The role of vAs – and how planners
Are using Them for Tax diversification
Variable annuities (VAs) can play a central role in managing uncertainty regarding
taxes. Though VAs are often purchased because of their guaranteed income benefits
or death benefits, their unique tax profile
plays a more useful role than ever when it
comes to preparing for tax changes. “In VAs
bought with after-tax dollars, earnings are
deferred,” Henderson said. He argued this
could be particularly relevant in 2013 after
the Bush tax cuts expire. “You want to pay
taxes this year when we are in a low tax situation but not in the near future when taxes
could shoot up, so tax deferral could become
very important.”
“Similarly I
have no clear
idea where tax
rates will be
10 years from
now in terms
of income,
capital gains,
estates, giving, and so forth, so it
is important to diversify across
different potential tax outcomes.”
— Joel Dickson
Principal and Senior Investment Strategist,
Vanguard
Many planners share this point of
view–and are turning to VAs as a solution for potential tax hikes. Michael Fisher
Jennings, an AXA affiliated advisor in Troy,
Mich., said, “Tax rates have been very beneficial in recent years. But looking forward,
we see an environment where taxes on income, capital gains, and dividends are likely
to increase. Any financial product, such as a
VA that gives you the ability to defer taxes,
has an enormous benefit.”
“Tax rates
have
been very
beneficial in
recent years.
But looking
forward,
we see an
environment where taxes on
income, capital gains, and
dividends are likely to increase.
Any financial product, such as
a VA that gives you the ability
to defer taxes, has an
enormous benefit.”
— Michael Fisher Jennings
Advisor, AXA
Similarly, Phil Rousseaux, President of
Everest Wealth Management, in Towson,
MD., said, “We think that when you are
looking for tax-deferred growth, an annu-
ity is the place to be.” Rousseaux’s focus on
tax-deferred growth comes from his outlook
on America’s fiscal situation. “The way we
view things is very simple. Given the size of
the debt, the government has to figure out
a way to pay for it,” he said. The govern-
ment could cut down on spending or increase
taxes, or both he argued. Even if it is hard
to predict the future of taxes with certainty,
some scenarios are more probable than oth-
ers. Rousseaux’s viewpoint is that it is likely
that the capital gains tax in particular will be
raised. “This is what we believe will happen
and what we tell clients.”
More subtly, variable annuities’ tax-de-
ferred features also make them ideal vehicles
for rebalancing. “VAs give you the ability to
be able to do that systematically, enabling
investors to focus on maintaining their plan-
driven asset allocation and suitably manage
their risk-return objective in a volatile mar-
ket,” AXA’s Jennings said. In contrast, he ex-
plained that often the tax tail wags the dog in
non-tax deferred investments—meaning that
advisors are hesitant to rebalance because
of the tax hit. But inside a VA, “because
of tax-deferred growth, advisors can make
holistic decisions from an asset allocation,
risk management, and planning perspective,”
he said.
“The way we
view things is
very simple.
Given the
size of the
debt, the
government
has to figure out a way to
pay for it.”
— Phil Rousseaux
President,
Everest Wealth Management
From the big picture perspective, the
tax advantages of annuities may have been
overlooked in comparison to their other
benefits in recent years. “But with tax rates
likely to increase, there is renewed focus
on VA’s ability to shelter taxes, defer gains,
and give people the ability to make tax-efficient changes within their portfolio,”
AXA’s Jennings said. •
