Saving taxes on annuity

A: Yes, this is one of the big disadvantages of annuities that is seldom discussed by the insurance representatives who sell them. Even worse, you do not get out of the problem when you die because your beneficiaries still wind up paying the higher tax rates! It makes sense to deal with the problem now because the tax issue will only continue to get worse as the contract accumulates taxable value over time. Most annuity owners are not even aware of the tax problem and, as a result, millions of dollars in avoidable taxes will be paid by baby-boomers in the same situation. While life insurance policies can be transferred to annuity policies, it is not possible (from a tax perspective) to convert annuity to a life insurance policy and enjoy the tax-free benefit. Usually the best thing is to consider selling your annuity especially if you can get an offer significantly more than the contract's face value. Financial firms now specialize in buying and selling these "after-market" annuity contracts. Insurance companies only offer "face value" if you cash in your annuity contract. If your health is good, the annuity can be worth more than its face value. This is because an annuity contract has a built-in "income for life" feature that is based on average mortality tables. If your life expectancy is longer than "average" then the annuity contract may be worth more than you realize. The proceeds can then be reinvested in a tax-efficient investment vehicle. In your case, placing the cash value into a life insurance policy might give your family or trust account twice the current value on an after-tax basis at your death if the money is not likely to be needed during your lifetime. Otherwise, many other investments would offer long term capital gains tax rates. (There is now a legislative proposal to completely eliminate taxes on long term capital gains). An annuity sales transaction is best handled by a non-commissioned investment adviser since because the annuity firms do not deal directly with the public and it might be wise to avoid creating a conflict of interest by using a commission-based representative. Discuss the specifics of your annuity contract with OnlineAdviser to see if this strategy will work.