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Preservation
Principles
Although
Social Security is the largest source of income for many retirees, annual
benefits may trigger a higher tax liability for those who have other significant
sources of retirement income.¹
Since
1984, Social Security beneficiaries with income exceeding certain levels have
been taxed on a portion of their benefits. Today, the calculations for
determining the taxability of Social Security benefits are complex and are based
on a two-tiered system, under which either 50 percent or 85 percent of benefits
may be taxable. This can pose a tax problem when income from other sources
(including pensions, taxable investment income, and retirement plan
distributions) puts a retiree's income over the income thresholds ($32,000 or
$44,000 for married couples, $25,000 or $34,000 for single filers).
Fortunately,
if a Social Security recipient receives investment interest income that can be
deferred and is not needed for basic living expenses, there is a strategy that
can be used to help manage the tax burden: a tax-deferred annuity.²
Less
or More
Some income received by retirees is fixed, such as
pensions and required minimum distributions from employer-sponsored retirement
plans. But it's possible that investment income can be managed differently. For
example, by transferring interest income from such investment vehicles as CDs,
bonds, and mutual funds to a tax-deferred annuity, the retiree can more easily
manage how much income to take each year and may possibly reduce his or her
taxes.
Annuities
offer two key advantages: Any earnings generated in the annuity are not taxed
until withdrawn, and there are no required minimum distributions each year. If
no money is withdrawn from the annuity, any earnings can continue to accumulate
without any immediate tax consequences.³
If you
are looking for ways to help reduce taxes on your Social Security benefit, an
annuity strategy may be one answer. We can help you evaluate your options.
1) 2003
Retirement Confidence Survey, Employee Benefit Research Institute
2) Most annuities have surrender charges that are assessed during the early
years of the contract if the contract owner surrenders the annuity. In addition,
if the annuity is surrendered before age 59½, it may be subject to a 10 percent
federal income tax penalty. Generally, annuities contain mortality and expense
charges, account fees, investment management fees, and administrative fees.
Variable annuity sub-accounts fluctuate with changes in market conditions, and
when surrendered, the principal may be worth more or less than the original
amount invested. Variable annuities are long-term investment vehicles designed
for retirement purposes. They are sold only by prospectus, which contains more
information on charges and expenses, as well as the objectives and risk factors
of the underlying investments. Be sure to read the prospectus carefully before
deciding whether to invest.
3) Taxes will eventually have to be paid on any earnings accrued in an annuity
when funds are withdrawn.
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