Evaluating Alternative Investments

BY DARYL D. JONES

I was surprised and disappointed by the article “ Investment Tax Planning for Retirement ” ( JofA , Aug.03, page 63). While on target with the discussion of qualified retirement plans and Roth IRAs, the article misinformed readers about nonqualified annuities.

Given the recent changes in tax laws concerning more favorable tax treatment of dividend income and capital gains, there is no question that nonqualified annuities have lost some of their tax appeal, despite the opportunity for tax deferral. However, taxation is only one component in evaluating the overall value of any investment.

While the article focused on the taxation of different retirement investment alternatives, it overstepped its bounds by deviating to discuss the characteristics of such alternate investments other than taxation.

The use of a .5% threshold to determine whether an annuity is too expensive to select as an alternative investment is strictly an opinion and completely arbitrary. Considering the last three years of stock market performance, most people would have gladly given up more than .5% of return to “insure” their investment—receiving the greater of the market or a guaranteed compound 5% or 6% rate of return. Over the last 36 months, many people have lost 40% or more of the value in their portfolios where no such downside protection existed.

Annuities, as with any other product, financial or otherwise, should be completely explained to and understood by potential clients. Then ultimately the client decides whether the costs are worth the benefits.

Daryl D. Jones, CPA
Orlando, Florida

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