The question of whether it is a good idea to house an actively traded portfolio in a no-load variable annuity (VA) is easy to answer with a simple mathematical analysis.
Let’s take a 45-year-old investor who has $250,000 allocated to a brokerage account that he wants “actively traded.” I will let the money grow in the account for 20 years and then will take an equal amount of money out of the account every year from ages 66–85, where the account balance after the last withdrawal is $0.
I’m going to assume an 8 percent gross rate of return and that the actively traded account incurs short-term capital gains taxes on all of its growth. I’ll assume the client is in the 30 percent income tax
bracket (which means the net return after taxes each year will be 5.6 percent).
How much could be removed from the brokerage account every year? $62,724
What if the client had his actively traded account in a no-load VA with only a $20-monthly fee? $117,319
But because all of the growth will get hit with income taxes, I need to reduce the $117,319 accordingly.
I’ll assume the client stays in the 30 percent income tax bracket in retirement, and for simplicity sake, I’ll spread the $250,000 basis
out equally for the 20-year withdrawal period.
How much net will the client have using the no-load VA every year? $85,837
Which one will the client like better, $65,724 or $85,837? Of course, the higher number.
And what did we really do differently for this client? Nothing, except take his actively traded account and place it inside a no-load variable annuity.
If you have clients who have X amount of their money in an actively traded portfolio where the gains each year will be hit with short-term capital gains taxes
, mathematically, it will make much more sense to have those accounts traded inside a no-load variable