Monday, 31 May 2021 13:15

Is there a tax-free and safe investment for me?

Q. I’m looking at options for a tax-free, compound interest option for future needed money. I’m 64, retired, married to an 86-year-old handicapped man. The stock market isn’t dependable and my husband’s pension ceases at his death and I receive nothing because we were not married when he retired. Is there such a thing as a tax-free, compound interest investment? — Looking for guarantees

A. We’re generally not fans of annuities because they are appropriate for only certain kinds of investors.

But it sounds like something you may want to consider with a portion of your assets.

An annuity is a product that is sold by an insurance company that would provide you with a fixed stream of income that would last for your lifetime or a set number of years, Marnie Hards, a certified financial planner with Aznar Financial Advisors in Morris Plains.

There are a variety of different annuity products, some of which are quite expensive, so you do want to be careful when evaluating your options, she said.

One type of annuity is called an immediate income annuity.

“With this type of annuity, you would pay the insurance company a lump sum and in return, they would provide you with a lifetime stream of income that would start within 12 months of your payment,” she said.

Then there’s a deferred income annuity.

This is similar to the immediate income option but has a start date from 13 months to 40 years from the time the insured pays the premium, Hards said.

Depending on what choice you make, you can opt for a death benefit to be paid out after the income start date, she said.

“If you do not have anyone who is reliant upon you financially and are not concerned with leaving assets to an heir, your benefit during your lifetime would be higher if you do not elect a death benefit option,” she said. “Given the fact that your husband is quite a bit older than you, you likely do not need a joint option either which would result in a higher monthly payout to you.”

If the annuity you choose does not offer any sort of inflation protection, it is important for you to understand how much the payment will be worth to you 10, 20 and 30 years from now on an inflation adjusted basis, she said.

You can purchase an annuity with money inside or outside of an IRA or other retirement account, but keep in mind that you get a tax benefit when you purchase an annuity regardless of where the money comes from, Hards said.

“So, regardless of where the funding comes from, the investments within the annuity wrapper will grow tax-free until the funds are withdrawn,” she said. “Once you start taking withdrawals, income taxes are due at ordinary income tax rates, not capital gains rates.”

If you use taxable funds to purchase the annuity, the payments will be taxed to you using an exclusion ratio, so a portion of the money you receive back will be tax-free and the balance will be taxable. If you use qualified funds — retirement fund money — to purchase the annuity, the distributions will be fully taxed upon distribution, she said.

“Keep in mind that on average, individuals tend to annuitize between 20 and 30% of their available savings,” she said. “An annuity can be a helpful tool to supplement a well-diversified portfolio, but should be used in tandem with the portfolio, not by itself.”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.