Skip to main content
No. of Recommendations: 0
<<I have a question:

My Mother, at 78 (and of course retired), has money sitting in a tax-free annuity (I believe it's with an insurance company), that's earning approximately 6%. She says that this is money she doesn't need to live on, and is "play money".

I've encouraged her to pull this money from the annuity and reinvest it in the Vanguard 500. The problem is, that this would now be a taxable account. But even with paying 20% per year on capital gains on the Vanguard 500, she should be able to dust her old 6% return on the old tax-free account.

Any feedback???>>


Could she beat the return she's presently getting in her annuity? Probably, but there are several factors involved here. First, she would have to surrender the annuity. When she does that, there will be taxes to pay on all the previously untaxed gains in the account. There may also be surrender charges. How much will she have left for investment in an alternative? Find that number, and you can run some comparisons.

And you are mistaken about a 20% capital gains rate on the Vanguard 500. That pertains only when she sells her shares in that account. She will, though, have to pay taxes on any dividends, and those will be distributed to her each year. Therefore, she will have some ordinary income tax impact each year.

If she doesn't intend to use the income generated by this money, you may want to see what happens to the annuity in the event of her death. Does anything pass to heirs? The taxable account would, but that's not necessarily true of the annuity. Therefore, if she considers this "play money" and doesn't need it for living expenses, the ability to pass it on to heirs may be a sufficient reason to move regardless of the returns.

BTW… The money in the annuity isn't "tax free." Someone pays the taxes when it's withdrawn. It merely grows tax deferred while it's within the annuity. When she starts withdrawals, all gains will be taxed at ordinary income tax rates.

Regards….Pixy
Print the post  

Announcements

The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.