Variable annuity owners often hear a "good information, bad news" saga from their financial and tax consultants. The excellent news may be that their investment went up in worth; the negative information is that when they die, their beneficiaries may have to pay income tax on that growth. There's, nevertheless, a method to eliminate the "bad news" part of this story and pass much more bucks to your loved ones with tax savings.
Let's take the case of Sally, age 70, a widow with 1 daughter. After her husband died, ten yrs ago, Sally sold her home and invested part of the cash in a variable annuity.
This was smart tax planning as she didn't need cash for living expenses and simply needed to grow with out producing additional annual income tax.
Sally's annuity has almost doubled in worth over the time she has owned it. But she has lately been reminded that her daughter, who is in the 35% tax bracket, may eventually need to pay income tax on these benefits. Notice that one element of tax savings for annuities is always to have a person in the lowest tax bracket pay the taxes.
Because Sally doesn't need income from her annuity at the moment, 1 tax savings strategy could be to have her daughter buy a life insurance policy on Sally's life for the annuity's value. This would permit the proceeds of the life policy to pass income tax totally free when Sally passes away.
To pay for the policy, Sally may annuitize her variable annuity. She'll receive a lifetime income and be able to give her daughter enough money to make the life insurance premium payments. Any of the distributions that Sally doesn't spend, could be spent to supply for her long term needs.
You will find yet 2 additional tax savings advantages. At the age of seventy, annuity withdrawals may have a fairly high exclusion percentage which means that most of each payment is actually a tax-free return of principal. Even better is that Sally is living on a fairly moderate income and is in the 15% tax bracket. Consequently, by her harvesting the annuity, tax on the income will likely be paid at 15% rather than permitting the annuity to be inherited by her daughter who would need to pay tax at 35%.
Tax savings, the thinking in advance of ways to best deal with the annuity to cut back taxes, may save substantial tax dollars for the loved ones.
You Pay More Taxes Than NecessaryAnd we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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