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Old 03-05-2013, 09:23 AM   #21
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Originally Posted by panhead View Post
PB: please look at this:
http://www.fsdfinancial.com/SPIA_INFO_LBL.pdf

I just started looking at SPIAs, but what this seems to say is that if I buy a SPIA with after tax dollars then every distribution I receive from it will have a portion taxed at my income tax rate. This portion is based on the original investment/expected return. My point, is that if I am using after tax dollars invested in stocks and muni bonds to generate income, and I am in the 15% tax bracket, my taxable income from dividends/interest/CG is -0- in the current tax environment. If I buy the SPIA, it appears I will have to pay 15% tax on at least a portion of this money, until my complete after tax investment is returned in full, then the full distribution is taxed as income.

Now, if I use tax deferred accounts to buy the SPIA (obviously not tax exempt, ie ROTH) then each distribution will be taxed at my income rate, which it would be even if I was just withdrawing from it, so the tax liability is the same, the only difference is that you can't alter the distributions after buying the annuity to reduce your tax liability. But...the same distribution, either thru an annuity or simply withdrawing from the account, would be taxed the same.

Does this make sense?
I understand and agree with all you said, but I'm struggling to see what it has to do with the concern you expressed earlier of keeping bonds in your tax-deferred accounts.

If we assume that over the years that the return on bonds will be less than the return on equities, I can see that if you had equities in your tax-deferred accounts that when the time comes to buy the SPIA that you would have more to buy the SPIA and higher SPIA benefit payments. However, you would also have a much lower taxable account as a result of paying out 15% taxes on interest on the bonds in your taxable accounts.
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Old 03-05-2013, 11:05 AM   #22
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Quote:
Originally Posted by pb4uski View Post
I understand and agree with all you said, but I'm struggling to see what it has to do with the concern you expressed earlier of keeping bonds in your tax-deferred accounts.

If we assume that over the years that the return on bonds will be less than the return on equities, I can see that if you had equities in your tax-deferred accounts that when the time comes to buy the SPIA that you would have more to buy the SPIA and higher SPIA benefit payments. However, you would also have a much lower taxable account as a result of paying out 15% taxes on interest on the bonds in your taxable accounts.
Yes, I agree, unless I use a Intermediate Term muni bond fund in taxable (which I am planning on doing) instead of TBM, this will keep taxes at bay. You hit the nail on the head about my concern: That keeping equities entirely out of deferred will likely limit it's growth and thus if I want to buy a SPIA using only this, I will likely have less in here to spend. In other words, I definitely want to keep the majority of my bonds in tax deferred, that is common sense. What I'm struggling with is if I should keep an equity component in my tax deferred to enhance growth for the future possibility of buying a SPIA. I'm leaning toward the fact (as you seem to agree with above) that the benefit of trying to increase growth in the deferred portion for this purpose simply doesn't make sense and further complicates things. If I need a bigger floor under income, I can use taxable $$ and take (what seems to be a reasonably small) tax hit.

Thank you very much for posing these questions, it's really helping me work thru my thought process on this.
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Old 03-05-2013, 11:31 AM   #23
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Panhead,
Thus far, your discussion has focused on taxable and tax-deferred (meaning 401-K or Traditional IRA). In addition, you could consider a Roth IRA. Then as you construct your withdrawal, you have four sources to draw from (taxable, deferred, Roth, SPIA).

Taxes are not a concern with a Roth (other than paying them up front when you deposit or convert from tax-deferred).

-- Rita
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Old 03-05-2013, 01:04 PM   #24
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Rita: Yes, I agree that the ROTH also plays a part here. In my specific circumstances, I have very little in ROTHs to date (like $5k) and I am currently not in a situation to do conversions as I'm working and in the 28% tax bracket. I'm doing the backdoor ROTH conversion thing and will continue to do so while I have income. I'm not sure what I'm going to invest in inside the ROTH. To date, I've been using it as a ego stock trading account, and have successfully proven to myself that I am no good at picking stocks. My current thinking is I'm going to buy VNQ (vanguard REIT index ETF) and add to this holding each year with the backdoor conversion.

Also, my taxable account is roughly twice as large as my deferred account, thus all of this conversation. 60 is a long way off for me (17 years) but my current thinking is I will likely buy a SPIA in the amount that it + (estimated) SS will be my required floor income. Whether or not that will leave anything in the deferred account or not, remains to be seen. If it does, I will do ROTH conversions as appropriate from a tax perspective.

All of this needs to be factored in, but my current concerns are setting my Asset allocation (which I've done) and determine if there really is a disadvantage to keeping all of my Fixed Income in deferred accounts (This discussion has led me to believe there is not). I'm doing a complete portfolio makeover in the next coming months, so that's why all the questions.

Regards,

Pan
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Old 03-05-2013, 04:18 PM   #25
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I need to print this thread out. Thanks, Panhead, for your post. It gave me more to think about.
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Old 03-06-2013, 01:27 PM   #26
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Hey AR, I'm glad this helped you, it definitely helped me as well!
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