Written By: Robert Zimmerman | H&R Advisory Service, LLC
While annuities are great places to deposit your safe money, they are not tax free accounts, any more than IRA or 401k accounts. Yes they do offer higher interest rates on a guaranteed basis, and they have some attractive side benefits, they are still a ‘tax deferred’ account.
Many people don’t realize that annuity values do not pass tax-free to heirs. All the interest gained through the years is taxable income to the heirs. Even if you rolled over one annuity to another. This can dramatically increase the taxes on their own income!
This situation is an illustration of the biggest problem with annuities. People simply do not understand them. Even insurance agents are hard put to keep up with all aspects of annuities. They are a mystery to many accountants and attorneys.
What is the solution?
Just this! Set up a ‘tax free’ account with the same insurance company, or any other insurance company of your choice.. Did you know that insurance companies offer tax free accounts? (They are otherwise known as life insurance.)
We know, you already have all the life insurance you ever intend to have, and even if you wanted more, you are not healthy enough to qualify for more .
Nobody says you have to have more life insurance for yourself in order to benefit. You can still own and control the money if the person insured is a spouse, or a son or daughter, or even a grandchild.
What is most important for you to understand is this: The simple act of adding a little life insurance to an annuity makes it an entirely different animal from a tax standpoint. We refer to it as a ‘super annuity’, and will speak to some of the side benefits in a future message. At this point, let’s just say you don’t have to give up the benefits of your current annuities in order to reduce your heir’s future tax burden.