If your gains in an actively traded portfolio will be hit with short-term capital gains taxes, it makes sense to trade those accounts inside a no-load variable annuity.
The question of whether it is a good idea to house an “actively traded” portfolio in a no-load variable annuity (VA) is easy to answer with a simple mathematical analysis.
Let’s take a 45-year-old investor who has $250,000 allocated to a brokerage account that he wants “actively traded.” I will let the money grow in the account for 20 years and then will take an equal amount of money out of the account every year from ages 66 to 85 so the account balance after the last withdrawal is $0.
I’m going to assume an 8% gross rate of return and that the actively traded account incurs short-term capital gains taxes on all of its growth. I’ll also assume the client is in the 30% income tax bracket (which means the net return after taxes each year will be 5.6%).
How much could be removed from the brokerage account every year?
What if the investor had his actively traded account in a no-load VA with only a $20-monthly fee?
Because all of the growth will get hit with income taxes, I need to reduce the $117,319 accordingly. I’ll assume the investor stays in the 30% income tax bracket in retirement; and for simplicity sake, I’ll spread the $250,000 basis out equally for the 20-year withdrawal period.
How much net income will the client have using the no-load VA every year?
It’s easy to figure out which the investor like better: $62,724 or $85,837.
The only thing the investor did differently to get that $85,837 was
take his actively traded account and place it inside a no-load variable annuity.
If you have X amount of money in an actively traded portfolio where the gains each year will be hit with short-term capital gains taxes, mathematically it will make much more sense to have those accounts traded inside a no-load variable annuity.
Roccy DeFrancesco, JD, author of
, and founder of The Wealth Preservation Institute, can be reached at
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