Annuity for 25 Year Old Client

[aus0417]

What about just withdrawing the interest each year and leaving the principle intact?

 

[Brantley]

What about just withdrawing the interest each year and leaving the principle intact?

He will be forced to pay ordinary income tax on the interest and the 10% penalty for early withdrawal because he is under 59 1/2. Plus the fact that the interest he's going to earn in any annuity contract is going to be paltry at this point. Even if the market goes way up and he's in an index annuity, the caps are so low, it's just not worth it.

I love to sell annuities more than anyone but in this case, IMHO you'd be forcing a square peg into a round hole.

 

[Franz Kafka]

What about just withdrawing the interest each year and leaving the principle intact?

If he's absolutely fine with paying the penalty, let him do what he wants. Find out how much income he will need - if it's low enough he won't pay much tax. If he can get 3%, that's still 2.7%. Make sure he understands any withdrawal above 10% will be subject to surrender charges on top of everything else. JMO

 

[Paul K.]

Check out some blue chip dividend paying stock, he could yield in the 3-6% range. Combine them with some REITs and UITs and s/t bonds he could do well for cash flow. I definitely wouldn't go with any type of annuity at age 25, that's just totally unethical.

 

[aus0417]

Let me clarify one thing: I did not suggest an annuity to this guy, he came to me with his mind made up that he is going to buy one...he just wanted me to find the best strategy for him. I just don't want you guys thinking I'm trying to push something on him that is not in his best interest.

Secondly, if he puts money in a fixed annuity, w/draws the interest each year @ say 3%, pays the income taxes (he is not in a high tax bracket) and the 10% penalty, don't you think he would have still made more money than if he had it in a savings account earning 1.1 to 1.5% (which is still taxable)? Also, if goes with a bonus annuity (7 to 8%) this would offset the 10% penalty.

If this is flawed thinking, please explain.

 

[scagnt83]

Secondly, if he puts money in a fixed annuity, w/draws the interest each year @ say 3%, pays the income taxes (he is not in a high tax bracket) and the 10% penalty, don't you think he would have still made more money than if he had it in a savings account earning 1.1 to 1.5% (which is still taxable)? Also, if goes with a bonus annuity (7 to 8%) this would offset the 10% penalty.

If this is flawed thinking, please explain.

Remember that short term capital gains are taxed as income.
So any gains over $380k its 35%. And dont forget state taxes if applicable (8% in my state).

So assuming he doubled $500k to get $1mill, he will loose $175k to the feds, giving him a total of $825k (not counting state taxes)

The biggest variable is the cost basis the money.

Assuming my example above, right now $500k is basically tax free, only gains are taxed.

Moving the money to an annuity would change the tax status of the basis (whatever it is), into a taxable asset.

Of course the flip side to that is the tax deferral of the gains in the annuity.

First, he should take any first year income from wherever the lump sum is now.

Second, he needs to decide if taking a 25% fed income hit + 10% "pre 59.5" penalty + any state income tax, is worth it.
Thats a minimum 35% tax hit on income taken.


If he puts the $ into a brokerage account with some high quality bond funds (which have an extremely consistent return of 5%-6%, and extremely little volatility) , he can easily take a 4% income and still most likely have 1%-2% growth in the account.

The big thing with the brokerage account is taking 1st year income now, then delaying taking gains until year two; this delays gains over the one year mark and makes income taxable as Long Term Capital Gains (15% + state).

This cuts the tax hit in half. It also doesnt make the basis taxable.


If he wanted to deffer income for a while then the annuity might make more sense because of the tax deferral.

 

[briko3]

Remember that short term capital gains are taxed as income.
So any gains over $380k its 35%. And dont forget state taxes if applicable (8% in my state).

So assuming he doubled $500k to get $1mill, he will loose $175k to the feds, giving him a total of $825k (not counting state taxes)

The biggest variable is the cost basis the money.

Assuming my example above, right now $500k is basically tax free, only gains are taxed.

Moving the money to an annuity would change the tax status of the basis (whatever it is), into a taxable asset.

Of course the flip side to that is the tax deferral of the gains in the annuity.

First, he should take any first year income from wherever the lump sum is now.

Second, he needs to decide if taking a 25% fed income hit + 10% "pre 59.5" penalty + any state income tax, is worth it.
Thats a minimum 35% tax hit on income taken.


If he puts the $ into a brokerage account with some high quality bond funds (which have an extremely consistent return of 5%-6%, and extremely little volatility) , he can easily take a 4% income and still most likely have 1%-2% growth in the account.

The big thing with the brokerage account is taking 1st year income now, then delaying taking gains until year two; this delays gains over the one year mark and makes income taxable as Long Term Capital Gains (15%).

This cuts the tax hit in half. It also doesnt make the basis taxable.


If he wanted to deffer income for a while then the annuity might make more sense because of the tax deferral.

Good advice. I was thinking the same thing with structuring it to get the capital gains rate instead of income tax rate. BTW, there's no reason to do only one thing. Show him a strategy where he puts a couple hundred grand in an annuity and put the rest in a brokerage account. He gets what he wants and you give him flexibility.

 

[Norwayguy]

Let me clarify one thing: I did not suggest an annuity to this guy, he came to me with his mind made up that he is going to buy one...he just wanted me to find the best strategy for him. I just don't want you guys thinking I'm trying to push something on him that is not in his best interest.

Secondly, if he puts money in a fixed annuity, w/draws the interest each year @ say 3%, pays the income taxes (he is not in a high tax bracket) and the 10% penalty, don't you think he would have still made more money than if he had it in a savings account earning 1.1 to 1.5% (which is still taxable)? Also, if goes with a bonus annuity (7 to 8%) this would offset the 10% penalty.

If this is flawed thinking, please explain.

Just to clarify the 7 to 8 percent bonus is a 1 time thing...The 10 percent penalty is on all withdrawals until age 59 1/2.

Now the original thought process isn't totally crazy because the savings account would also be taxable Fed & State at the same rate so the only variable is the 10 percent penalty so if earning 1 percent in savings and 3 percent in an annuity then yes he would be better off....

Still don't think this is the best approach but like has been said before some of that money into an annuity might be a good thing...Second thing is to have notes and notes and more notes on this transaction because I can see the future and 5-6 years down the road he runs into someone else and they say you could have done this or this and not been subject to that penalty at which point having tottally forgotten all that this transaction comes back to bite you.

 

[Franz Kafka]

If he puts the $ into a brokerage account with some high quality bond funds (which have an extremely consistent return of 5%-6%, and extremely little volatility) , he can easily take a 4% income and still most likely have 1%-2% growth in the account.

You're dangerous.

 

[aus0417]

I appreciate everyone's input on this; however, I regret to inform you that all your thoughts and ideas were in vain. As it turns out, the guy hasn't really made any money yet (although that's not what I was told initially) and was only seeking "hypothetical information."

People piss me off...