The Most Misunderstood Investments

BY BARBARA JEAN RASKIN

The article “ Investment Tax Planning for Retirement ” ( JofA, Aug.03, page 63) contains the following statements: “There are some savings options CPAs should encourage clients to avoid. These include tax-deferred annuities, which usually carry high fees…” and “The high fees associated with nonqualified tax-deferred annuities mean they are seldom the best alternative for clients saving for retirement.”

Tax-deferred annuities are some of the most misunderstood investments available today. A few years ago when the stock market fell quickly, clients came to me during tax season with 1099DIVs from mutual fund investments showing sizable income to be reported. The underlying mutual funds had decreased in value by a significant amount. These taxpayers were paying tax on income at ordinary income tax rates of up to 39.6% on investments that had shrunk by as much in value. These were not happy times.

Had these same taxpayers been invested in those same mutual funds through a tax-deferred annuity, the funds would have shrunk but they would not have had to pay tax on phantom income.

The high fees referred to in the article also provide guaranteed minimums or set points in many products. Illustrations that show the benefit of tax deferral in the investment often offset such high fees. In many cases the high fees are merely 1.5% more than an investment in the same mutual funds outside the deferred instrument.

Many CPAs now have securities and insurance licenses and offer these products to their clients. It is disheartening to see that an article in our professional journal would make two such bold, blanket statements about products we recommend to our clients under the right circumstances. Maybe such an article is how insurance salespeople ended up with the “chartreuse coat, fast-talking” reputation they have had to bear for so many years.

Barbara Jean Raskin, CPA
Gainesville, Florida

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