by Sisan » Mon Dec 10, 2012 07:27 am
A 401k plan is an employer-sponsored retirement plan that allows you to save money for retirement while deferring income taxes on the savings until the time of withdrawal. Investments typically consist of mutual funds focusing on stocks (including, perhaps, your company’s stock), bonds, and money market funds or stable value investments.
An Individual Retirement Account (IRA) also allows you to save money for retirement in tax advantaged way. An IRA is similar to a 401k, but an IRA can be set up without the help of an employer.
Rolling your 401k or IRA into an Annuity gives you a continued tax shelter, while permitting you a huge range of index options, guarantee of principle options, and living and death benefits that can protect you and/or your family whether the stock and bond markets go up or down.
An Individual Retirement Account (IRA) also allows you to save money for retirement in tax advantaged way. An IRA is similar to a 401k, but an IRA can be set up without the help of an employer.
Rolling your 401k or IRA into an Annuity gives you a continued tax shelter, while permitting you a huge range of index options, guarantee of principle options, and living and death benefits that can protect you and/or your family whether the stock and bond markets go up or down.
Posted: Tue Dec 11, 2012 03:56 pm Post Subject:
Apparently, Sisan is an agent with FEG Insurance Services / Freedom Equity Group, whose claim to fame is
We don’t sell life insurance you have to die to use! We sell the new kind.
As if there is a "new kind" of life insurance (the "pitch" is for cash value insurance and heavy borrowing from the cash value as "income" -- nothing new, just something that has great potential to destroy a person's life insurance policy and expose them to a huge tax liability with no money to pay it).
FEG does not market variable products, so it's no wonder that Sisan is all hyped-up over indexed annuities. The primary Annuity carrier groups FEG promotes on its websites are American National and Great American/LSW.
They claim that their "management team" has over 80 years of "combined experience", which is a meaningless statement.
I don't want Sisan to think I'm "arguing" with him, or trying to intimidate him in any way. I'm trying to help him become better at what he does. It starts with understanding the products one markets. And, unfortunately, Sisan does not truly understand indexed annuities beyond what he's read in a marketing brochure or heard a "trainer" say to someone else. That, alone, does not create product knowledge.
A good agent will be willing to say to a client/prospect, "Gosh, what you really need is something I don't have. Let me tell you what you need and where I think you might get it."
(Very much like Kris Kringle's attitude as the Macy's Santa in Miracle on 34th Street -- and how that attitude swept through the company in the movie).
Sadly, most agents would say, instead, "Here's the best product for you . . ." yet cleverly omit ". . . even though it's not what you really need." They may make the sale, but they give our industry a black eye, because these folks later learn that what they have is not what they needed or, sometimes, even what they wanted.
The agent got his commission, and the rest of us have to work that much harder to build trust with folks who constantly hear from others how some insurance agent or some insurance company ripped them off.
Indexed annuities will ultimately end up with similar returns to traditional fixed annuities. If you don't recognize this fact, you don't understand what you are selling.
An astute observation. I've been reading articles for the past two or three years written by insurance company actuaries that say pretty much the same thing: That the contracts cannot support the lifetime withdrawals that have been promised in the rush to sell indexed annuities in a stagnant stock market environment.
And now, as companies like The Hartford and others are looking to dump their Indexed Annuity business because they are finally listening to their actuaries who already told them it wouldn't work when they were asked to design the products. People in America are simply living too long.
Well, maybe Obamacare, the "fiscal cliff", and the Democrats and Republicans (in both Congress and the state legislatures) will kill off enough of us before our life expectancies to make the insurance companies happy.
Posted: Tue Dec 11, 2012 04:12 pm Post Subject:
the fact that I Said that rolling over the 401k to annuity is an alternative for the clients???
It wasn't this "fact" -- annuities are perfectly fine as a rollover IRA vehicle . . . but not for everyone.
The "fact" was, you have made a lot of other statements that just aren't true because you're too new to know better. Which is not an excuse, it is a flaw (that can be corrected with knowledge).
In one post, you mentioned "tax-deferred" annuities and then go on to mention another type called "tax-advantaged". I asked you to explain the difference -- which you have refused to do -- and am anxiously awaiting your answer. But I know I will not get an answer because tax-deferred and tax-advantaged are exactly the same thing.
There are not two different types of annuities in that sense. There are, however, two types of annuities: QUALIFIED and NONQUALIFIED annuities. The only difference has to do with the tax treatment of the money going into the contract -- a qualified annuity is funded with pre-tax money as a retirement plan (IRA, 401(k), 403(b), SEP, SIMPLE, Keogh, 457, etc) contribution -- and those contribution amounts are limited by law. A nonqualified annuity is simply funded with after-tax money, and there is no legal limitation on contributions.
But once the money is in any annuity, they all work the same -- the cash accumulation grows in a tax-deferred / tax-advantaged environment, protected from current income taxation. When distributed from the annuity (as a stream of lifetime income or as a simple withdrawal), it creates a taxable event. A qualified annuity payment is 100% taxable no matter how it is taken, but a nonqualified annuity payment is only taxed on the gain -- however, when taking simple withdrawals from a nonqualified annuity, all of the taxable gain comes out first, then, once it's gone, the nontaxable principal comes out (when annuitized, the payments are a combination of principal and interest, until all the principal has been distributed -- so, initially, the payments are not fully taxable).
You have demonstrated that you know the difference between limited and "unlimited" contributions, but you use that difference in a way that says, "Oh, you shouldn't put that money in an IRA -- don't you know you can only put in $5000? I have this other tax-advantaged indexed thing that you can put in as much money as you want." That's an unfair comparison, and it is misleading. And it's also being used to market Indexed Universal Life and Variable Universal Life . . . mostly to folks who aren't maximizing their retirement plan contributions in the first place.
We'll wait to see if Sisan has anything else to say. As I initially wrote, an agent who lacks product knowledge is in a position to harm the public, not with the products he sells, but with the misinformation he communicates and which leads folks to buy something that isn't the right thing for them.
Think of it this way: You go into a clothing store needing a new suit. You want one in navy blue with pinstripes. You wear a size 40 jacket. You look through all the suits, but they only have 38s and 42s. The 42 is way too big, the 38 is too small, but the salesman says, "Don't worry, I'm sure you'll lose some weight. But look at this material! And the color is perfect for you. Let me wrap it up for you."
Would you take that suit knowing that the material was great, the color was perfect, but it didn't fit you? Of course not!
But insurance clients trust their agents to provide them with something that fits correctly, not just something that they have for sale. When the product doesn't fit, it's the client that suffers the most. Sometimes they can recover by suing the agent and/or the insurance company, but that takes time, money, and causes a lot of heartache in the meantime. It shouldn't have to happen like that.
Posted: Tue Dec 11, 2012 08:04 pm Post Subject:
a qualified annuity is funded with pre-tax money as a retirement plan (IRA, 401(k), 403(b), SEP, SIMPLE, Keogh, 457, etc) contribution
A qualified annuity payment is 100% taxable no matter how it is taken,
Do you want to correct this?
Posted: Tue Dec 11, 2012 11:02 pm Post Subject:
No. What do you think is incorrect? (unless you're thinking of after-tax 401(k) or 457 contributions in some plans -- those, of course, are cost basis dollars and haven't been part of the discussion until now). Or unless you misinterpret the word PAYMENT as money going in (which I would have called premium), when I intended it to be read as money coming out. I suppose I should have used the word distribution for clarity.
If you haven't paid tax on the money going in, it has no cost basis, so every penny that comes out is gain, it's all going to be taxed on the distributions. Including the death benefit.
Nonqualified annuities are only subject to taxation of the gain over cost basis. Any portion of the death benefit representing gain is taxable to the beneficiary. The 10% pre-age 59-1/2 penalty only applies to gain.
Posted: Wed Dec 12, 2012 01:11 am Post Subject:
As you are now mentioning, a qualified annuity does not need to be funded with pre-tax money.
Reading your previous post, it appeared as if you were saying that the difference between a non-qualified annuity and a qualified annuity was whether the contribution was pre-tax (qualified) or post-tax (non-qualified).
In reality, the difference is simply that if the annuity is inside of a qualified plan, it is qualified. It does not matter if the contributions are pre-tax or post-tax.
When you say something like this, "A qualified annuity payment is 100% taxable no matter how it is taken," without qualification, it just isn't a correct statement. You are going to say that I'm just parsing statements since you have trouble admitting your mistakes. Here's a simple example:
Max rolled over his $100,000 Roth IRA into a qualified SPIA. The result will be that 100% of the payments will be tax free.
Post tax dollars have the ability to fund both qualified and unqualified annuities.
Posted: Wed Dec 12, 2012 05:42 am Post Subject:
When you say something like this, "A qualified annuity payment is 100% taxable no matter how it is taken," without qualification, it just isn't a correct statement.
You're correct, and I'll accept the lumps on that one. I don't think most people think about commingling qualified and nonqualified money in the same account, and I know I certainly wasn't when I posted my response. In my practice, I generally recommend to folks (other than in their employer-sponsored plans) that they have separate accounts for qualified and nonqualified contributions, just to keep things clear.
(And when I wrote "no matter how it is taken" my intent was in regard to withdrawals, surrenders, or after annuitization. If the money is taxable, there is no way to get it without the tax liability. Of course, we both know that the nonqualified money will generate taxable gains, and those must come out before any of the nonqualified money, even from a qualified annuity)
Max rolled over his $100,000 Roth IRA into a qualified SPIA. The result will be that 100% of the payments will be tax free.
But, you've erred here, too. If Max takes any money (principal or gain) out of his Roth IRA (annuity or not) before the account has been established at least five years (even if he's past age 59-1/2 and not disabled or deceased), it is considered a "nonqualified" distribution and subject to taxation -- as are withdrawals of gain before age 59-1/2 (other than for the few qualified exceptions, such as $10,000 for the purchase of a home, as well as for certain medical or educational expenses), even if the account has been established more than 5 years. So you can't say 100% of the payments are tax free, either.
So it's not really parsing, this time, it's just looking beyond what almost everyone understands in general, to some of the more trivial aspects. Now, aside from these relative trivialities, I believe we're on the same page where Sisan's lack of knowledge is concerned and the hazard that poses for his clients.
Posted: Wed Dec 12, 2012 12:16 pm Post Subject:
Max, you are using some terminology that is making this confusing.
There is no such thing as "qualified" and "non-qualified" contributions. There are "qualified" and "non-qualified" accounts. You sound as if you are using "qualified" to mean "pre-tax" and "non-qualified" to be "post tax".
There is no way to co-mingle qualified and unqualified accounts. It is easy to co-mingle "pre-tax" and "post-tax" contributions into a qualified account. When it comes to distributions, it is irrelevant whether they have been co-mingled or kept separate. The taxation will be identical.
But, you've erred here, too.
Nope. One of the exceptions to the pre 591/2 rule is series of substantially equal payments. A lifetime SPIA qualifies for this.
If Max takes any money (principal or gain) out of his Roth IRA (annuity or not) before the account has been established at least five years (even if he's past age 59-1/2 and not disabled or deceased), it is considered a "nonqualified" distribution and subject to taxation --
Just keep in mind that "nonqualified" does not equal "taxable". In general, contributions can be removed any time without taxes and penalties.
As for Sisan, hopefully he has just learned enough to realize that he may not know as much as he thinks that he knows. Sisan, neither Max nor I have a problem with indexed annuities. The problem tends to be with salesmen who don't quite understand what they are selling. Let me challenge you to do something. Take the last contract that you sold. Put aside the marketing material. Read the contract. SLOWLY. Make sure you understand every single word of it.
Posted: Wed Dec 12, 2012 04:19 pm Post Subject:
Nope. One of the exceptions to the pre 591/2 rule is series of substantially equal payments. A lifetime SPIA qualifies for this.
andIn general, contributions can be removed any time without taxes and penalties.
Yes, IRC 72(t) does permit this -- although you fail to mention that such a plan requires that distributions must continue to age 59-1/2 or for 60 months, whichever is longer, but a Roth IRA still requires that the account be established for 5 years before either contributions or gains may be removed without an income tax liability, the point you are dancing around. After five years, any amount of contributions may be taken from a Roth at any age, because those dollars have already been taxed -- they are not considered "qualified" dollars, thus they must be "nonqualified" dollars. Maybe the use of "nondeductible" would sit better with you.
Posted: Wed Dec 12, 2012 08:38 pm Post Subject:
I didn't need to mention "5 years or until age 59 1/2" because I already said that I was talking about a lifetime SPIA.
As for contributions to a Roth and the 5 year rule, you are wrong. It may be considered an unqualified distribution when money comes out within 5 years, but that does not mean that it is taxable or subject to a penalty. Contributions can be removed at any time and it is tax and penalty free.
Max, there is truly too much stuff that you "know" incorrectly.
Posted: Thu Dec 13, 2012 02:31 pm Post Subject:
Max, let me make this even easier for you to understand.
The 5 year rule deals with qualified distributions. In order for a distribution to be qualified, the person must have a Roth IRA for 5 years AND be older than 59 1/2. (We are ignoring the exceptions.)
What happens if a distribution is not qualified? The gains are taxed and are also subject to a 10% penalty.
Let's use an example:
In 2011, Max opens and contributes $5000 to a Roth IRA. It is his only Roth IRA. The account grows to $15,000. In February of 2012, Max removes $5,000 from this IRA.
It is a non-qualified distribution. It is permissible and it tax and penalty free.
In March of 2012, Max removes another $5,000 from this IRA. This will be taxed and penalized.
Max, there simply is no "5 year rule" that impacts contributions. They can be removed anytime for any reason tax and penalty free. Hopefully, again, you can admit your error.
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