Is a Fidelity Personal Retirement Annuity (FPRA) a Good Investment?
Posted July 21, 2013on:
A client of mine recently asked me the above question. He is a high-income business owner who makes close to $1m a year and he has used up all of his available tax-advantaged investment vehicles. He is interested in this Fidelity product primarily because it is tax-deferred.
Now let me start out by saying that I love Fidelity. I custody all of my clients’ assets with them. Their advisor support team is fantastic and without Fidelity, I wouldn’t have been able to build my independent wealth management practice. FPRAs are also cheap compared to other variable annuities out there and if you absolutely have to buy a variable annuity, an FPRA is definitely the way to go. But…. I don’t recommend it.
The primary selling point of a variable annuity is the so-called tax-deferred growth. Yet, this is not all it’s cracked up to be. You can achieve much (but not full) deferral with a tax-efficient mutual fund, like an index fund or an asset class fund. So in other words, deferral of earning recognition is just not that big of a deal, so don’t let it hook ya!
Herein lies the rub! With an annuity, all the deferred gains and earnings will be taxed at the much higher ordinary income rate, not the lower, long-term capital gain tax rate.
Take my client for example; he is in the 39.5% tax bracket, then factor in the state tax rate of 5.75% and you’ve got quite a number! Comparatively, the long term capital tax rate is only 20%. Why pay 45.25% when you can pay just 20%? And don’t even get me started on the many other tangible and intangible costs of variable annuities, such as early withdrawal penalties, lack of investment choices and hidden investment costs!
If you seriously want to learn about tax-efficient investing, schedule an appointment with me.
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