As a CPA and CFP, I work almost exclusively with retiring or retired clients. These clients must weigh many decisions, including whether they want or need upside potential in an investment, whether they desire a death benefit guarantee and whether they require a steady source of cash flow from a particular investment.
The article, “ Investment Tax Planning for Retirement ” ( JofA , Aug.03, page 63), suggests clients should avoid tax-deferred annuities. In fact, it states, “CPAs should advise couples to invest in taxable accounts before buying nonqualified tax-deferred annuities” and that MUNIs and other tax-exempt investments would be more advisable.
I agree that, prior to retirement, 401(k)s, Roth IRAs and nonqualified and/or taxable accounts can be the most effective savings tools. However, the article does not seem to distinguish between investments appropriate before retirement and investments appropriate during retirement.
Upon retirement, many clients who receive Social Security benefits can lower their income tax significantly by structuring their investments within tax-deferred accounts. In addition to the obvious tax savings due to tax deferral, they also can lower the portion of Social Security benefits subject to income tax (up to 85% can be taxed). This is not tax deferral—this is a permanent savings. Exempt bonds suggested in the article are an addback in determining the portion of Social Security subject to tax and for this reason can be a poor answer.
The article also does not seem to consider the appropriateness of fixed annuities, which can typically offer a higher payout than CDs on a tax-deferred basis. These accounts do not typically charge the fees—the issuing company determines an appropriate interest rate.
Finally, the article has missed the point. Retired clients generally want assurances. Many tax-deferred annuities offer death and income benefits while offering upside potential in the stock market. Some of these programs are simply too expensive. However, good programs are available that offer clients upside potential with certain protection mechanisms.
I provide clients with many choices. I do not focus on annuities, but they can be a very useful tool in achieving a client’s objectives.
Ronald L. Myers, CPA, CFP