The most important skill a financial planner brings to the table for their client is not knowledge, designations, or even experience. A planner’s most important asset is his or her ability to put down the pen and listen to each client’s wants, needs, anxieties, hopes, and dreams. It is only then that he or she can best pick the products and strategies that will help meet the client’s goals.
Invested in Bank CDs
Dear Medallion Group,
I am an 82-year-old widow in very good health. My husband and I built a nice nest egg of about $2 million. I don’t need it, as I also have a good pension and Social Security benefits. I simply want to pass that money on to my three kids. I have the money invested in bank CDs that average about 5%. But I recently spoke with two different brokers who have different suggestions. One said I should put the money in stocks and bonds, while the other said to invest in tax-deferred annuities. What should I do?
-Sharing the Wealth
Dear Sharing the Wealth,
First, we hope you don’t have all those CDs in one financial institution. Remember, FDIC only covers each individual, not each CD, for $250,000 per institution. Anything over that limit is uninsured and at risk should the bank or credit union default. As to your question of picking a stock and bond portfolio or a tax-deferred annuity, both have advantages and disadvantages you should consider.
Stocks and Bonds
Most of your stock and bond portfolio would be taxed at the dividend tax rate and the long-term capital gains rate, which can be 0 to 20% for most investors, depending on taxable income. A huge advantage for the stock and bond portfolio is that it would be inherited as tax-free income for your children! It also has the potential of outperforming both CDs and tax-deferred annuities. However, people can and do lose money in stocks and bonds, even on the principal amount invested.
A tax-deferred annuity has the advantage of principal and interest guarantees, which are based on the claims-paying ability of the issuing company. Furthermore, you would not pay income taxes on the deferred interest until you die. However, your kids would owe ordinary income tax on the tax-deferred interest when the funds are inherited, and there may be additional costs associated with the features of an annuity.
What’s Your Best Option?
Of the options discussed, stock and bond portfolios offer the lowest inheritance tax rate and highest growth potential. But, if you are not comfortable with the risks and you find the annuity expenses acceptable, then tax-deferred annuities may be your best option. CDs are FDIC insured and offer a fixed rate of return, but they are also taxed at your ordinary income tax rate each year. You should take all of the pros and cons into consideration before making your decision.
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply.
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
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