Marc Killian  00:19

Welcome to the podcast. Thanks for hanging out with Jude and I here on and I here on the Roth guy. Jude is the Roth guy. And of course, if you guys questions and need some help, please reach out to Jude and his team before you take any action on something here on our podcast or any other you can find him online at centrus fs.com that’s centrus fs.com or the tax bomb.com and we’ll have links to the show notes or to those websites in the description below, so you don’t have to remember them if you want to click on them, but make sure you’re checking in with Jude and his team before you take any action. What’s going on? My friend? How are you this week?

 

Jude Wilson  00:49

Doing Excellent. I’m excited. And it’s March Madness. It

 

Marc Killian  00:53

is the middle of it. Are you busted already?

 

Jude Wilson  00:55

Oh, I’ve been busted. Yeah. Got busted

 

Marc Killian  00:59

the first day, so always the case, right? But you know, we are in the middle of tax season as well, right? And you and I were chatting, we can’t remember for sure if we’ve had this conversation or not,

 

Jude Wilson  01:12

which is kind of a good problem, because it means that we’ve been talking a lot,

 

Marc Killian  01:15

maybe low our many podcasts, whether an audio form or certainly now in video form, whether we talked about, you know, annuities and there and the tax site, tax side of things, and seems like a pretty appropriate conversation piece for the Roth guy, absolutely,

 

Jude Wilson  01:31

you know, it’s funny to me. It’s kind of like most things in life. You have some people that think annuities are the worst thing since, God forbid, anything. Oh, yeah, like Ken Fisher saying you should never get an annuity, right? And then you have people on the other side. One of my favorite guys, Tom hegna, believes an annuity should be a part of every portfolio. So, yeah, you got people on both sides of the spectrum. Well, it’s

 

Marc Killian  01:59

a it’s a financial product, and like any financial product, they can be, you know, oversold or under explained, or, you know, lots of different things. So let’s just jump right in, I guess. Let’s do the basics real quick. Just give us some basics of what is an annuity, right? Because it can get a little confusing, yeah, I give

 

Jude Wilson  02:15

an example most of the time that people can really wrap their head around. Okay, yeah, your folks probably had a pension. You don’t see very many pension these days. So remember when your dad or your grandfather retired, more than likely, they had a stream of income other than Social Security that came in regardless, and that was a pension. And annuities work in a very similar fashion. That really was the basis of annuity developed by insurance companies. Is a contract between you and the insurance company to provide a stream of payments that you can’t outlive. That’s really the basis of an annuity, yeah,

 

Marc Killian  02:58

yeah. And so you get, what, the the owner, right, the annuitant, the beneficiaries, right? So you’ve got some basic contract stuff there, and, and we, I was thinking about this, and there’s so many annuity types out there, dude, it can get a little nuts. And, you know, we were talking one time before, I feel like a long time ago, we might have said this, but if you ever, if you ever had, like an older sibling or an older cousin or something like that that went through school before you and they were a troublemaker, and then as soon as the teacher saw your name and it was the same name, they’re like, Oh no, yeah, this one’s going to be just as much trouble. Well, that’s what happens with some of the annuities, right? Some get a little bit more of a bad reputation than others. So let’s talk about the flavors, if you will, of annuities for

 

Jude Wilson  03:44

sure. You know, I mentioned some of the gurus there, like Ken Fisher, Susie Orman, and these are people in the camp that believe all annuities are terrible. But like you said, there are many different types of annuities, and it all really depends on your particular situation. For example, they are variable annuities.

 

Marc Killian  04:02

And variables usually the bad cousin, right? That’s usually,

 

Jude Wilson  04:05

that’s, that’s usually the one when people are pointing to an annuity that is terrible. Nine times out of 10 they’re talking about invariable annuity. It’s

 

Marc Killian  04:15

never talking terrible. That’s true. That’s true if we’re talking about, like, my family member, like, that was the one that was putting, like, the cherry bombs and the toy Yeah, in the high school kind of thing. Yeah, right. So don’t get their weights, by the way,

 

Jude Wilson  04:26

but there were you came along. Yeah, you’re kind of like the fixed index of annuities. Well, fixed index annuities generally do not have the fees associated that a variable annuity has. And most of the time, like we said before, when people are talking about annuities and how terrible they are, they’re really pointing to the fact that some variable annuities have high internal fees, and most people don’t understand what that fee is all about. Okay? Some of it has to do with the investments within the annuity, and some of it has to do with mortality costs, because most annuities have a death benefit associated with it. So you really have to kind of dig a little bit deeper and to see whether, in your situation, which annuity makes sense. And of course, nobody likes to pay fees that they’re that needlessly. But if there’s benefit within that annuity that that matches your situation, then that fee may may be appropriate. So

 

Marc Killian  05:31

we’ve got what fixed, right, fixed, indexed variable. What’s the difference between like deferred or immediate?

 

Jude Wilson  05:39

Yes, so deferred annuities are when you’re in the accumulation phase of your life, you’re saving money and you’re putting away money to eventually retire one day. And so what they mean by deferred is that that income from the annuity is going to be deferred to a later point in time. Gotcha an immediate annuity? It’s like you’re at the top of the mountain. You’ve been saving money for years and years and years, and now you’re ready to trade your your you’re trading your time for money, and now you’re ready to trade your money for your time, and that immediate annuity will give you income immediately for the rest of your life. Gotcha.

 

Marc Killian  06:19

Okay, so let’s talk about some advantages, and then we’ll talk about some disadvantages, right, right? So some tax benefits, right? Because obviously that’s a big portion of what we talk about here, too, on the show is trying to help people, you know, think about the tax ramifications of various different things. So let’s talk about, I guess, start with the accumulation phase, like the deferral phase.

 

Jude Wilson  06:38

So in the deferral phase, you’re putting money away in an annuity, and you’re receiving what some advisors call the triple tax benefit. The money that’s in the annuity is not being taxed while it continues to grow so kind of like an IRA or a 401, K, you’re not paying taxes. You don’t get a 1099, at the end of the year saying you made this much and and Uncle Sam is knocking at the door, and you’re getting growth on what you would have paid to in a tax benefit. So so you’re not getting that 1099, and what you would have paid to Uncle Sam that continues to grow. That’s the second benefit. And then the money continues to grow and compound. And really, that’s really the third benefit is that you get your money is growing at a potentially faster rate because you’re not sending that additional money over to the federal government while it’s being tax sheltered.

 

Marc Killian  07:34

Okay, gotcha. And then during the income phase, when you’re receiving it, right? So a couple things to think about here. Yeah,

 

Jude Wilson  07:41

so when you’re receiving that money, if it’s non qualified dollars, meaning you’ve already paid taxes on money that you receive, and you decided to take some of that money that you that you’ve earned, and put it in the annuity. So you’re not going to pay taxes again on that money, but you will have to pay taxes on the earnings. So that’s what they refer to as last in first out. The interest that’s coming out of the annuity is the is considered the first to come out, and that’s fully taxable, but at some point in time, the the money that you put in, which was already taxed, that’s not going to be taxed again. So the annuity that that income payment can be a little bit confusing, right? Because you get, you’re getting part of your money as a return, and part of your money is money that you’ve that you’ve earned on that annuity, and that’s never been taxed before, so now it has to be taxed on the way out. Gotcha.

 

Marc Killian  08:34

Okay, all right. So let’s look at a couple of disadvantages as well, right? So you kind of mentioned fees and expenses already, so that’s definitely, that’s kind of par for the course. Any financial product typically has some kind of fee to it. So just making sure that you’re understanding what those are is a big part of the hurdle.

 

Jude Wilson  08:50

Yeah, absolutely. Because at the end of the day, you want to receive some value for for the fee that you’re paying. Sure, and if the fees are too high, it’s limiting the potential that you’re that you can keep in that particular annuity. So it’s always a cost, cost benefit analysis. And when we’re looking at annuities for clients, and again, it’s not the only solution, but when we’re looking at it, we want to make sure that it fits the particular goals of that client, if you’re looking for income, and we talked about an immediate annuity. Sometimes, when you’re in that phase where you’re ready to retire and you need income, there’s very little. There are very other products that I know that can provide income for life, regardless of what the market is doing. So that may fit for some for some people, alright?

 

Marc Killian  09:43

So talk to me about the surrender charge period. Jude, because this trips people up. It can be short, it can be long, right? And it’s kind of like a lease, right? Like, if you break it, you know, really early, then you got a lot longer on the contract. It’s gonna cost you more, right? But the closer you get to the. End of it, not so much, right? But kind of break that down for folks a little bit.

 

Jude Wilson  10:03

And that’s such a great analogy that I actually wrote that down, and I’m going to start using it. That’s great. That’s that’s pretty good. Please don’t charge me for that. So the surrender fee is very similar to how you described it for most annuities, and they’re different. For all annuities, there’s a period of time that if you cancel the contract, there’s a fee to get out of the contract and receive all your money, and, and, and, if not explained well, people have a tendency to look at that and say, Whoa. You know, I don’t want to be charged something to get to my own money, or

 

Marc Killian  10:38

I’m stuck in it for 10 years before I can access it, or whatever, exactly,

 

Jude Wilson  10:41

because that fee goes down. Usually, in most annuities, there’s a certain percentage that that fee goes down every year to where right that at the end of that surrender period, there’s no fee to cancel the contract. So for instance, in our bucket plan process, we look at where an annuity should be placed, and we take into consideration that surrender fee so that people don’t have to look at that annuity as the sole place that they can take money on out of in case there was an emergency. So it’s important to so it’s important to kind of think of the annuity in its totality. It’s not a one solve, fit fits fits all. It should be part of a comprehensive financial plan

 

Marc Killian  11:23

well. And I think typically, what that happens is, the conversation that happens is, is, this is the best place for you to participate in the gains of the market without any of the drops, right, depending on the type of annuity, again? And we hear that, we go, that’s what I want. I need. I need this tool to help me out. And then we maybe get put into the wrong tool right? Again, back to the conversation of the different types of annuities. So depending on what it is that you’re looking for that you need in your overall plan, an annuity could be a good swiss army knife. However, it needs to be on the correct setting, right. The Swiss Army does have like, 20 different settings in there, and it needs to be on the right one, right for sure. And let’s not trip up on the fact too. Jude that I think people get confused and aren’t aware that just like your 401 k, if you pull money out before 59 and a half, you get that penalty. Right? Is that 10% as well? Absolutely.

 

Jude Wilson  12:16

So the 59 and a half rule applies to annuities, very similar to 401, k or IRA, right? And that’s why, you know some, some people, when they go into annuity, if they’re not really given all of the the pros and cons, and a situation happens in which they they do need to take money out, they didn’t anticipate the situation, sure. And now, all of a sudden they see, whoa, I didn’t know that there were surrender fees and whoa, I didn’t know I there was the 59 and a half rule. That’s why I strongly suggest to anybody that’s listening, if you’re are interested in an annuity, if you’ve been approached about an annuity, make sure you look at all aspects of that annuity, and really work with someone that’s very qualified, that’s not looking at it as just one piece of the pie, but in trying to incorporate it in a holistic plan, so that you understand how this particularly fits in your situation.

 

Marc Killian  13:15

Yeah. And also, one more piece, Jude on disadvantages, and then we’ll just talk about, you know, who it might be a fit for. Is it does get taxed as ordinary income as well, right on the withdrawal. So it’s not a capital gains tax, it’s an ordinary income tax,

 

Jude Wilson  13:27

exactly, and sometimes that’s another area where people are not educated to find out by whomever is proposing the annuity. How is that income coming out some people, instead of using an annuity, may be selling investments. And look at that versus getting income from an annuity, which, as you said, is ordinary income, versus selling an investment, maybe at a profit, and paying capital gains. Capital Gains Tax is generally less than income tax. And again, I’ve got to be a broken record here, where, if planned correctly, you have a balance between ordinary income and capital gains. And that’s why, when we look at a client, not only do we look at the buckets, understanding what investments should go in each bucket. But we also refer to, and we’ve talked about this in previous episodes, we have our tax filters, understanding pre tax dollars, post tax dollars and tax advantage dollars. So the recipe, if you will, has to be customized. That is the, probably the biggest lesson that I have to make sure that people understand it’s not a one size fits all. It’s got to be customized to your situation well,

 

Marc Killian  14:46

and that’s a great point too, about the, you know, having different products and maybe selling some stocks or something, because most of us tend to get charged capital gains at 15% that’s where most people fall. So yeah, it could be that could be lower than your. You know, pulling the annuity income out and paying that at your whatever rate you might be, 22 or 24 whatever your tax bracket might be. So that’s something to certainly talk with your advisor as well. And I was going to ask you, like, what, where might it be a fit you already touched on one of those right from from a taxation standpoint, what about like, if you’re, what, some other places where maybe an annuity is good fit for you people that are looking to just maybe have already maxed out their 401, K, maybe.

 

Jude Wilson  15:25

Yeah. So I think there’s two situations where an annuity may be the most advantageous, okay, one where you, you’re, you’re, you’re looking to put money away in a tax sheltered ways, so you may be in a high tax bracket. Now you want to save more money. You’ve maxed out your 401 K, you’ve maxed out other vehicles. And so, because the annuity is tax sheltered, that may be a vehicle that you want to look toward putting money away again, you need to speak to your tax professional or financial advisor, and then the one that I think is most appropriate, when I look at potentials for using an annuity is really what the annuity was designed for, since the beginning of time, is being able to give income for life. Because there’s no other vehicle that I know of that can guarantee income for life. People sometimes say, Well, dude, you know, I’ve got a great bond portfolio within my within my overall portfolio, and bonds can pay interest income, sure, but interest income on a bond is for a set period of time, and after that period of time, you know, if interest rate changes, the income is going to change. So I’m not saying that bonds are worse than annuities, or annuities are better than bonds, but what I’m saying is I don’t know if a vehicle that can guarantee you income for life, and if that’s really important, maybe that should be part of your overall strategy.

 

Marc Killian  16:57

Now, some good information for sure this week here on the on the podcast. And you know what’s kind of funny dude, like people off, you know, like you said, they have a very stark reaction, right? You know, the annuity, it’s like, it’s, oh, we’re gonna drop the a word, right? You know, it’s either really good or really bad. What’s funny to me is that Social Security is an annuity, right? I mean, technically, it’s an annuity, right? So, you know, they’re not inherently bad, they’re not inherently great. It’s just another vehicle. Is it the right fit for you? Right? And how might it fit your overall plan and strategy? So that’s the point of making sure that you talk with a, you know, a professional who, again, I think the key takeaway too, Jude, is who’s explaining it to you correctly, right? We do know that they tend to get oversold. There was a period for a while where they were definitely heavily being oversold and not properly explained, not necessarily, you know, a bad a bad tool is as long as it’s been explained, you know, and how it’s going to work in your situation, is that fair?

 

Jude Wilson  17:52

Oh, it’s, it’s 100% fair. And then, to your point, there was a period of time that, if you spoke to a professional, and that’s the only tool that they had in their bag. Well, if you’ve got a hammer, everything looks like a nail, sure, but again, when you looking at a professional that looks at your situation holistically, right? Hey, maybe we use a hammer, maybe we use a wrench, maybe we use a combination of all these tools to build something that’s customized for you?

 

Marc Killian  18:23

Yeah, no, that’s a great point. There’s definitely, you know, make sure, when you’re talking with the finance professional, that if they only have the one Arsenal that’s they’re going to try to sell you on that. So just be aware that doesn’t necessarily mean they’re trying to sell you a bad one. However, just know that they may not have any other options to be able to discuss with you because of licensing and whatnot. So just make sure that you are getting and I think that’s why it’s important to talk with multiple advisors when doing some shopping, find the right financial professional for you. You can always do lots of different things. You can vet them. You can go on fenrir.org, you can go lots of different places to check out some information. So if you need some help, as always, please check with a qualified professional. And again, maybe go on a couple of, you know, reviews, almost like a financial advisor, speed dating, if you would go in and check them out, do that hour consultation, see if they’re the right fit for you. And of course, if you need some help, reach out to Jude and his team. They’ll be happy to get you on the calendar and have a chat with you again. Find the links below in the show descriptions, and thanks for hanging out with us here on the Roth guy. We always appreciate that. Don’t forget to like us on Apple and Spotify, and, of course, YouTube and and whatever you know platform you like you and hit the little thumbs up and the notification bell so you catch new episodes when they come out, and hopefully you learn something new along the way. Jude, thanks for bringing it down. My friend. Always appreciate you.

 

Jude Wilson  19:37

Thank you, partner and I love our conversations.

 

Marc Killian  19:41

Always good stuff, man, I always learned something new, so good stuff. Hopefully folks did as well, and we’ll see you next time here on the Roth guy, catch a little bit later on,

 

Walter Storholt  19:53

financial planning and advisory services are offered through prosperity Capital Advisors, PCA and SEC register. Investment Advisor with its principal place of business in the state of Ohio, centrist financial strategies and PCA are separate non affiliated entities. PCA does not provide tax or legal advice. Insurance and tax services offered through centrist financial strategies are not affiliated with PCA. Information received from this podcast should not be viewed as individual investment advice, product discussions and illustrations are hypothetical in nature and will vary based on many factors, including, but not limited to age, health product insurance carrier and product design. You should consult the insurance carrier website and policy for detailed information, for information pertaining to the registration status of PCA, please contact the firm or refer to the Investment Advisor public disclosure website, www.advisorinfo.sec.gov for additional information about PCA, including fees and services send for our disclosure statement as set forth on Form ADV from PCA using the contact information herein, please read The disclosure statement carefully before you invest or send money.

 

21:03

You.