Variable annuities became lots more loveable to RIAs and their clients when Jefferson National pioneered the low-cost investment-only variable annuity (IOVA) seven years ago. Tax deferral is a key attraction, as well as the contract's flat $20-a-month fee. As with other VAs, income earned won't be taxed until the funds are withdrawn.
Now, with a growing number of companies offering IOVAs, the space is the fastest growing segment in the VA arena, according to many industry members.
IOVAs allow clients to invest in a wide range of actively managed funds. Some IOVAs may be available with the guarantee of a death benefit, same as traditional VAs – or else it is offered as an added option.
Drawbacks include a 10% penalty payable to the IRS if funds are withdrawn before the client reaches age 59 1/2, as well as market risk, especially when investing in alternatives among the IOVA's underlying funds.
Jefferson, now Nationwide Financial's advisory solutions business, based in Louisville, Kentucky, boasts 4,200-plus advisors – RIAs and hybrid BD reps – using its IOVA, dubbed Monument Advisor. Assets under management in the no-commission, no-surrender-fee annuity total $4 billion. The firm serves up a wide range of tax-deferred IOVA funds, including fixed income and REITs – similar to those that advisors use in taxable accounts.
ThinkAdvisor recently interviewed Jefferson's president, Laurence Greenberg, about the considerable tax efficiencies of investment-only variable annuities. Greenberg led the firm's Monument Advisor launch, the first flat-fee IOVA. Here are excerpts from our conversation:
THINKADVISOR: Why is a variable annuity a good choice for income tax mitigation?
LAURENCE GREENBERG: One of its prime components is that the money grows tax-deferred. But for a long time, the value of helping people save tax-deferred and then annuitizing an income stream was overshadowed by living benefit riders.
What's the salient tax-related issue about an investment-only variable annuity (IOVA)?
The accumulation phase is tax deferred. This is important because advisors who manage money believe that they're able to manage market risk over a long period. So they're looking for ways to improve accumulation. A key part [of an IOVA] is having the right variety of funds but also making sure that the cost of the tax-deferral benefit is extremely low.
What's a downside to using an annuity as a tax-efficient strategy?
Just like with an IRA accunt or a 401(k), the IRS can assess a 10% penalty if you withdraw the funds before age 59 1/2.
Can IOVAs be rebalanced without generating a tax liability?
Absolutely, because the money is growing tax deferred. An advisor may decide to put investments that take losses in a brokerage account so that the client can get a tax benefit, but where there are investment gains, in an [IOVA] since there won't be an immediate tax implication.
