Tax-Efficient Income And Principal Protection With Annuities
With the Federal Reserve’s interest rates at a 15 year high, fixed-rate annuities continue to offer the best tax-deferred guarantees available. A 60-year-old with $250,000 in after-tax funds can secure a guaranteed growth rate of 5.65% for 10 years — an excellent, fully guaranteed rate.
Annuity products also serve as an income source. By withdrawing interest, that same 60-year-old could generate $14,125 in gross annual income while preserving their initial $250,000 investment. After accounting for a 35% tax bracket, the net income would be $9,181.25 per year. While this is a solid option, a more tax-efficient approach can further enhance income using a split annuity strategy, which combines a fixed deferred annuity and a single premium immediate annuity (SPIA).
A More Tax-Efficient Approach
By strategically dividing the $250,000 investment:
- $144,292.90 is placed into a fixed deferred annuity at 5.65%, ensuring it grows back to $250,000 over 10 years.
- The remaining $105,707.10 is used to purchase a 10-year period certain SPIA, leveraging favorable exclusion ratios to minimize taxable income.
This SPIA generates $12,943.68 per year, with 82% of the income excluded from taxes as a return of principal. After taxes, the net annual income increases to $12,128.23, providing an additional $3,000 per year compared to simple interest withdrawals—all achieved through smart tax planning.
Maximize Your Clients’ Tax Efficiency
With tax season approaching, now is the time to introduce clients to strategies that optimize income while preserving wealth. Contact us today to explore more tax-efficient solutions that capture your clients’ attention and help them make the most of their financial future.