuities, but usually to a maximum of 25% of your investment portfolio. The ideal investor is usually past age 70 and is paying tax installments quarterly or has large income tax deductions from your retirement income. Not all investors though are over age 70. Some annuities work well with people in their 60s since they can sometimes qualify for insured annuities, which guarantee the principal amount tax free to beneficiaries upon death. This is done by purchasing a life insurance policy.
Insurance companies also allow you to purchase insurance on a smaller amount of the principal. Talk to your financial professional to see if annuities might help boost your income and reduce your tax bill.
The additional annual growth from tax deferral in a deferred (savings account type of) annuity account, compared to a stock or bond index mutual fund that is outside an annuity account, is less than 0.2% (see cash flow projection on annuityevaluator.com).
An immediate annuity that pays you a stream of periodic payments has no tax-deferred advantage over a stock or bond index mutual fund that is outside an annuity account
An index mutual fund that is outside an annuity account generates few short-term capital gains and, therefore, is mostly taxed at a low long-term capital gains tax rate, compared to annuity income which is taxed at the higher ordinary tax rate. Some of the annuity income is excluded from taxes, but the higher tax rate offsets the benefit of the exclusion.
Why not wait until interest rates get up to a reasonable figure and then buy 30 year US Treasury bonds. With Treasury Direct there are no fees. For most people over 60 years old this is a life annuity. Worst thing that can happen if you live past the bond’s maturity is that you get all of your money back. Die before that and your heirs get 100% of the bonds at maturity. The best of all possible worlds would be if Treasury Direct opened IRAs also with no fees.