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Annuities vs. Mutual Funds, Bonds and CD’s

Mutual funds, bonds and CD’s – unlike Annuity ownership – may subject Social Security income to taxation.

Single taxpayers who have adjusted gross incomes of $25,000 or more and married couples with adjusted gross incomes of $32,000 or more are subject to paying ordinary income taxes on from 50% to as much as 85% of their social security income. Mutual fund dividends, capital gains and bond income (even tax free bonds), CD and other savings and money market interest all count in the formula to determine adjusted gross income.

Because earnings and interest earned in annuities are tax deferred, they do not count in the social security formula, for as long as it remains in the annuity. Ask your clients and prospects that have CD’s, savings accounts or muni-bonds if they are paying taxes on Social Security. If the answer is yes, ask them how they feel about paying taxes (often times they are not using the earnings, so why pay taxes on them).

By repositioning their assets, you may be able to eliminate these earnings from the Social Security formula and possibly eliminate the taxes they are paying on Social Security Benefits.

Example:

Jack and Mary are retired and receive Social Security benefits of $18,000 per year.
Jack receives a pension of $20,000 per year.
This income of $38,000 is enough for them to live on.

They also have CD’s that total $200,000 and earn 4% for $8,000 income. They don’t spend this.
They also have $100,000 of tax-free muni bonds that earn 5% for another $5,000 income. They reinvest this income also.

To see if they are taxed they must add one-half of their SS benefit, plus the pension, CD income and muni bond income together (9,000 + 20,000 + 8,000 + 5,000). This total is $42,000. This exceeds the $32,000 limit for married filing jointly, so 50% of their benefit (50% of $18,00), $9,000 is subject to taxation.

Now, if we reposition assets they aren’t using into fixed annuities, we could eliminate the Social Security tax. Transfer CD’s and muni bonds into an annuity. They eliminate $13,000 (of income they weren’t using) from the social security formula, thus lowering their income formula to $29,000.

By making these changes you have eliminated the clients Social Security benefit from being taxed. You have also given the client fixed income and removed the risk of the bond portfolio dropping if interest rates rise.

By Bill Whipple, MassMutual. For more info on SS taxation, see Publications 554 and 915 at www.irs.gov



Last Updated: 9/23/2012 10:05:00 PM