Deferred Fixed Annuities

[pb4uski]

^^^^ Ready. Fire. Aim.

I think it would be more prudent to find out the specifics of the alleged insurance before judging... but I agree that it is odd.

 

[ShokWaveRider]

I have a question on annuity. With some of my finds in Penfed CD already at 3.5 percent 5 years term. My Chase bank adviser suggested on my prefer CD at Chase expiring soon to change to a 5 years annuity at 3.3 verse a CD at 3.1 percent. He suggest that the annuity is tax deferred, interest compounded daily, and insured up to $1M. Not familiar with the annuity so any input is appreciated!

Not sure if it is insured, in Florida there is a Annuity guarantee up to $250k per contract per company. (One contract allowed in each company) $1m seems like a sales tactic to me. Does not sound right and as you know you can never believe a sales person with respect to them.

That said, the fixed deferred annuity is a good way to shelter returns on taxable money to keep MAGI down for ACA purposes. You can get 3.1% for a 3 year now though, so why 5?

 

[brewer12345]

Not sure if it is insured, in Florida there is a Annuity guarantee up to $250k per contract per company.

This is coverage by the state guaranty fund. The fund is only supported by assessments on other insurance companies operating in the state. This structure will not hold up if an insurer of any size goes under.

 

[NM_Mike]

I'm thinking about doing the same things as the OP. My plan is to invest about 15% of my net worth and putting the SPIAs in a ROTH. By putting the SPIAs in a Roth, I am generating a tax free money making machine.
Mike

 

[njhowie]

I'm thinking about doing the same things as the OP. My plan is to invest about 15% of my net worth and putting the SPIAs in a ROTH. By putting the SPIAs in a Roth, I am generating a tax free money making machine.
Mike

Just be aware of all the potential issues, as many folks readily point out in the annuity threads. A few of the most important being:

1. Expenses and fees - be very sure you understand how much you are paying.

2. Understand that whatever the annual "return" is, that a portion of it is your own money. It is not the same as APY on a fixed income product like a CD, treasury, or other fixed income instrument.

3. When you pass away, regardless of how soon, unless you're paying for additional riders, that money is gone. As comfortable as it may seem for having the guarantee of the income stream for some period (or the rest of your life), essentially you are paying for a longevity insurance policy - wagering that you will live long enough to recoup the amount paid plus a lot more. It's effectively the inverse of a life insurance policy.

 

[bada bing]

I'm thinking about doing the same things as the OP. My plan is to invest about 15% of my net worth and putting the SPIAs in a ROTH. By putting the SPIAs in a Roth, I am generating a tax free money making machine.
Mike

A Roth is already a "tax free money making machine" irregardless of what
investments you put in it. I find it useful to consider annuities as insurance
products, rather than investments. Considered as an investment, the actual
return on an annuity, after you discount for return of capital, is generally pretty
low. The tax advantages of money in a Roth usually are better utilized by investing
in the higher risk/return part of the allocation of your portfolio.

An annuity is very much like the mirror image of a level premium term life
policy. One insures if you die too soon, the other insures if you die too late.
That is the most useful way to evaluate an annuity. Used as investments, they
pretty much suck.

 

[ShokWaveRider]

Please do not confuse or compare "Deferred Fixed Annuities" (AKA MYGAs) with all the other HIGH Fee annuity instruments out there. Yes we hate those unless the advantages for an individual are worth the extra fees, these are TBD on an individuals particular situation and rquirements. MYGAs do NOT have associated fees unless you annuitize them after the fixed period. They a no different monetarily to a CD with a Bank or CU, just with an Insurance company. So like all Insurance instruments they are not FDIC insured which is the only real downside to a MYGA. But stick with an A+ or above company and all will be OK, as they are regulated. A "Deferred Fixed Annuities" or MYGA has it's uses, primarily the "Deferred" part. Income is NOT taxed until it is taken out (Say after 3 to 5 years), that is the difference between them and a regular bank or CU CD that is taxed as regular income in the year it is received. This can be handy for those managing taxable fund returns and MAGI in order to take advantage of programs such as the ACA.

Full disclosure, I am not an insurance agent, nor do I have any MYGAs yet. But I am considering them in order to reduce MAGI for the next 3 years of ACA subsidies for DW. It still works out financially far better paying the tax at maturity than it does not getting the ACA subsidy for 3 years till she goes on Medicare, or claims her SS early to cover it.

A good place to lean about MYGAs is here: https://www.immediateannuities.com/deferred-annuities/

 

[target2019]

I'm thinking about doing the same things as the OP. My plan is to invest about 15% of my net worth and putting the SPIAs in a ROTH. By putting the SPIAs in a Roth, I am generating a tax free money making machine.
Mike

Correct me if I'm wrong. Your plan is to buy an annuity contract inside a Roth. Then let it grow by 3% or some other guaranteed rate, until you're out of annuity penalty period. Then you annuitize, and the payout is a Roth distribution.
QUESTION: how do you get 15% of your net worth into Roth at the time? Contribution limits in effect?

 

[capjak]

Correct me if I'm wrong. Your plan is to buy an annuity contract inside a Roth. Then let it grow by 3% or some other guaranteed rate, until you're out of annuity penalty period. Then you annuitize, and the payout is a Roth distribution.
QUESTION: how do you get 15% of your net worth into Roth at the time? Contribution limits in effect?

Assume already have done a "backdoor roth". A backdoor Roth is a conversion of Traditional IRA assets to a Roth IRA. Currently, anyone can convert money that they have put into a Traditional IRA to a Roth IRA, no matter how much income they earn. What’s more, they can also roll as much money as they want from an existing Traditional IRA into a Roth IRA. In other words, if the Traditional IRA has more than the yearly contribution limits on IRAs, you can roll over that larger sum into a Roth at one time.
https://www.rothira.com/what-is-a-backdoor-roth-ira

 

[zinger1457]

Assume already have done a "backdoor roth". A backdoor Roth is a conversion of Traditional IRA assets to a Roth IRA. Currently, anyone can convert money that they have put into a Traditional IRA to a Roth IRA, no matter how much income they earn. What’s more, they can also roll as much money as they want from an existing Traditional IRA into a Roth IRA. In other words, if the Traditional IRA has more than the yearly contribution limits on IRAs, you can roll over that larger sum into a Roth at one time.
https://www.rothira.com/what-is-a-backdoor-roth-ira

The problem is most people have tax deferred money in their t-IRA, if you convert any of that money you have to pay taxes on it. The benefit of the backdoor is for people whose income don't allow ROTH contributions to be able to make non-deductible t-IRA/401K contributions then convert that over to a ROTH tax free. Even in that case you still might get hit with a tax bill if converting from a t-IRA, I believe they look at the total of all your IRA accounts, if 90% is deferred and 10% after tax then you pay taxes on 90% of the conversion, they don't allow you to just select the non-deductible contribution. My understanding is that 401K plans do allow you to select just the non-deductible contribution when converting to a ROTH, the problem is not all 401k's allow non-deductible contributions .

 

[NM_Mike]

Let me clarify a few things. I have been doing ROTH conversions for several years and will continue until I am 70 1/2 (I am currently mid 60s). By that time, I should have 15% of my net worth in the ROTH. I do not have any heirs to worry about. I should have said that by buying SPIAs inside the ROTH I would be creating a tax free "income" generating machine. I understand that the income is mostly my money, but what else could I put my money and get over 6% tax free income? If I invest in a 60/40 mix, I am back to the 4% SWR.
Mike

 

[pb4uski]

No SPIA will provide you with 6% income... you might be confusing payout rate with rate of return.

Below is a table that shows your rate of return of a SPIA with a 6% payout rate based on how many years of payments that you receive. Even if you receive benefits for 50 years you still don't ever get to a 6% return.

Period	Cash Flow	IRR
0	-100
1	6
2	6
3	6
4	6
5	6
6	6	-23.17%
7	6	-17.93%
8	6	-13.94%
9	6	-10.82%
10	6	-8.35%
11	6	-6.36%
12	6	-4.72%
13	6	-3.37%
14	6	-2.24%
15	6	-1.29%
16	6	-0.48%
17	6	0.22%
18	6	0.82%
19	6	1.35%
20	6	1.80%
21	6	2.20%
22	6	2.56%
23	6	2.87%
24	6	3.15%
25	6	3.40%
26	6	3.62%
27	6	3.82%
28	6	4.00%
29	6	4.16%
30	6	4.31%
31	6	4.44%
32	6	4.56%
33	6	4.67%
34	6	4.77%
35	6	4.86%
36	6	4.94%
37	6	5.02%
38	6	5.09%
39	6	5.16%
40	6	5.21%
41	6	5.27%
42	6	5.32%
43	6	5.37%
44	6	5.41%
45	6	5.45%
46	6	5.49%
47	6	5.52%
48	6	5.55%
49	6	5.58%
50	6	5.61%

 

[NM_Mike]

Yes you are correct, it is not rate of return, but it is income. Yes, most of the income is the return of my capital. Bottom line is I put x dollars in and I get x*.06 out for as long as I live. If you know of a better income generator, I am all ears.
Mike

 

[capjak]

No SPIA will provide you with 6% income... you might be confusing payout rate with rate of return.



Based on immediate annuity he would do better than 6% pay out (annual payout/lost premium).

If a 70 year old purchased a $350,000 (assume 15% of $2.3 million) SPIA today he would get 7.9 payout
till he passes or 6.11% with an annual 3% increase.

Based on a 7.93% payout if he lives to be 94 he has a IRR of 5.93% and at 95 it is 6.13% https://www.investopedia.com/calculator/arannuity.aspx

 

[pb4uski]

.....If a 70 year old purchased a $350,000 (assume 15% of $2.3 million) SPIA today he would get 7.9 payout till he passes or 6.11% with an annual 3% increase.

Based on a 7.93% payout if he lives to be 94 he has a IRR of 5.93% and at 95 it is 6.13% https://www.investopedia.com/calculator/arannuity.aspx

And a 70 year old male has about a 10.3% chance of living to age 94 and a 7.8% chance of living to age 95 based on the 2015 SS Period Life Table.

That 70 year old male has only a ~57% chance of living to 82.7 and collecting $350,000 worth of benefits equal to the premiums paid.

https://www.ssa.gov/oact/STATS/table4c6.html