You’d think after all my rants and tirades that I hold all annuities in contempt.

No. Just the high fee, high pressure model, with all the pricey riders that most likely will never be utilized.

I hate the way annuities are marketed to unsuspecting and unsophisticated seniors, and the lousy seven year lockups (the back end load).

I hate the tidal wave of money that flows back to the brokers and product manufacturers, allowing them to profit at the expense of their clients.

But what I like is the basic concept of deferring taxable income when you are in your prime earning years, and then drawing down the annuity when you have retired, hopefully to a lower tax bracket.

Especially when you’ve already picked off the low hanging fruit of gaining the employer match on your 401k.

I’m a big believer in insurance products once they’ve been stripped of all the price scaffolding.

Term insurance, and low or no fee annuities.

Here’s how to build your own, paying zip in fees.

The D-I-Y Annuity

Let’s assume you are high income earner, already maxing out your 401k. Your income is too high to qualify for the Roth IRA. But at any income you have the option of funding a non-deductible IRA. And you should.

The limit was raised to $5,000 this year ($6,000 with the over 50 catchup) so a spousal couple can put away $10,000 to $12,000.

1. Make sure you open a separate IRA account, so that you will not be taxed on your contributions when this account is drawn down. You only pay tax on the investment gain. This is exactly like a non-qualified annuity. And with the bonus of asset protection from judgment creditors, just like a store bought annuity.
2. Now, pair this account with an I-Bond portfolio. The limit for a spousal couple is $10,000 for paper I-Bonds purchased at your local bank, and an additional $10,000 purchased via Treasury Direct on line.  Just remember to reverse the lead social security number on both formats after the first $5,000 to double the allowance.

Now you have government assured, inflation protected bonds, and like your non-deductible IRA, no tax is due on interest income until you cash in the bonds, to a maximum term of thirty years.

That’s it. You’ve shifted income and gain to your retirement years, and you will never have to pay tax on your contributions (i.e. basis).

But now I’ve broken the two cardinal rules of the retirement/investment complex.

1. To make simple that which is usually overcomplicated.
2. And to make free that which is usually unconscionably expensive.

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Posted: 06|13|08 at 6:56 am. Filed under: bonds, retirement.
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