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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Fixed Annuity Date: 7/29/2001 1:40 AM
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Rosie (a.k.a. rpalisson0) you asked:

<< Thanks so much for the replies. I'm a new Fool, started investing through BuyAndHold a few months back. Nice to know that annuities are good for some people, especially given her investing style (absolutely does not want to take risks). Her annuity account has zero upfront costs and annual charges. Her returns are minimum 4% and this year it's 6%.

TTRoberts, what did you mean when you said:
"The main drawback of the annuity is that if she never uses it before she dies, it doesn't get the step up in basis that CD's would (the same goes for the other tax deferred positions)."
>>

Investment in CD's would get a "step up in basis" meaning that if YOU were to inherit the CD's the income tax basis of those CD's would be the value at the time of her death. With annuities, YOU wouldn't get that step up and you, the beneficiary, would pay income taxes at YOUR marginal tax rate on the earnings part of a distribution of that annuity whenever you do take a distributions. This could be a very large tax hit if you as the beneficiary were to take a lump sum distribution of a very large annuity that's been accumulating for a long time.

<< And do you think she should take her 10% every year and invest it some place else or dump it back in a CD? Or just leave it in there in the annuity account to earn the minimum of 4%? >>

I really DEPENDS on how she plans on using or not using the annuity. It will certainly help save her some current taxes and give here the benefit of tax deferred growth on a part of her portfolio that's earning a low rate of return. If the plan is to annuitized this annuity at some future point, then I don't see any reason not to leave it where it is. If she really doesn't plan to every use it, and hold onto it for a sense of security sake, it may not be the better place to do what she wants as previously outlined by you.

Dare I say it in THIS forum???? <grin> ;-) If she doesn't plan on using it but wants to keep ownership of it while she's alive and achieve those issues you mentioned, she might consider the advantages of a single pay life insurance contract. She could annuitize the annuity and pay for such a policy over a short period of time. You might suggest that she discuss the details of this with her financial advisor. With this approach, she will still have access to cash if she really needs to; she can realizes the same kind of conservative return (though not federally insured as the banks are); she will get the tax deferred growth and reduce her current tax liability; and the growing Death Benefit will go the beneficiaries income tax free. I'm not saying this is something she should do. I'm only saying that it's something to consider and review with the details as to how she plans to use her assets during retirement.

I hope this is helpful Rosie.

K, ok, ok you Fools, you can take a breath now! ;-)



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