KEY TAKEAWAYS
- If retirement income is no longer needed, an annuity may be converted into a strategy designed to enhance the wealth transferred to heirs.
- Annuity gains are generally taxed as ordinary income, while life insurance death benefits are typically income tax-free to beneficiaries.
- Income needs, health underwriting, estate planning objectives, and tax considerations must all be evaluated to determine whether annuity maximization is appropriate.
Understanding the Opportunity
Many annuities are originally purchased to provide a predictable income in retirement, often with riders that guarantee lifetime income. Over time, however, your financial situation may change. You may find that the income is no longer necessary, or that your priorities have shifted toward wealth transfer and legacy planning. In some cases, removing certain annuity riders may not be possible, meaning you could continue paying for benefits you no longer need. When that happens, it may be worth evaluating alternative strategies.
What is Annuity Maximization?
Annuity maximization generally involves repositioning annuity assets to help fund a life insurance policy. The goal is to convert a potentially tax-inefficient asset (where gains are taxed as ordinary income) into a life insurance benefit that is generally paid to beneficiaries income tax-free.
One common approach may include:
- Exchanging or repositioning the annuity into a Single Premium Immediate Annuity (SPIA), which provides a predictable income stream for a defined period
- Using that income to fund life insurance premiums
- Leaving beneficiaries with a potentially larger, tax-efficient death benefit
Another approach may involve taking distributions from the annuity and using after-tax proceeds to fund life insurance directly. However, this may create current tax consequences and should be evaluated carefully.
Potential Advantages
Depending on your circumstances, annuity maximization may:
- Help increase the value passed to heirs
- Improve tax efficiency for beneficiaries
- Provide access to life insurance cash value, if structured appropriately
As with any strategy, suitability depends on your goals, health status, tax situation, and overall financial plan. Is annuity maximization the right strategy for you? A thoughtful evaluation of your income needs, estate objectives, and tax considerations is essential before making changes. Contact your Janney Financial Advisor to learn more.
Working With Janney
Depending on your financial needs and personal preferences, as well as the fees and costs associated with those services, you may opt to engage in a brokerage relationship, an advisory relationship, or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
If you engage in a brokerage relationship, you will buy and sell securities on a transaction basis and pay a commission for these services. Our recommendations for the purchase and sale of securities will be based on what is in your best interest and reflect reasonably available alternatives at that time.
If you engage in an advisory relationship, you will pay an asset-based fee, which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory relationships.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
*Annuities are offered by prospectus and a prospectus is available upon request. The prospectus contains important information about the annuity contract, including investment options, death benefits, and annuity payout options. Many annuities have surrender charges and other fees and expenses that may apply, consider these expenses as they apply to your specific circumstances. There is no assurance that any specific investment, annuity product, or strategy will be successful.
Annuity riders are optional guarantees available in some annuities. For example, a death benefit rider may be available at an additional cost to ensure your heirs receive at least the principal you invested upon your death (minus any withdrawals). Some riders are not optional and may be a standard cost associated with the annuity contract.
Janney makes no representation that an account will obtain gains or losses similar to those illustrated. This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy the securities highlighted. The information provided should also not be relied on for accounting, legal, or tax advice. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.
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