Lower Taxes with a Fixed Annuity
Bob Richards--Marketing and Financial Services
The objective to lower taxes is important to all but especially to those who own mutual funds
A study concluded that high tax-bracket investors who had held taxable equity mutual funds were losing 25% of their fund earnings to taxes every year (a mutual fund must pass through all of its taxable incoer to the shareholders). And bond funds’ returns were shown to have lost almost 40% to income tax. This loss to taxes can be attributed partially to how portfolio managers manage the tax liability that is passed on to shareholders. Each time the fund administrator claims a distribution, like an interest distribution or a short-or long term capital gain, it flows through to your taxable income. And this occurs even though you never withdraw any cash from the fund. Therefore, if you presently don’t need the income from a fund investment, why pay taxes on its earnings? Why not lower taxes?
According to the previously mentioned study, if you invest $100,000 in a bond fund that yields 6%, you’d lose up to 40% to taxes resulting in a 3.6% after-tax return. After five years, your account would be worth $119,344. On the other hand, with the objective to lower taxes, making investments that allows interest to accumulate tax-deferred, such as a variable annuity or fixed annuity, with a five-year 5% rate would increase to $127,628. The added income on your net worth statement, $8,000, results from the lower taxes that are in your possession earning for you. Even though the tax is only deferred and will eventally need to be paid, it does not need to be paid during your lifetime.
All this doesn’t mean that mutual funds are poor investment choices as in an IRA, the investment is sheltered from tax. However, for non-sheltered funds, a fixed annuity may be good option to lower taxes. The rate of interest is locked in for a term which you select, your principal is assured by the claims paying ability of the issuing organization, and you decide when to pay income taxes (until the most optimal time) and thus lower taxes.
You can learn more about fixed annuities.