Should I contribute to variable annuity or a taxable account?
I'm self-employed. I've maxed out my SEP IRA as well as my traditional IRA (I can't contribute to a Roth due to income). I also have a variable annuity with Fidelity. I want to save even more for retirement. Should I fund my variable annuity or contribute to a taxable account?
This is an excellent question and one many people are faced with on a regular basis.
In order to answer this specifically for your situation I believe we would need a bit more information. For example, do you have enough monies set aside that are not in retirement accounts in case of emergency or need of cash? I will assume that you do have enough outside of your retirement accounts based upon your question and are simply looking for additional ways to put more monies away tax deferred for retirement.
I would recommend looking into a Solo K plan as a replacement for your SEP. The Solo K may allow you to put an additional $18,000 ($24,000 if you are over the age of 50) up and above what you are putting away in your SEP.
You could also have a Roth component to your Solo K that would allow you to put post tax dollars away and have them grow tax free. You can only contribute a maximum of $18,000 ($24,000) combined between the traditional and Roth components of the Solo K, not $18,000 ($24,000) each. This will allow you to contribute monies to a Roth and not be subject to the income limitations.
I would suggest that a variable annuity be your last resort, after exploring the options above first. Should you still have the need/desire to invest additional monies tax deferred then I would suggest looking for a no-load variable annuity structure. This will give you the least expensive options for a variable annuity. These investment products are very complicated and you will want to make sure you understand what you are investing in prior to doing so. I would recommend reviewing these options with a fiduciary.
Best of luck with your investments!
Great job maxing out your IRAs! I would definitely fund a taxable account over a variable annuity. Annuities can be very risky and often have high sales charges, capped returns, and loss of principal at the payout phase. Even Fidelity warns about their potential downside. I recommend an ETF portfolio based on your goals and time horizon.
You could be saving to a solo-401(k) where you would have another $18,000 or $24,000 if you are over 50. Need to save more you can find a plan that allows after-tax contributions and potentially save more, though this has issues.
You may also be able to roll your pre-tax accounts into the solo-401(k) and convert your traditional IRA to a Roth before it grows. By moving the growth to a Roth you remove it from taxation in the future. As it is, your traditional IRA growth will be taxed.
If you are really able to ramp up your savings, you could look at a cash-value pension plan. All of the above have benefits over a variable annuity, which is frequently limited and costly, even at low-cost producers.
Taxable accounts have value based on what you put into them. With all of these accounts, you should make sure to save to maximize tax-efficiency.
A variable annuity defers growth but it converts all growth to ordinary income, which I don't think is very really ideal. It removes benefits to beneficiaries and lower capital gains treatment on stocks and qualified dividends. But, overall it is difficult to say without knowing more about you. The above is general in nature.
It is important that you have funds that are not taxable when you need them, other than any capital gains they may have earned, depending on your tax bracket at the time of the distribution. I would contribute to a taxable account and use as many tax efficient/exempt position you can to match your ojective, risk tolerance and time horizon.
That is a great question and it goes quite a bit towards other discussions on many "tax buckets" in retirement. When someone retires, it is good to have money in:
- IRAs/SEP IRAs/401k's, etc.
- Insurance Based Products - like Annuities (Variable/Fixed/Indexed) and Life Insurance with Cash Value (like whole life, etc.)
- Taxable Accounts
- Roth IRAs
- Income Producing Assets (like rental property)
One of the issues that you need to consider in this answer is how much you already have in retirement accounts. As an example if you have $1 million in your SEP and only $100k in your taxable account, I would encourage you to fund more in your taxable account to grow more into that bucket. It also depends on your age until retirement and your current tax bracket (if you could qualify for a Roth IRA...but maybe you could do a "back-door Roth contribution/conversion").
Here are the basic pros and cons and considerations of annuities:
- Pro - good if you need "asset protection" if you have a risk of being sued, etc.
- Pro - If you are in a high tax bracket, you get tax deferral
- Con - Typicaly Variable Annuities (VAs) have high fees and somewhat limited investment options.
- Con - When you pull money our in retirement, you pull out gains first typically and they are taxed as ordinary income (vs. possibly capital gains in a taxable account.
Bottom line, I like multiple buckets coordinated with good "Tax Placement". As an example, I like having or considering all FIVE of the buckets mentioned above and then making sure you "place" the right investments in each of the buckets (each account does not need to be fully allocated as its own portfolio. As an example:
- Muinicipal bonds and Long-term buy and hold stocks in taxable accounts.
- Taxable Bonds and high income securities (like REITs and MLPs) - if income not needed now - in IRAs/tax-deferred.
- Investments that throw off UBIT in taxable accounts.
In your case it sounds like you are putting a lot into retirement accounts and should consider more into taxable accounts. The best way to find out is to utilize a combination of financial planning and tax projection software to find a way to better optimize your financial planning decisions.