Tax-Free Income

  • 2011 - SOA - Tax Diversification in Retirement Planning, by Gregory C. Freeman, Society of Actuaries - 26p
    • Cash Value Life Insurance
      • 2 - Tax considerations impact many financial and investment decisions; for example, clients may accept lower returns of municipal bonds just to avoid income taxes.
        • Others will pay insurance charges to gain tax protections offered by annuities and life insurance.
      • 11 - C – Distributions at retirement may be managed to be tax-free
      • 12 - g. In low tax years, clients might take extra income or gains from those accounts that generate taxable income, pay taxes at the lower rates, and then reposition the funds into accounts that would deliver tax-free or tax-advantaged income in future years when rates might be higher.
      • 19 - Tax Benefits Come With a Cost
        • As complex as the federal tax code may be, virtually every provision offering tax relief has been written with some purpose in mind, often a behavioral purpose. For example, a tax deduction for mortgage interest encourages home ownership. Retirement and tax planners often search out the new tax opportunities and use them to whatever advantage they can, whether this is what the U.S. Congress intended or not. This is the root of various tax arbitrage strategies and the occasional “loophole.” Going back to the green segments in the various tax buckets, it seems that every good tax benefit has a cost. The following are some examples:
        • 5) The tax-free growth and income of a Roth IRA or cash value life insurance are created only with assets that have been taxed previously.
  • I'd like to go through a bit of history and cover some of the challenges that are coming up and see what we might be able to do with them.
    • Let's start with October 1987, which, in my mind, started a nifty period for the annuities -- the "golden age," as I would call it.
    • There was a period of time, 1985 through most of 1987, when single premium fixed life insurance and single premium variable life insurance were really coming on strong.
      • These products were offering the potential for tax-free income through wash loan features, and the indication was that the SPDA product was going to be left behind. Things changed rather abruptly - within a two-week period.
      • There was a 500-point Dow Jones decline in October of that year, and a big challenge emerged on the tax front with Stark and Rostenkowski. Ultimately, a year later, the tax laws were changed to preclude tax-free income through use of the loan feature.
  • So it was back to basics for agents and stockbrokers. The good, old tax-deferred annuity concept wasn't that bad after all, so they got re-energized.

--  Michael Winterfield

1991 - SOA - Annuity Product Development Update, Moderator: Philip Polkinghorn, Society of Actuaries - 22p