The greatest annuity mumpsimus

By Paul Cross

Annuity National Brokerage Co.


Perhaps the greatest expressed objection and the greatest silent procrastinator to tax-deferred annuities is a mumpsimus. My definition of a mumpsimus is the persistent belief in a false idea or concept. "The world is flat" is a mumpsimus that survived a long time. Perhaps the next runner up is, "you've got to pay the tax someday."

If I could show you how to grow an annuity into a rather large sum of money which will pay-out streams of income during your life, but which you will have never paid tax on its growth, would you like to know how?

Okay, but first let me say that annuities can make you so much money in so many ways you just may feel guilty. Remember the last time you made so much money you felt guilty? Oh, so it's been a while.

Annuities grow and compound tax-deferred, creating an automatic re-investment cash flow with tax dollars compounding on tax dollars. For many retirees, annuities may reduce or eliminate income tax on social security income. Annuities can provide 45 percent more growth on money sitting in bank CDs and money markets.

Forty-five percent more growth in the first year

Sample illustration: You have a small bank CD earning on $1,000. Come year's end, your friendly banker sends you a 1099. In a 31 percent combined FIT & SIT tax bracket, you pay $310 in tax, leaving you with only $690 after tax. So, $310 equals 31 percent of the amount you earned, but it equals 45 percent of the amount you get to keep. If you were to transfer the bank CD to an annuity -- and the annuity earns no more than the bank CD -- your annuity earns $1,000, and you pay zero tax. And $1,000 is 45 percent more than $690.

The mumpsimus: "But I have to pay the tax someday, don't I?"

Perhaps, but only if you insist. You can grow the annuity into a rather large sum of money on which you have never paid tax and then enjoy streams of income from the annuity on which you have never paid tax. If you could develop an income with 100 percent tax dollars would you like to know how? Was that a yes?

Sample illustration: $100,000 at 6 percent compounding tax-deferred will grow into $320,715 in 20 years. That is $95,627 more than the after tax growth of the bank CD's $225,088. That $95,627 is made up of tax dollars and the compound growth on tax dollars that were automatically reinvested and compounded tax-deferred. If we exercised a partial 1035 exchange of the $95,627 into a SPIA, would we not have developed an income with 100 percent tax dollars?

After converting the tax dollars into a stream of income, note that the annuity value equals the bank CD value $225,088, that is for one year, and then the growth of the annuity will again surge beyond the bank value and in a few years you could again transfer the tax dollars into another SPIA.

Another option: You could elect an interest income option on the annuity value of $320,000 and enjoy an interest income for life, and then your spouse, named as your designated beneficiary, may continue the interest income for the remainder of her life. And, neither of you will have paid tax on the growth of the annuity that is providing the interest income.

"Oh, I get it, but my children will have to pay the tax dollars, won't they?"

Thanks to the [IRS-PLR 200151038], your children, as designated beneficiaries, can now convert big tax balloon payments into streams of income over their life expectancies.

Annuities can make you and your family beneficiaries so much money so many ways, all of you just may feel guilty -- but it's a good guilty feeling.

*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.