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- Oct 13, 2010
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Variable Annuity Use Case
I'm not sure it's mainstream enough to qualify for inclusion, but I know of a possible use for one of the better variable annuities (no commission, low expense wrapper on low expense funds like those sold by Fidelity, and formerly Vanguard).
If you have kids going to college, you can get a discount if your after-tax bank account is not too big; the FAFSA "expected family contribution" is based on the sum of after tax (but not 'retirement') savings. Schools call them 'scholarships', but they're basically discounts off the list price, based on expected family contribution. Through the purchase of a variable annuity, funds become 'retirement assets' and so the discounts become available as the after tax portfolio gets below a certain amount.
Given favorable annuity rules (no surrender fee and no need to ever annuitize) the negative is that it's FIFO (pay tax on all gains to uncover the original contribution), and not getting the favorable tax treatment of qualified dividends and capital gains. Those negatives might not outweigh the benefit of getting a discount on higher education, especially if you're funding multiple kids at high cost schools.
I'm not sure it's mainstream enough to qualify for inclusion, but I know of a possible use for one of the better variable annuities (no commission, low expense wrapper on low expense funds like those sold by Fidelity, and formerly Vanguard).
If you have kids going to college, you can get a discount if your after-tax bank account is not too big; the FAFSA "expected family contribution" is based on the sum of after tax (but not 'retirement') savings. Schools call them 'scholarships', but they're basically discounts off the list price, based on expected family contribution. Through the purchase of a variable annuity, funds become 'retirement assets' and so the discounts become available as the after tax portfolio gets below a certain amount.
Given favorable annuity rules (no surrender fee and no need to ever annuitize) the negative is that it's FIFO (pay tax on all gains to uncover the original contribution), and not getting the favorable tax treatment of qualified dividends and capital gains. Those negatives might not outweigh the benefit of getting a discount on higher education, especially if you're funding multiple kids at high cost schools.