need help with variable annuity decision


M

matt noone

While it is true that the reduction in capital gains taxes has
increased even further the payback period for variable annuity
investments holding stocks, I believe it has had no impact on variable
annuity investments holding Reits and Bonds, since profits from these
investments are treated as ordinary income, not capital gains.

It seems to me that using variable annuities to invest in Bonds and
Reits is a far superior alternative than using taxable accounts to
invest in these areas, because of the tax deferral aspect. If a bond
fund returns 6% in a taxable account, my actual after tax return will
be a shade-over 4% due to a 31% combined state and federal income tax
rate. However, in an annuity, I don't have to pay income tax until I
begin my withdrawals, some twenty years from now. So I have a 6%
return compounded annually for twenty years with a variable annuity,
vs. a 4% return compounded annually. This spread can obviously add up
to big differences in the long run. Moreover, when I actually begin
drawing down on the annuity in 20 some odd years, I will be retired
and likely in a lower tax bracket.

Based upon this, I am considering investing in a Vanguard Variable
Annuity. I want to invest in the Vanguard Annuity because its fees
are rock-bottom vs. other annuities, and their bond fund returns are
always the best due to their low fees. Of course the only alternative
within the Reit category is a Reit index and there is a possibility
that a well managed actively traded Reit fund can beat the Reit Index.
However, once the tax implications are considered, the
actively-managed fund would need to return 30% better than the Index
before it would be a better investment alternative than a tax-deferred
real estate index fund. I doubt even the best actively-managed Reit
fund can do this consistently for twenty years.

The money I am looking to invest would probably be only between $5,000
to $15,000 a year for the next ten years. There may even be years
where I invest nothing, particularly in years where I don't get a
bonus. In year 10 my mortgage will be paid off, and I will likely
increase the annual annuity investments by about $8000, about half of
my current principal and interest mortgage payments. I have maxed out
my Keough, my 401k, both my and my wife's IRA's, and have no other
tax-deferred means of investing available to me, other than whole life
which I'm not interested in at this time. I do not anticipate ever
having a need to withdraw this money before age 59 1/2, about nineteen
years from now. So I think that I should open a Vanguard Annuity. I
only have a JD and an MBA, so I would like to hear what you financial
professionals out there think about this plan. First, should I use
the variable annuity to invest in Reits and Bond funds. Second, do
you feel there is a better alternative than Vanguard? Third, is there
some other investment option which I should consider to increase my
exposure in Bonds and Reits?

There is one wild-card in this strategy--Lifetime Savings Accounts.
If these ever come into being, I think they will be a better
investment vehicle for Reits and Bonds than the variable annuity. I
have heard rumblings that Bush is going to propose them again this
year. What do you think the likelihood of them passing is? Should I
wait until the end of the year to invest in the annuity on the chance
that the LSA is passed?



30% the profits from that taxa alternative is Index I think a well
managed y are the premier bond fund investors

Here's what I am considering , so I , get the full 6% profit will I
the income . A 6 investing in are a far superior altn excellent
vehicle for investing in Bonds and Reits. You get tax defferal
 
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N

Nashville Pete

I think you are right on track. I am not a professional, just a BSEE with an
MBA and a 63 year old retired investor for 9 years. And I'm never too old to
learn. I do the same for bond investments but I hadn't considered REIT's,
thanks!


matt noone said:
While it is true that the reduction in capital gains taxes has
increased even further the payback period for variable annuity
investments holding stocks, I believe it has had no impact on variable
annuity investments holding Reits and Bonds, since profits from these
investments are treated as ordinary income, not capital gains.

It seems to me that using variable annuities to invest in Bonds and
Reits is a far superior alternative than using taxable accounts to
invest in these areas, because of the tax deferral aspect. If a bond
fund returns 6% in a taxable account, my actual after tax return will
be a shade-over 4% due to a 31% combined state and federal income tax
rate. However, in an annuity, I don't have to pay income tax until I
begin my withdrawals, some twenty years from now. So I have a 6%
return compounded annually for twenty years with a variable annuity,
vs. a 4% return compounded annually. This spread can obviously add up
to big differences in the long run. Moreover, when I actually begin
drawing down on the annuity in 20 some odd years, I will be retired
and likely in a lower tax bracket.

Based upon this, I am considering investing in a Vanguard Variable
Annuity. I want to invest in the Vanguard Annuity because its fees
are rock-bottom vs. other annuities, and their bond fund returns are
always the best due to their low fees. Of course the only alternative
within the Reit category is a Reit index and there is a possibility
that a well managed actively traded Reit fund can beat the Reit Index.
However, once the tax implications are considered, the
actively-managed fund would need to return 30% better than the Index
before it would be a better investment alternative than a tax-deferred
real estate index fund. I doubt even the best actively-managed Reit
fund can do this consistently for twenty years.

The money I am looking to invest would probably be only between $5,000
to $15,000 a year for the next ten years. There may even be years
where I invest nothing, particularly in years where I don't get a
bonus. In year 10 my mortgage will be paid off, and I will likely
increase the annual annuity investments by about $8000, about half of
my current principal and interest mortgage payments. I have maxed out
my Keough, my 401k, both my and my wife's IRA's, and have no other
tax-deferred means of investing available to me, other than whole life
which I'm not interested in at this time. I do not anticipate ever
having a need to withdraw this money before age 59 1/2, about nineteen
years from now. So I think that I should open a Vanguard Annuity. I
only have a JD and an MBA, so I would like to hear what you financial
professionals out there think about this plan. First, should I use
the variable annuity to invest in Reits and Bond funds. Second, do
you feel there is a better alternative than Vanguard? Third, is there
some other investment option which I should consider to increase my
exposure in Bonds and Reits?

There is one wild-card in this strategy--Lifetime Savings Accounts.
If these ever come into being, I think they will be a better
investment vehicle for Reits and Bonds than the variable annuity. I
have heard rumblings that Bush is going to propose them again this
year. What do you think the likelihood of them passing is? Should I
wait until the end of the year to invest in the annuity on the chance
that the LSA is passed?



30% the profits from that taxa alternative is Index I think a well
managed y are the premier bond fund investors

Here's what I am considering , so I , get the full 6% profit will I
the income . A 6 investing in are a far superior altn excellent
vehicle for investing in Bonds and Reits. You get tax defferal


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