ROTH annuity options

[RunnerDude]

I am relatively new to annuities and Roth conversions. I have a 68 year old (single, female) Medicare client with about $965,000 in Edward Jones ($300K is non-qualified; the rest in traditional IRA accounts). She is interested in protecting her money from loss due to market downturns, inflation, and future tax increases- as well as potential long-term care needs in the future. She also wants to leave a legacy for her children and grandchildren. Her home is paid off, and her monthly income consists of $2,000 from social security and $1,000 from Edward Jones. She states that Edward Jones is charging about 2% per year to manage her accounts. She is concerned because of recent losses due to market downturns. I have briefly mentioned the idea of converting about $500,000 to Roth accounts of some type, and she is willing to listen. I know about the Allianz Benefit Control FIA with Roth conversion, but would like to know other possible options. I would appreciate any advice. Thanks.

 

[scagnt83]

So you want to do the ROTH as a legacy solution?

Its going to be hard to make the numbers work out well these days, especially with current annuity rates. Lots to factor in with a conversion, especially the price of being bumped into a higher tax bracket in the year of the conversion, also loss of tax credits, deductions, etc. Without their accountant involved its almost impossible to do the math correctly.

Most ROTH conversions are not a single conversion, but multiple conversions to avoid being bumped into a higher tax bracket on that converted money. And the number of annuities that are flexible premium are very few these days. So that would mean multiple products over multiple years.

Imo, you are going down a rabbit hole that you probably dont need to.

Her savings are being gutted by EJ with a 2% fee. She is worried about market downturns and protecting her assets. She is the perfect annuity prospect WITHOUT including the complication of a roth conversion.

IRA funds can be used as legacy assets even with RMDs being taken out. There are multiple annuity products out there that have DB riders that give guaranteed accumulation. And RMDs can just be contributed to a flexible premium annuity or other investment that will leave a legacy as well.

Speaking of RMDs, is she insurable for life insurance?? That is by far the best way to leave a legacy. She can take RMDs and use them to fund a life policy, thus giving her 2 very effective forms of legacy building.

If insurable, you could also look at an annuity with an income rider and let the income rider fund the life policy.

There is software out there that can do conversion comparisons. Or you could spreadsheet it. But depending on the clients personal tax situation, there can be a lot of things you can miss. Best to have their accountant involved because extra income can cause them to lose certain tax deductions or tax credits, even without being bumped into the next bracket. After the tax hit, it rarely makes sense unless their tax rate is fluctuating over time. You got her interest with the conversion, now pivot into her main concerns and show how the annuity fixes that. The whole conversion issue is going to be a 6 month long rabbit hole that is going to pit you against her EJ guy in a game of spreadsheet comparisons of her taxes, rates of return, etc. And since he can provide a better rate of return, he is going to win that game. You need to play your cards that are strongest: that is safety, guarantees, legacy building, no fees or minimal fees.

 

[DHK]

Why not use the Athene Agility 10 FIA to do 10% level withdrawals to purchase NQ SPIAs each year for 10 years? NQ SPIAs are only taxable for the exclusion ratio and if you do it each year for 10 years, you'll be "DCA'ing" into the mortality tables for lifetime income.

In addition, you won't be doing a $500k conversion in ONE year to shoot their taxable income through the roof.

 

[scagnt83]

Why not use the Athene Agility 10 FIA to do 10% level withdrawals to purchase NQ SPIAs each year for 10 years? NQ SPIAs are only taxable for the exclusion ratio and if you do it each year for 10 years, you'll be "DCA'ing" into the mortality tables for lifetime income.

In addition, you won't be doing a $500k conversion in ONE year to shoot their taxable income through the roof.

Go back and look at the situation. The lady is only taking $1k a month from a $1.2m pot of money. Thats a 1% withdrawal rate. She is looking to leave a legacy, not maximize income.

But maybe the funds are very conservative and that is the reason for the low withdrawal rate. In that case, an income strategy might be the key to winning her as a client. Good reason to do a thorough fact finder and ask lots of questions.

She could leave it in the Agility, its a solid wealth transfer annuity.

 

[DHK]

She is interested in protecting her money from loss due to market downturns, inflation, and future tax increases- as well as potential long-term care needs in the future. She also wants to leave a legacy for her children and grandchildren.

Looks like the legacy is a secondary consideration.

NQ SPIAs would work to maximize income and protect against everything else. I'd just prefer to do it over time to spread out the tax liability rather than all at once.

If you did one NQ SPIA a year for 10 years... that 10th SPIA would be a nice chunk of change. When I last did a proposal for that for a 65 year old, the distribution rate was about 6.8% when it was all combined for lifetime income.

PLUS the Agility has its own lifetime income benefit rider (included - no fee), but I would assume that would be taxable. It'll probably be well below the standard deduction, so it wouldn't have any taxes owed on it.

If you're in any other state outside of California, the Agility has a LTC benefit rider too. You can also carve out a portion of the portfolio to buy a stand-alone asset-based LTC policy.

For legacy for children, if insurable, I'd look at non-lapse GUL products OR single premium life to "double" the amount she originally had in mind on leaving.

 

[DHK]

Note: she's only 3-4 years away from RMD's. She won't be taking only $1,000 a month from the portfolio at that point - not with over $600k in qualified assets.

 

[shooter]

Just thinking out loud.
Runner Dude, do you have a security license?
It has been a while since I was licensed.
But thought you couldn't discuss securities with a client unless you were.
Maybe not.

 

[DHK]

Just thinking out loud.
Runner Dude, do you have a security license?
It has been a while since I was licensed.
But thought you couldn't discuss securities with a client unless you were.
Maybe not.

Who is talking about securities?

Unless he is making a buy, hold, sell, or analysis of individual or asset allocation of securities, he's not giving securities advice. He will be presenting an alternative strategy, not presenting a recommendation based on "risk analysis" or anything of the sort.

Please see the sticky at the top of the annuity sub-forum regarding "New Annuity Suitability" for great guidelines on this topic.

 

[Allen Trent]

She won't be taking only $1,000 a month from the portfolio at that point - not with over $600k in qualified assets.

That is a fact. Even with new 2022 lower RMD tables, age 72 will still need to take $22k per year RMD based on $600k balance. If the facts in post are accurate based on current income, she could increase IRA distributions now a bit & stay in the 0/10/15% bracket or small Roth conversions. Would likely want to avoid large distributions or conversions that would put her in higher tax brackets, expose her SS checks to 50% or 85% taxation or cause her to hit the substantially higher Medicare Premiums based on income. Best to have a CPA find some nice amounts to pull out annually or convert to Roth. The increased distributions (if income is not needed) could be used to leverage into Life insurance or Life insurance LTC hybrid depending on needs, insurability.

She may also be a candidate for some of the money to make it into Fixed index annuities or even RILA VA to take away some or all of the downside risk.

Side note—I would be shocked if her current account is charging her 2% in annual fees

PS— as much as I love Tom Hegna materials, I am not seeing a big need for a SPIA based on information provided, especially considering the record low interest rate & longer mortality rates priced in current SPIA offerings. Might be able to use an income rider on a FIA for some of that, if income becomes a need

 

[LostDollar]

Side note—I would be shocked if her current account is charging her 2% in annual fees

Caveat, not an agent

If financial advisors are charging 1.5% of assets under management, I don't know if it is surprising to see a suggestion that EDJ is charging 2%.