IRAs and annuities are growing in popularity as retirement investment options, according to recent surveys, but they can have serious disadvantages.
Last year, four out of 10 U.S. households had IRA accounts that's up from 17 percent two decades ago, according to an ICI Research survey. But they can be bad for beneficiaries if your client has a very large account.
Investment in annuities, touted as offering a potential guaranteed income stream, also continue to grow with sales up 10 percent in the second quarter of this year.
"Annuities have several dark sides, both during your lifetime and for your beneficiaries," says wealth management advisor Haitham "Hutch" Ashoo, CEO of Pillar Wealth Management. "My business partner, Chris Snyder, and I wouldn't recommend investing in them."
Putting large amounts of money in either annuities or IRAs can have serious tax consequences for heirs, adds attorney John Hartog of Hartog & Baer Trust and Estate Law. "If you want to ensure beneficiaries get what your client saved, you need to take some precautions," Hartog says.
Ashoo, Hartog and I offer these suggestions:
Take stock of your client's assets – they could be worth more than they think: If your client's estate is worth more than $5.25 million (for couples, $10.5 million), their beneficiaries face a 40 percent estate tax and federal and state income taxes. It can substantially deplete the IRA.
To avoid that, take stock of their assets now – they may have more than they realize when they take into account such variables as inflation and rising property values. Be aware of how close to that $5 million/$10 million benchmark they are now, and how close they'll be a few years from now. Consider vacation and rental properties, vehicles, and potential inheritances as well.
Also, take advantage of the lower tax rates enjoyed today, particularly if they're going to skyrocket after death. A lot of people want to pay zero taxes now and that's not necessarily a good idea. For instance, if they're at that upper level, consider converting their traditional IRA to a Roth IRA and paying the taxes on the money now so their beneficiaries won't have to later.
No matter what the estate's value, avoid investing in annuities. Wealth management adviser Ashoo warns annuities, offered by insurance companies, can cost investors an inordinate amount of money during their lifetime and afterward.
