To Draw or Not To Draw?

Background: Variable Annuities with Minimum Income Guarantees are quite popular and have been a very effective planning strategy. There are many different types of these contracts offered by various insurance companies. Some provide a guaranteed minimum income benefit, some provide a guaranteed withdrawal benefit, some provide a guaranteed death benefit, and lastly, some provide a combination of those! These guarantees are not “walk away” values, but values used by the insurance company to pay the amounts they have guaranteed for some future event (withdrawal, annuitization, or death). These allow clients an opportunity to participate in the market with a “safety net” offered by an insurance company. Because these contracts offer a guarantee, they typically have fees that could be 2 to 3 times that of other investment vehicles.

Our Case: A client has a Variable Annuity IRA with a Guaranteed Minimum Income Benefit rider of 6% in which they invested in that they purchased in 2009. If they elect to draw on it, they can receive 6% of the Income Base. If they do not draw, the guaranteed Income Base goes up by 6% per year. This contract is “underwater,” meaning the Income Base value is higher than the current contract value. The client really doesn’t need the cash and would rather not pay taxes on this today.

The Question: To draw or not to draw? When is an optimal time to start drawing income from this contract? Are there strategies to incorporate in these withdrawals that can minimize current taxation?

The Results: Using an internal analysis tool customized for each client and contract, we are able to help the client analyze when an optimal time might be to draw on the contract. In this circumstance, we recommended the client take the 6% income guarantee. We rolled the income into a brokerage IRA which avoided current taxation. Eventually this will have RMDs and taxes will need to be paid on withdrawals. In this case, the client would rather pay the taxes later, and we were able to assist in accomplishing that using a direct IRA to IRA transfer.

Bottom Line: The client was thrilled with the analysis! Not only did it maximize the benefit of the contract, but it also did not create additional current taxes. We are still able to “manage” the contract to retain the death benefit. This scenario likely provides the client with the most cash out of the contract. And after all, that is the goal with insurance – to get the most cash from the insurance company.

This emphasized our tagline of With Your Interest in Mind! It was an aspect that had not even been considered, as they did not need cash. It confirmed that our role is to look at all ideas and options, not just what is “right in front of us at the moment,” but what is best for the client.

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This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities.