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The above link is an overview with some other internal links and a short video.
This link is for the investment choices within the annuity.
Normally, I am not a fan of annuities; as sold by insurance companies. However, if our house were to inherit a sum of money beyond our current needs, we would fully review the above annuity plan in order to defer taxation. A few notes from my recall about this product......55 fund choices, no brokerage feature (so no stock, etf, index or other vendor funds available, except the few along with the Fidelity choices). The cost of the annuity is .25% added to the expense ratio of a given fund. No surrender or holding periods that lock up the money at a cost, as is common with annuities. Review the exchange restrictions among the funds; as there are limits as to how often one may move monies around within the annuity.
Fidelity is not the only company to offer a similar plan; but I don't have that MFO discussion at hand and short of time today.
The short term downside for this would be the taxation of the sale of current holdings in order to fund such a plan.
Anyhoo........perhaps something to review relative to your circumstance.
Take care of you and yours, Catch
I had a similar reaction to the taxable account issue. (Glad you jumped in first to serve as the lightning rod)
To add a few thoughts here: - VAs are a lot like nondeductible IRAs. They're not much good for tax-efficient investments. If one is using them for equity investments, I feel one needs several decades for them to pay off. Given the time frame we're talking about (say, 20-30 years), I might suggest limiting their use to bonds or perhaps balanced funds.
- There is another short term downside - you won't be able to get at this money for a decade without paying a penalty. Like IRAs, there is a penalty if you withdraw money before age 59.5. So while this can hold bond funds, it's not going to be useful for current income. It's value is more for stability - sleeping well.
- I'm not a big fan of Fidelity's VA. When they lowered the cost of the VA wrapper to 0.25%, they also changed the share class of several of the underlying funds - so they cost more. A couple of VAs that may be better are TIAA-CREF's, and Vanguard's.
For example, with Fidelity's VA, you can invest in PIMCO VIT Real Return, but the share class you get costs 0.65% (for a total cost of 0.90% including the VA wrapper). With TIAA-CREF and a $100K annuity, the wrapper costs 0.35%, but the PIMCO fund share class costs 0.55%, so the total cost is the same. And after you own the annuity for ten years, the wrapper cost drops to 0.10%. TIAA-CREF also offers 50+ funds; some in-house, mostly outside.
Vanguard's offering is, well, Vanguard. Mostly large, dull, inexpensive Vanguard funds, but then again, that's what you're looking for. Many of the 17 funds offered are index funds. While they offer conservative and moderate allocation funds, these are not clones of Wellesley or Wellington. Rather, they are managed in-house by Vanguard (not Wellington Mgmt) - they have the same team that manages Vanguard Star, and they invest in mixes of Vanguard index funds. But the Balanced fund in the annuity is managed by the same (Wellington Mgmt) team that manages Vanguard Wellington Fund.
One other VA to consider (if you're not in NY) is Jefferson National Monument Advisor VA. This is an unusual annuity in that it charges a flat $240/year (rather than a percentage of AUM). So for a $100K portfolio, the wrapper costs 0.24%. It offers a gazillion (380) funds, including some that are very low cost (e.g. Vanguard); however if the fund is very low cost, there's a transaction fee - just as brokers have NTF funds but charge TFs for Vanguard funds. The insurer is not well rated; this doesn't matter for VA subaccounts (since the assets are segregated), but does mean that you should think carefully before annuitizing or getting a fixed annuity with them.
I can tell you that 75% of the portfolio is in taxable accounts because it is inherited money. The remaining 25% is in tax-deferred accounts (401K, Roth IRA, Rollover IRA). I'm maxing out my Roth IRA each year, but there's not much else I can do with this breakdown. As a result, taxes are a concern moving forward.
You mention that you're currently maxing out your Roth IRA but are you also maxing out your 401k?
The reason I'm asking is if you're not because you can't afford to, I'd suggest maybe taking some money out of the inheritance in order that you can.
For example if you're only putting in say $5500/year and can't afford any more, take $12k/yr out of the inheritance so that you can up your contributions to the max. That way you'll have more money in a tax-deferred vehicle and might not pay that much taxes on accessing that $12k. You didn't mention what form the inheritance came in (i.e. stocks, mutual funds, etc...) but if they were in any of those you'd get a stepped-up cost basis so the taxes owed on the money likely wouldn't be that much.
Just something to think about tax-wise if it applies. It won't solve your tax-problem completely but would help. I'd also suggest using some ETF's where you can as you stated just for the tax efficiency of them.
I can tell you that 75% of the portfolio is in taxable accounts because it is inherited money. The remaining 25% is in tax-deferred accounts (401K, Roth IRA, Rollover IRA). I'm maxing out my Roth IRA each year, but there's not much else I can do with this breakdown. As a result, taxes are a concern moving forward.
You mention that you're currently maxing out your Roth IRA but are you also maxing out your 401k?
The reason I'm asking is if you're not because you can't afford to, I'd suggest maybe taking some money out of the inheritance in order that you can.
For example if you're only putting in say $5500/year and can't afford any more, take $12k/yr out of the inheritance so that you can up your contributions to the max. That way you'll have more money in a tax-deferred vehicle and might not pay that much taxes on accessing that $12k. You didn't mention what form the inheritance came in (i.e. stocks, mutual funds, etc...) but if they were in any of those you'd get a stepped-up cost basis so the taxes owed on the money likely wouldn't be that much.
Just something to think about tax-wise if it applies. It won't solve your tax-problem completely but would help. I'd also suggest using some ETF's where you can as you stated just for the tax efficiency of them.
Ok, so you are saying that I could use a larger portion of my paycheck to fund my 401K and use my inheritance money to pay my bills normally funded by my paycheck. Interesting. I never thought of this concept. Can you think of any downside to using this method?
I can tell you that 75% of the portfolio is in taxable accounts because it is inherited money. The remaining 25% is in tax-deferred accounts (401K, Roth IRA, Rollover IRA). I'm maxing out my Roth IRA each year, but there's not much else I can do with this breakdown. As a result, taxes are a concern moving forward.
You mention that you're currently maxing out your Roth IRA but are you also maxing out your 401k?
The reason I'm asking is if you're not because you can't afford to, I'd suggest maybe taking some money out of the inheritance in order that you can.
For example if you're only putting in say $5500/year and can't afford any more, take $12k/yr out of the inheritance so that you can up your contributions to the max. That way you'll have more money in a tax-deferred vehicle and might not pay that much taxes on accessing that $12k. You didn't mention what form the inheritance came in (i.e. stocks, mutual funds, etc...) but if they were in any of those you'd get a stepped-up cost basis so the taxes owed on the money likely wouldn't be that much.
Just something to think about tax-wise if it applies. It won't solve your tax-problem completely but would help. I'd also suggest using some ETF's where you can as you stated just for the tax efficiency of them.
Ok, so you are saying that I could use a larger portion of my paycheck to fund my 401K and use my inheritance money to pay my bills normally funded by my paycheck. Interesting. I never thought of this concept.
Maybe it's just me, but I find this a bit incredulous.
$$ = $$. A basic plain ol' written "budget" should allow you to move $$ around (position it) in a manner most efficacious to your needs. I've got to believe this simple concept KV968 mentioned is one of the most commonly utilized by those with wealth not from income.
Depending on your age, circumstance and needs, the same idea works in using independent wealth to "Rothize" traditional IRAs. Not up on current laws, but think that that tax-dodge (let's call it what it is) may also now be allowed for employee sponsored plans like 401Ks.
Willmatt72- If you are a frequent visitor to the site, you will quickly find that you recognize the handles of those posters who consistently give well thought out and considered advice. Read those and ignore the rest. Pareto's 80/20 principle.
My re-read of Wilmatt's original post shows he's currently invested 35%/40%/25% (Equities, Bonds, Cash respectively). I pass no judgement on the appropriateness of that mix. But, any notion that he is "doing nothing" is incorrect.
Here's what even very conservative investments might reasonably be expected to return in one year's time on his stated $1.1 million. (Does not include gains/loss due to changes in NAV).
TRBUX (ultra-short bond) current yield .28% ..............$3,080 PRWBX (short term bond) current yield 1.49% ..........$16,390 PRFHX (high yield municipal) current yield 4.32%).....$47,520
My re-read of Wilmatt's original post shows he's currently invested 35%/40%/25% (Equities, Bonds, Cash respectively). I pass no judgement on the appropriateness of that mix. But, any notion that he is "doing nothing" is incorrect.
Here's what even very conservative investments might reasonably be expected to return in one year's time on his stated $1.1 million. (Does not include gains/loss due to changes in NAV).
TRBUX (ultra-short bond) current yield .28% ..............$3,080 PRWBX (short term bond) current yield 1.49% ..........$16,390 PRFHX (high yield municipal) current yield 4.32%).....$47,520
Thanks for the input, Hank. Yes, having $750,000 in the stock market is certainly "doing something." lol
Ok, so you are saying that I could use a larger portion of my paycheck to fund my 401K and use my inheritance money to pay my bills normally funded by my paycheck. Interesting. I never thought of this concept. Can you think of any downside to using this method?
Yes, that's what I'm proposing but you'd have to figure in your tax situation to see if it makes sense.
The downside is that you'd owe taxes on the money you pulled out of your inheritance however that should be offset, if not more so, by the savings incurred by your increased 401k.
Say you need to put an extra $10k in your 401k to max it out but don't have it. Take $10k out of the inheritance over the year as needed so you can put the $10k in the 401k. On that you'll either pay your nominal tax rate but a on stepped-up cost basis (if the inheritance was in equities or mutual funds) but you'll also reduce your taxable income by the same amount. If you have long-term capital gains on the withdrawals then you may only pay 15% taxes on those while possibly getting a 25% "tax reduction" on the money contributed to the 401k. All depending on your tax brackets.
Granted you may have to pay more than the long-term rate (15% if its still that) when you withdrawal the money from the 401k since it'll then be taxed at your nominal rate and not as long-term gains as you would be able to do if it was out of the inheritance but in the meantime the money is growing tax-deferred.
Comments
To add a few thoughts here:
- VAs are a lot like nondeductible IRAs. They're not much good for tax-efficient investments. If one is using them for equity investments, I feel one needs several decades for them to pay off. Given the time frame we're talking about (say, 20-30 years), I might suggest limiting their use to bonds or perhaps balanced funds.
- There is another short term downside - you won't be able to get at this money for a decade without paying a penalty. Like IRAs, there is a penalty if you withdraw money before age 59.5. So while this can hold bond funds, it's not going to be useful for current income. It's value is more for stability - sleeping well.
- I'm not a big fan of Fidelity's VA. When they lowered the cost of the VA wrapper to 0.25%, they also changed the share class of several of the underlying funds - so they cost more. A couple of VAs that may be better are TIAA-CREF's, and Vanguard's.
For example, with Fidelity's VA, you can invest in PIMCO VIT Real Return, but the share class you get costs 0.65% (for a total cost of 0.90% including the VA wrapper). With TIAA-CREF and a $100K annuity, the wrapper costs 0.35%, but the PIMCO fund share class costs 0.55%, so the total cost is the same. And after you own the annuity for ten years, the wrapper cost drops to 0.10%. TIAA-CREF also offers 50+ funds; some in-house, mostly outside.
Vanguard's offering is, well, Vanguard. Mostly large, dull, inexpensive Vanguard funds, but then again, that's what you're looking for. Many of the 17 funds offered are index funds. While they offer conservative and moderate allocation funds, these are not clones of Wellesley or Wellington. Rather, they are managed in-house by Vanguard (not Wellington Mgmt) - they have the same team that manages Vanguard Star, and they invest in mixes of Vanguard index funds. But the Balanced fund in the annuity is managed by the same (Wellington Mgmt) team that manages Vanguard Wellington Fund.
One other VA to consider (if you're not in NY) is Jefferson National Monument Advisor VA. This is an unusual annuity in that it charges a flat $240/year (rather than a percentage of AUM). So for a $100K portfolio, the wrapper costs 0.24%. It offers a gazillion (380) funds, including some that are very low cost (e.g. Vanguard); however if the fund is very low cost, there's a transaction fee - just as brokers have NTF funds but charge TFs for Vanguard funds. The insurer is not well rated; this doesn't matter for VA subaccounts (since the assets are segregated), but does mean that you should think carefully before annuitizing or getting a fixed annuity with them.
The reason I'm asking is if you're not because you can't afford to, I'd suggest maybe taking some money out of the inheritance in order that you can.
For example if you're only putting in say $5500/year and can't afford any more, take $12k/yr out of the inheritance so that you can up your contributions to the max. That way you'll have more money in a tax-deferred vehicle and might not pay that much taxes on accessing that $12k. You didn't mention what form the inheritance came in (i.e. stocks, mutual funds, etc...) but if they were in any of those you'd get a stepped-up cost basis so the taxes owed on the money likely wouldn't be that much.
Just something to think about tax-wise if it applies. It won't solve your tax-problem completely but would help. I'd also suggest using some ETF's where you can as you stated just for the tax efficiency of them.
Regards,
Ted
$$ = $$. A basic plain ol' written "budget" should allow you to move $$ around (position it) in a manner most efficacious to your needs. I've got to believe this simple concept KV968 mentioned is one of the most commonly utilized by those with wealth not from income.
Depending on your age, circumstance and needs, the same idea works in using independent wealth to "Rothize" traditional IRAs. Not up on current laws, but think that that tax-dodge (let's call it what it is) may also now be allowed for employee sponsored plans like 401Ks.
If you are a frequent visitor to the site, you will quickly find that you recognize the handles of those posters who consistently give well thought out and considered advice. Read those and ignore the rest. Pareto's 80/20 principle.
Good luck.
Here's what even very conservative investments might reasonably be expected to return in one year's time on his stated $1.1 million. (Does not include gains/loss due to changes in NAV).
TRBUX (ultra-short bond) current yield .28% ..............$3,080
PRWBX (short term bond) current yield 1.49% ..........$16,390
PRFHX (high yield municipal) current yield 4.32%).....$47,520
The downside is that you'd owe taxes on the money you pulled out of your inheritance however that should be offset, if not more so, by the savings incurred by your increased 401k.
Say you need to put an extra $10k in your 401k to max it out but don't have it. Take $10k out of the inheritance over the year as needed so you can put the $10k in the 401k. On that you'll either pay your nominal tax rate but a on stepped-up cost basis (if the inheritance was in equities or mutual funds) but you'll also reduce your taxable income by the same amount. If you have long-term capital gains on the withdrawals then you may only pay 15% taxes on those while possibly getting a 25% "tax reduction" on the money contributed to the 401k. All depending on your tax brackets.
Granted you may have to pay more than the long-term rate (15% if its still that) when you withdrawal the money from the 401k since it'll then be taxed at your nominal rate and not as long-term gains as you would be able to do if it was out of the inheritance but in the meantime the money is growing tax-deferred.
Again, just something to think about.