A New Approach to Tax Planning with IOVAs

Despite low yields and ongoing volatility, many advisors have a strategy to help their clients manage the market and earn meaningful gains in 2016. But another hurdle approaches on April 15th as tax bills come due. Taxes can be your clients’ single biggest investment expense—especially for the high net worth, who can face rates as high as 40 percent or even 50 percent, when Federal and State taxes are combined.

That’s why tax deferral is key. According to surveys by Jefferson National, 96 percent of RIAs and fee-based advisors say tax deferral is important. Yet, less than 20 percent know tax deferral can potentially add 100 bps or more to a portfolio. And more than half said clients have no knowledge about tax deferral beyond 401(k)s and IRAs. Many are missing opportunities to maximize wealth.

IOVAs: Built for Tax-Advantaged Investing

The first step is investing in qualified plans. But the high net worth can max out low contribution limits. Now a new category of Investment-Only Variable Annuities (IOVAs) can maximize the power of tax deferral with low fees, or even flat-fees, no commissions, and no surrender charges. With an expanded lineup of underlying funds, including more liquid alternatives, low-cost IOVAs can be used for a range of tax-advantaged investing strategies:

Asset Location

Research shows asset location can potentially increase returns by 100 bps or more—without increasing risk. In taxable accounts, locate tax-efficient investments taxed at lower long term capital gains rates, including buy and hold equities and ETFs. In low-cost IOVAs, locate tax-inefficient investments taxed at higher rates for short term capital gains and ordinary income, including fixed income, REITS, actively managed strategies and liquid alternatives—preserving upside without the drag of taxes.

Tax-Efficient Re-Balancing

Inside low-cost IOVAs, investment income or capital gains remain untaxed. When re-balancing means taking gains, avoid taxes inside an IOVA. When re-balancing means taking a loss, take it in taxable accounts and use for tax loss harvesting.

Building Personal Pensions

Defined benefit and pension plans continue disappearing. Use low-cost IOVAs to accumulate more. Strategically diversify income during retirement to minimize “bracket creep,” using Roth and Traditional IRAs, fixed or immediate annuities and systematic withdrawals from IOVAs. No required minimum distributions means non-qualified IOVAs are especially attractive, offering tax-deferred accumulation beyond age 70½.

Preserving a Windfall

When selling a business, optimize the after-tax windfall by building a fully diversified portfolio using asset location with a low-cost IOVA. If there is no immediate need for liquidity, a low-cost IOVA can be used for the entire windfall.

Legacy Planning and Wealth Transfer

Trust income over $12,150 is taxed at 39.6 percent—the highest bracket—plus 3.8 percent net investment income tax. By funding trusts with low-cost IOVAs, you control when income is generated and when it’s taxed. IOVAs often work best with CRUTS, Credit Shelter, Bypass, Revocable and Special Needs Trusts. Or use non-qualified stretch with low-cost IOVAs to generate a lifetime income stream when wealth is passed to heirs.

Right Time for IOVAs

There’s a direct link between paying less in taxes—and earning higher returns. That’s why tax-planning should be a top priority not just now—but all year long. And now you can to take a new approach to tax planning using a new category of IOVAs. Offering lower costs, more funds and more flexibility, Investment-Only VAs can be used in ways that traditional VAs can’t to help clients minimize taxes and increase returns—without increasing risk.

Important Disclosures:
Variable annuities are investments subject to market fluctuation and risk, including possible loss of principal. Your units, when you make a withdrawal or surrender, may be worth more or less than your original investment.
Variable annuities are long-term investments to help you meet retirement and other long-range goals. Withdrawal of tax-deferred accumulations are subject to ordinary income tax. Withdrawals made prior to age 59 ½ may incur a 10% IRS tax penalty. Jefferson National does not offer tax advice. Annuities are not deposits or obligations of, or guaranteed by any bank, nor are they FDIC insured.