Episode Transcript
[00:00:00] Speaker A: Hello and welcome everyone to the Annuity Straight Talk podcast. Episode number 162.
Coming in on the end of the year. My name is Brian Anderson, founder and creator, writer and researcher and sharing what I learned on annuitystraighttalk.com coming on 22 years in the business.
Got a great topic. Not beating a dead horse here at all, but let's look at the newsletter. Give me a visual aid as I go through this. Please like subscribe or comment on any of your favorite podcast platforms or on YouTube and if you want to talk to me, you can schedule a call by on the top right corner of any page on annuitystraighttalk.com look at this right here. You can see it on the screen. If you're looking at the YouTube video schedule call, click that button. Name, time, zone, time, some notes, phone number, I will call you. Everybody's like, are you going to call me? Of course I'm going to call you. Why would I need your phone number if I'm not going to call you? We'll try to figure out how to get that on there. So this is a good end of the year topic because Roth conversions have to be executed before December 31st. Been hot topic in the past few years. I call them panic conversions. We're going to talk about somewhat nefarious sales practice that I consider we're go through the details on that but I'm going to talk about a few things first. So past few years, fear based selling. Everybody's worried about tax Trump tax cuts expiring in 2025. They failed to listen to the fact that candidates on both sides, even Joe Biden way back when said, hey, we're going to extend parts of those tax cuts. So I said don't worry about it. But there's still advisors that were trying. They're just trying to get you in their office and they're going to see what you got and try to sell you stuff. I didn't put a lot of stock in it. My expectation that was that paying large amounts of taxes just to convert assets to tax free wouldn't mostly be a waste of money. Good business for those guys in fear based selling. But we use logic and reason here, try to come to thoughtful conclusions, take your time. And Trump was reelected. So far I've been partially correct and I'm not getting as many calls from people oh my goodness. They're gonna. Yeah. And I'm not just like holding a grudge on this one. New information came to light in the past few days that's what I'm gonna talk about goes back to June. I released the podcast Financial Conspiracy Theories. It brought to light several cases of broken federal promises. If you trust them, good for you. I don't. And when it comes to retirement, they got their hands in every cookie jar. So careful what you get into with them. So leads into question whether Roth IRAs will always be tax free. Now, I covered the reasons why I'm skeptical earlier this year, but I got something new. Now, a Roth IRA is technically called a 408A. That's the tax code for it and it states that distribution shall not be includable in gross income, which is exactly how Social Security started. Now, if you make too much money, it's not a lot of money. It's $32,000 and Social Security is taxable.
85% of it. That's not 85% goes away. That's just how much you have to report on income. Just like Medicare, Parts B and D. There's a means test and you can't convince me that Roth IRAs won't be on the chopping block one day. So if you're looking at going whole log into a Roth conversion, think twice about that. And I'm going to give you one more reason why I'm a little skeptical. So every two years I got to complete 24 hours of continuing education in order to keep my license. That came up this year. I have until the end of my birth month, which was November. So I just did this very recently. So I finished the coursework. You read the course, take the tests. There was one class I took that was specifically about IRAs of all types.
Something when I was reading through and kind of cruising through it. Now these tests are all what are contribution limits for IRAs in 2024? When are catch up contributions available? I mean it's the same answer that it's been for 20 years.
So it's not that hard, but it takes time. But something new caught my eye. And then when I went to take the test, it came as a question. My suspicions were strengthened. I'm going to share it with you. I took a screenshot of the multiple choice question and posted it below. Draw your own conclusions. Tell me what you think. 12 on this IRA test was which of the following tax benefits is not characteristic of Roth IRAs? A tax deferral of earnings. That is a characteristic B possible tax free distributions after age 59 and a half. Yep, that's a characteristic C deductibility of contributions. We all know you don't get to deduct your contributions to a Roth ira? I got this question correct. You should have as well if you were thinking about it. So do I need to point out on option B, possible tax free distributions after age 59 and a half is a characteristic emphasis on the word possible. So these tests are very literal and this is what the regulatory agencies want to train us professionals to say. That's the language we they want us to use is you will possibly get tax free distributions if taken after they're qualified, after 59 and a half. Right. There's no more obvious way, in my opinion, to point out that the door is open.
My contention is that a means test for this is very likely. I'm not trying to scare anybody. Use common sense. Trying to catch ahead of it. Do not sell out to complete Roth conversions because it's just as risky as many other strategies that have no guaranteed outcome. Now, because it says possibly you'll get tax free distributions, I consider that to not be a guarantee. Again, trust whoever you want. Washington, D.C. no thank you. Not for me. And when I say sell out, it's like, don't go into higher tax brackets. I'll talk about better options, like quickly. I'll talk about it in just a second. Don't go into higher tax brackets to do it. But this brings me to my next case of predatory sales tactics that directly hits the title of the newsletter.
Dozens of people asked this question this year. A lot of people came to me. There are guys out there claiming that a large annuity bonus can pay for a Roth conversion. Now, a bonus can help, but that's misleading because you still have to pay taxes from somewhere else to get it done. You convert X amount, you got a tax rate, then you got to come up with the taxes. Now, I think this is a poor idea for several reasons. It's possible it's not the worst thing to do, but it's not. There's no advantage there. So consider all these things first. If that's what you think you want to do and if you still want to do it, then go ahead. I don't care. It's your money. The best peer bonus from a reputable company. Now, I just got news of one of the A companies that I stayed away from for a long time, thank goodness, who went into state receivership because they got into financial trouble. People probably aren't going to lose money, but it's going to be tied up for a while. And if you're in an income situation or if you're doing something and you got money tied up? It could be. I don't know that it is because I don't know the numbers. But it's not like boom companies. They're going to try to rehabilitate it. They'll probably keep making payments. They'll cash some things out, they'll sell some things off. I don't know how they're going to do it, but it's brand new. So reputable companies and everybody says, oh, but the state guarantee fund, it's a bunch of garbage. Nobody knows how it works. I'm the only one I know of that has actually explained it. It's on the newsletter page. Anyway, that's a tangent. You can go search for failure, bankruptcy, right? And you'll find those newsletters. There's three or four of them, one podcast and it explains it. I've had people from home office insurance companies come to me and say ask the question. I send them to my newsletter page, right? So reputable company, good company, not some flashy garbage thing that gets put into receivership down the road just because they're trying to get a bunch of business.
13% is the best bonus. It's got to be a fixed index annuities because those are the only contracts that currently allow for parts. Partial Roth conversions in the contract specific way it's got to be done. There are only a handful of companies that do it.
So now you can get a bonus as high as 20% that I know of. That's a pure bonus to the cash value. We're not talking about the Allianz income riders and the protected income value and the 40% or whatever they've got now. We're talking about true boost to the cash value available upfront. So you can get up to 20% if you pay a fee, but the ongoing reduction of cash value with a fee negates the benefit of the bonus. So if you get an extra 7% fee, but you're paying 1% fee on a 10 year contract, you're going to pay 10% in fees roughly.
So you get a little bit of bump in the early years, but I don't think it really offsets now. The fees will come with other benefits that may be appealing to you. So if you choose a larger bonus, and I have some people that have done that because one of the other benefits was very important to them. But it's got to be an additional purpose besides just the extra money. So a lot of those guys selling the athene, they're selling the fee, but they're not Explaining to you what happens without the fee. It's not that I don't like the product, it's just not most advantageous in a lot of situations. So if you stick with the no fee bonus, your tax rate on the conversion needs to be less than that amount or it obviously doesn't make sense. If you are converting in a 22% tax bracket with a 13% bonus, well, that directly contradicts the claim that the bonus pays for the conversion because you're paying more in taxes than you're getting a bonus. Simple math, 22 is larger than 13. So the overall premise is that you're getting free money that recoups the out of pocket taxes paid. But the kicker is that any cost recovered is in the annuity. You can make Roth conversions and take withdrawals to pay for it, but it creates quite a mess and it just really drains your ira. So you end up with a right now it can be managed that way and it still works, but the best way to do it is if you you need another reason to own the annuity. You don't just buy the annuity because you're going to get free Roth conversions. Buy the annuity for the right reason and if that's part of it, then you can play with it as you go forward. Because if you successfully convert all of a traditional IRA annuity into a Roth IRA annuity because you had to pay taxes from somewhere else, then you're just going to have a big Roth annuity and that has to be what you want. The tax savings are questionable at best.
If you happen to want the annuity for other reasons and that's where you want your money to ultimately be, then go ahead and play with the conversions all you like. No problem from me. So conversions are best done with after tax money to keep it clean. If you don't have enough cash on the side to pay taxes, then you are most likely not in danger of being forced into an unwanted tax bracket. When RMDs come. For most people who don't need funds from a traditional ira, if you got an IRA that you don't really need, it's most often more tax effective. And I'm talking now. I've done two or 300 of these. You guys get to do one and maybe talk to your neighbor or your buddy about his done a lot of them and in the vast majority of them it's far more tax effective to take systematic distributions, pay the taxes, invest the proceeds net, and then swap to RMDs when it's time you're that has you saving money after tax, that is in almost every case I've seen. Now there are exceptions and I'm not talking about maybe you specifically, but in a general sense you have to think about these things. Most are likely to pay the least amount of taxes over time doing it this way. A lot of people like to play the tax game from year to year. Talked to another guy yesterday, love them dearly, these are great people. But keeping his taxes in one tight spot and he's deferring his IRA and it's growing a bunch. He's kicking the can down the road. It's going to be a big hit and I don't care what the dividends are paying now. But he'd be better off start to whittle down that IRA first. So if you have net proceeds of taxes, get a good investment manager that can pick the assets. Maybe highly appreciating stocks that aren't paying dividends. So you don't have additional ordinary income taxes if those are inherited as cash to get a stepped up basis. Some people will decide to go buy real estate with that money. Another stepped up basis in some cases. But then what you're doing is you're going to leave a big IRA to your kids and a bunch of cash so they can handle that the same way you're trying to handle it now. Doing it all through a Roth conversion, you're kind of boxing yourself into a corner. So there are ways to do that and you got tons of cash flow, tons of emergency cash, least amount of taxes. In a lot of cases, the majority of them, that is the best way to do it. So best case scenario for this strategy, taxes would be completely offset by the bonus.
You just light the cash somewhere else and amounts to a larger investment in annuity because it costs you all of your IRA and some additional money on the side.
Just the way it is. Now we all know, because I've talked about it, that the bonus annuities come with lower growth potential. There is no such thing as free money. Sure, it's a boost to the cash value, but the back end of that in an index annuity, you're going to get lower cap participation rates, less growth potential over time. So buy that. To do the Roth conversion translates to a bigger purchase and the result of that is your lower growth potential in the contract. That's what you get out of the deal. Now sold this. A lot of people like to boost the cash value. Like hey, it's a head start. We don't know what the indexes are going to do, but at least I'm going to bank that. And cool, we'll go with it. I don't have a problem with that. As long as you understand the alternatives and what it means. You have to have a choice so that you can choose what's in your best interest. Okay, so I'm not. I will not sit here and say that Roth conversions are always a bad idea. I think in part, they can be a good thing. And I'm not saying you should never use bonus annuities because some people really like them. They do good things. But the two together, nothing but a questionable sales pitch, final judgment, and answer right there. There are no doubt thousands of people who are convinced otherwise.
And I'll stand by that, because one thing I know about advertising online, three or four people coming with the exact same question when I haven't posted the information on it, means there's a trend out there of guys really doing that panic conversion. Hey, you got to get yourself an annuity. And boy, by the way, this bonus is going to offset it. There's some big firms that have been advertising this, and we've revealed several other questionable trends as well. Again, you got to have other reasons for wanting the annuity. And if the Roth conversion is that important, then do that, too. I'm not going to sit here and pretend you're outsmarting the system by doing it that way. And I know the feds want their money up front. They like it. Do a $200,000 conversion, pay $40,000 in taxes. They're licking their chops. Yeah, because when the Roth conversions came out, it's like there was a window a year or two where you can do Roth conversions now and then they just open it. They like getting all the money. They don't want to wait until you die, until you're 88 years old and you die. That's why they eliminated the stretch, too, because they weren't. They want their money up front because they don't know how to manage it. Right. Same with annuity agents who take all their commission up front. They can't manage their money, so they got to have all that money up front. Right, different topic. Similar. So they want their money up front, but be careful, because they want. Might want more at the end, and it will not be the first time it's happened. You guys are all going to be angry. They're going to do it for their voting block. It's going to be a means test. If you make too much income, blah blah blah. Whatever it is. I don't know how it's going to work, but it's very possible. Go back to that episode in June. Financial conspiracy theories. There's a couple of the reasons why I have questions about it and why I'm not going to recommend you do it, but I will say it's okay in pieces and parts. So this has been episode 162, annuity bonuses and Roth Conversions. Hope you guys got something good out of this good end of the year topic. Got one more and maybe a year in review, but we're going to cruise on in through the holidays. I hope you all had a Happy Thanksgiving again. Show it to you again. Top right corner any page on annuitystraighttalk.com schedule a call if you want to chat with me. Good time of year. You get me pretty focused because I'm usually not too busy. I'm just doing the production mode. But go and share it with your friends. Subscribe on YouTube. Anybody you think can help. Or if you got an advisor that totally disagrees with me, send it to him or her. That's great. Steel. Sharpened steel, right? I can take it if they bring up a valid point. Otherwise then I'll do another podcast. I'll correct my mistakes. Absolutely and or maybe I'll get a guest and we can go back and forth. So you guys have a great, great weekend and I appreciate you sticking with me, getting a lot of subscribers, a lot of followers. There's more coming and I will see you next week for episode 163. Okay, thanks guys. Have a great day. Bye.
[00:16:32] Speaker B: You have been listening to Annuity Straight Talk.
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