Bonus annuities bust capital gains crunch from Taxmageddon
By Kevin Startt
The annual super-duper investment strategies are enveloping the covers of annual forecast issues of hot places to put your money, like Kiplingers, Forbes and Fortune. Is there an editorial bias against the use of indexed annuities as a viable savings strategy for volatility-plagued investors?
They say that the only people who don’t mind getting flu shots are taxpayers because they are used to getting it in the end. I was recruiting a local well-known Atlanta radio personality and financial adviser for our broker-dealer in the mid 2000s. The perennial $10 million producer had one “ding” on their U-4 caused by the cardinal sin of advising with full disclosure that a potential client use a fixed index annuity bonus that was fully vested to offset an increase in the capital gains rate during the 1990s. Managing capital gains now can certainly reduce tax liability later. With the market’s doubling since March 2009, there are a multitude of market shakers, like Apple and Google, that will be capital gain makers for Uncle Sam next year at much higher rates.
Not only did my broker-dealer at the time reject his application because of this minor offense, but the advisor had to spend $10,000 to defend their reputation, record and spend an enormous amount of time. Here we are again with an increase in the capital gains tax of 59 percent for some taxpayers. For most of us 99-percenters, like average Jacks and Jills who are mutual fund holders, the increase will be 33 percent or a rise from 155 to 20 percent.
There is no doubt that throughout the annals of history, capital always flows from countries that provide the highest return on equity with the least risks, one of which is taxes, like capital gains. This is one of the reasons why the United States continues to fall in economic freedom surveys and also why the idea of using an indexed annuity bonus to offset capital gains is still a legitimate idea, especially if the client has a long-term time horizon, will be in a lower tax bracket upon taking income, and understands that bonuses may result in lower cap rates. Even though the bonuses are not as lucrative as they were in the Clinton era, several indexed annuity providers still offer an 8 percent bonus which, for a $100,000 one-time deposit, would offset $500 of the capital gains incurred on the sale of a mutual fund at year end. In addition, the account would continue to benefit from triple tax deferred interest that annuities offer over the remainder of the term of the annuity. It's simple math in an uncertain fiscal cliff, where capital gains seem to be on the back burner in negotiation so far but are critical to capital formation, which leads to jobs in the end.
We are pulling out the Southern hospitality rug by starting the flu bug this year down here. I got a flu shot in the arm and not the rear end. Give your client and your own portfolio a shot in the arm through considering the use of a bonus annuity to offset the onset of capital gains and pains that go along with Taxmageddon.
The annual super-duper investment strategies are enveloping the covers of annual forecast issues of Kiplingers, Forbes and Fortune. Once again, indexed annuities with better than a 3.5 percent average annual return for the last 12 years are nowhere to be found. Is there an editorial bias against the use of indexed annuities as a viable savings strategy for volatility-plagued investors?