When is a Tax Deferred Variable Annuity a good strategy?

Me and my spouse are 45 and 47 years old. We both max out our 401(k)s and IRAs. Our 401(k) contributions make us on track for retirement. We have good liquidity. We have $200,000 to invest and our financial advisor is recommending a Tax Deferred Variable Annuity. What is your recommended strategy?

Investing, Annuities
Answers
Sort By:
Most Helpful
December 2017

A tax-deferred variable annuity is a very bad idea.  First of all, if you check the fees, they tend to be unusually high.  Advisors who recommend them usually get up-front kickbacks from the providers which is why they are so often recommended.  Also, these will usually significantly underperform ordinary diversified portfolios over any period of time.  There will also be all kinds of restrictions and fees for "early withdrawals" which in some cases means taking your money out any time over the next twenty years.

There is also very little advantage to deferring taxes now that the Republican tax bill will become law in 2018.  Tax rates will be low, and will probably rise in 2021 when the Democrats likely regain control of the House, Senate, and U.S. Presidency.  You want to be accelerating as much income as possible into 2018-2020, not deferring it, since a huge budget deficit means that whenever higher taxes are enacted again they will likely remain high for many more years.

A much better strategy is to set up a schedule for doing Roth conversions.  This involves converting money in non-Roth 401(k)s and non-Roth IRAs into Roth IRAs.  You have many years to complete this process, since you will not have required minimum distributions until you are both 70-1/2.  You should set up a schedule for doing this starting in January 2018 when the tax rates will be lower.  Whichever shares you convert from non-Roth accounts to Roth accounts will become tax-free after conversion, so convert whichever shares you think will climb the most in value over the next year or so.  Convert as much as you can each year without putting yourself into the next major higher tax bracket.

Above all, be conservative now since U.S. stocks are near all-time record highs and are thus much more vulnerable to losses over the next two years or so.

December 2017
December 2017
December 2017
December 2017