ROTH annuity options

[RunnerDude]

That's true- converting over 10-15 years would keep her in the 12% marginal tax bracket. It looks like her taxes would still be about $3,000 to $4,000 per year. I was trying to avoid the loss of her investment portfolio by converting faster prior to RMD's. I guess a lot depends on the future of higher tax and market risk. The FIA will also prevent her from losing more of her portfolio.

 

[DHK]

But the exclusion ratio only applies to the gains on the annuity. Putting her current after tax brokerage money into a new NQ SPIA would require her to sell the brokerage account, pay capital gains on any existing gains on the equity portions & then deposit into a NQ SPIA which will have almost no gains going forward at todays rates. I dont see that as a tax play as much as I would if she had old NQ Annuities with existing built up gains.

There's an assumed interest rate within a NQ SPIA that is the taxable portion of the income payments... even if putting in a premium with no other taxable gains.

https://www.investopedia.com/terms/e/exclusionratio.asp

 

[Allen Trent]

There's an assumed interest rate within a NQ SPIA that is the taxable portion of the income payments... even if putting in a premium with no other taxable gains.

https://www.investopedia.com/terms/e/exclusionratio.asp

Correct, but most SPIA currently have a very, very small exclusion ratio because almost everything the client is getting back is their own money. On a fixed period payment, it is easy to calculate:. 10 year fixed period payments on 100k deposit with $900 monthly checks will equal $108k in total checks. 100k/108k = 92.3% of each month checks are not taxed because it is your own money coming back. Only $831 per yr will be reported as taxable because only 8k of the total of 10 yrs payments will be interesr & the rest your own money.

On a life payout, it uses mortality assumption in the carrier calculation. So, yes it is good that you get to receive some interest & some gain each month of checks compared to a deferred annuity where you have to take out all interest first before getting cost basis, today it isn't as big of a benefit as SPIA rates are so low & mortality long compared to old annuities on the books that have old higher interest rates embedded in the contract & old outdated shorter mortality...both of which make the payout checks substantially higher than what is offered today in new money SPIA.

A 70 yr old female choosing her life only would only get $6900 per yr on $100k deposit. Would need to live 14-15 yrs to get back her own deposit. Her life expectancy at age 70 is 17.6 years. So, the exclusion ratio would assume she will receive 17.6 x $6919 for a total expected payment of $121774. 100000/121774 is 82.1%. so, sure only 18% is reported as taxable per year but it is because she is expected to only earn a total of about 1% annually & has to live 17.6 years to do that & trade off she could get no checks. For those that don't need income, I just don't think the exclusion ratio is that big of benefit to irrevocably give up your pot oof money in exchange for a historically low rate if you don't need the checks at all.

Best SPIA plays I see are those that need checks they can't outlive doing life layouts & Medicaid spend down fixed period SPIA to comply with Medicaid Life Expectancy tables

 

[Tahoe Ray]

The one firm I am familiar with locally charges 1.5%

That is massively high. Like DHK mentioned, coming "all in" around 2% (including all fees) can make sense but a management fee of 1.5% that goes the RIA/IAR is not competitive today.

 

[scagnt83]

That's true- converting over 10-15 years would keep her in the 12% marginal tax bracket. It looks like her taxes would still be about $3,000 to $4,000 per year. I was trying to avoid the loss of her investment portfolio by converting faster prior to RMD's. I guess a lot depends on the future of higher tax and market risk. The FIA will also prevent her from losing more of her portfolio.

RMDs do not cause a large loss of assets. You lose the taxes paid, but the payment is retained and just goes into a different investment. So "avoiding a loss" due to RMDs is not really a thing. Taxes are being paid either way in either scenario... RMDs are just a redistribution of assets, not a loss.

Your scenario of putting her in a 24% tax bracket would have her pay $120,000 in taxes vs. $60,000 if it was taxed at her existing bracket. So you are recommending a $60k loss compared to her current situation. Which means she will need to make an even higher rate of return to make up the difference vs. staying at a 12% tax bracket.

The #1 rule of ROTH Conversions are to NOT put them in a higher tax bracket if it can be helped. It is hurting the client, not helping them.

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No CPA would approve this plan if involved (which they 100% should be). And you will get torn to shreds by the EJ advisor if he is even half competent.

You are recommending she pay 100% more in taxes than necessary.

You are recommending a product that keeps her at a very high annual fee of 2%.

You are recommending she take a $120k loss over 4 years just to avoid RMD payments that deplete her assets LESS than your plan. (12% RMD bracket vs. 24% conversion)

She would lose around $50k in earnings over the next decade by converting and taking that big of a tax hit in that short of a time.

Nothing about this is suitable. You locked on to a product and are trying to make the situation fit. It doesnt.

You do have a great opportunity to sell just a normal IRA annuity here. And you are going to blow it with this conversion scheme.

 

[DHK]

Um... her qualified plan assets don't completely all belong to her anyway. A portion belongs to the IRS depending on the size of withdrawal and the tax bracket in the year taking the withdrawal.

There is something to be said for paying a known tax today instead of unknown taxes tomorrow.

However, this needs to be her choice and all the consequences surrounding the decision need to be spelled out.

Let her choose.

Assuming $700k in IRA assets, based on a flat 12%, $84,000 is still owed in taxes on that account (if it were possible to liquidate it all today and only stay in the 12% tax bracket).

Now, personally, I don't believe that taxes on the middle class (those earning < $100k) will be increasing any time soon. Not because of the economics of taxes, but because of the policies and current political party in power. I don't believe in fear mongering, but I do believe in bringing up concerns.

No CPA would approve this plan if involved (which they 100% should be). And you will get torn to shreds by the EJ advisor if he is even half competent.

Depends on what is being compared and what the client wants to do.

And EJ CANNOT advise on taxes unless they too, are a CPA. That's the official stance of their compliance department... as is the standard line from most broker/dealer compliance departments.

 

[Allen Trent]

Assuming $700k in IRA assets, based on a flat 12%, $84,000 is still owed in taxes on that account (if it were possible to liquidate it all today and only stay in the 12% tax bracket).

By liquidate, are you saying putting $700k on a tax return would be possible to be in the 12% bracket? I assume you mean over the course of many years. The 12% bracket is only up to $40,500 taxable income & it needs to be factored in that some of her SS checks will add to her taxable income.

IE:. Monthly 1k IRA checks + 2k SS checks would only allow 25k per year Roth conversions to stay in 12% bracket. 26k would put the next dollars into 22% & start having SS checks be taxed at 50% & eventually 85%>. Currently, the client as stated in the post is in the 0% tax bracket so it would definitely make sense to start moving some IRA money out or converting in advance of RMD to get it out in 0-12% brackets..

Best interest Annuity state would have a hard time making a case to move much more than 25k out each year from IRA to Roth @22% federal plus state tax plus tax on SS checks plus potential substantial extra Medicare income based premiums

 

[DHK]

Best interest Annuity state would have a hard time making a case to move much more than 25k out each year from IRA to Roth @22% federal plus state tax plus tax on SS checks plus potential substantial extra Medicare income based premiums

Best interest garbage doesn't matter. They'll judge the product and the situation and how much is left as liquid assets.

For everything else, it depends on what the client wants to do and if all the consequences of the decision are spelled out or not. If not, better be sure your E&O is up to date. If it is, make sure it's documented and the files are kept up to date.

Van Mueller does these kinds of plans all the time - premiums higher than their incomes because he's doing wealth transfers into life insurance.

At this point in this video, Van talks about an $85,000 life insurance premium. (Keep in mind the tax brackets being used are for 2017.)

"Biggest sale of all; $85,000/year life policy & $4 million DB managed by Van; 15% bracket; next $57,000 of income taxes at 15% = $8,200; Van Mueller rule of 99/15: If you add up all these columns, $23,400 + $73,900 = 15% bracket = $99,300 or less = 15% bracket. $50,000/year of income, couldn't I get another $40k, pay another 15% and get rid of taxes on $1.968 million and only cost you $200k of taxes? Do it with Life insurance, annuities, MEC, etc."



Just disclose the consequences.

 

[Allen Trent]

Best interest garbage doesn't matter. They'll judge the product and the situation and how much is left as liquid assets.

For everything else, it depends on what the client wants to do and if all the consequences of the decision are spelled out or not. If not, better be sure your E&O is up to date. If it is, make sure it's documented and the files are kept up to date.

Van Mueller does these kinds of plans all the time - premiums higher than their incomes because he's doing wealth transfers into life insurance.

At this point in this video, Van talks about an $85,000 life insurance premium. (Keep in mind the tax brackets being used are for 2017.)

"Biggest sale of all; $85,000/year life policy & $4 million DB managed by Van; 15% bracket; next $57,000 of income taxes at 15% = $8,200; Van Mueller rule of 99/15: If you add up all these columns, $23,400 + $73,900 = 15% bracket = $99,300 or less = 15% bracket. $50,000/year of income, couldn't I get another $40k, pay another 15% and get rid of taxes on $1.968 million and only cost you $200k of taxes? Do it with Life insurance, annuities, MEC, etc."



Just disclose the consequences.

Yes, I am familiar with large premium cases, but the clients cases that I have been affiliated with this year ranging from $50k to $250k per year premiums were all either using income to pay premiums or they were already in relatively high tax brackets.

I highly doubt Van Mueller has a client with $1000 per month income in 0% tax bracket paying $85k yr in life premiums. I just don't foresee a case where someone is in the 0% tax bracket & they are put in 22%, 30,35% not to mention state, SS tax & Medicare premium surcharges would be well received by anyone reviewing the case details. Most reputable life carriers also have maximum % of income or liquid assets that can be used to pay life insurance premiums.

All in moderation I believe.

 

[scagnt83]

Um... her qualified plan assets don't completely all belong to her anyway. A portion belongs to the IRS depending on the size of withdrawal and the tax bracket in the year taking the withdrawal.

This is nothing but "sales jargon". You are saying she owes taxes on it. Which is true either way, conversion or no conversion.

The same could be said for any taxable investment someone owns. House, car, non-qualified account, a CD, bank account, etc. etc. etc. But you wouldnt say that about any of those would you?

Either she gives the IRS a huge lump sum over 4 years (per the OPs plan). Or she gives the IRS small amounts over a long number of years and uses the IRS's portion of the assets to earn more interest for herself.

There is something to be said for paying a known tax today instead of unknown taxes tomorrow.

No way to know what taxes will be in 4 years or 40 years.

But one fact we do know, it has been 100 years since someone with $36k in income has not been in a 24% tax bracket.

And most any tax expert would agree that the likelihood of $36k ever being taxed at 24% in the future is slim to none.

Assuming $700k in IRA assets, based on a flat 12%, $84,000 is still owed in taxes on that account (if it were possible to liquidate it all today and only stay in the 12% tax bracket).

Now, personally, I don't believe that taxes on the middle class (those earning < $100k) will be increasing any time soon. Not because of the economics of taxes, but because of the policies and current political party in power. I don't believe in fear mongering, but I do believe in bringing up concerns.

50% less in taxes is 50% less in taxes. ( I was using $500k since the OP said that was going to be his recommendation)


A tax rate not seen in 100 years is a concern?

The only reason it was that high on that amount so long ago is because the value was worth a lot more back then.

Depends on what is being compared and what the client wants to do.

And EJ CANNOT advise on taxes unless they too, are a CPA. That's the official stance of their compliance department... as is the standard line from most broker/dealer compliance departments.

Well, we know here what is being compared and what the client wants.

The OP is suggesting she take a $120k loss over 4 years.... in order to avoid a few thousand in taxes per year.

The EJ advisor is recommending she keep the $120k in her account and earn interest on it. Transfer RMDs to her NQ account and pay the $3k per year in taxes.

And at that very basic level, lets compare the numbers...$120k x 5% per year = $6k

Taxes on RMDs will be around $2500 at age 72. And around $3800 at age 82.

Thats a $3500 a year loss in earnings going with the OPs recommendation. And thats not counting any tax credits/deductions she might lose, and not counting increased Medicare premiums.

Taking a $120k loss just to avoid a few thousand a year in taxes is not a suitable recommendation, much less in their best interest. Any CPA worth 2 cents would recommend against this plan.

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And an EJ advisor cant "advise" on taxes. But they can give factual info on taxes... just like you and I can. You better believe they run numbers for ROTH conversions for their clients that include the given tax rate and Net returns for each scenario.