Bingo, so you shouldn't own growth stocks in an IRA.

I agree that if one has a choice about where to own growth stocks, a non-qualified account is the better place to do it.  However, this doesn't equate to saying that one should not own a growth stock inside of an IRA/401(k).  Someone's portfolio may be made up of 80% qualified money. 

You want to arbitrage tax deferal by owning the most tax ineffecient assets possible. (e.g not an annuity )

I would actually argue that non-qualifed annuities are about as tax inefficient as one can get.  You are looking at a "surrender" charge in the form of a penalty tax that lasts until age 59 1/2, taxation that takes gains first if it is not annuitized, and all gains taxed as income.  It is a major mistake to assume that tax deferral is a good thing.  None of that makes any difference when deciding what to do with qualified money.  When we can use the guarantees of the annuity to influence investor behavior VA's can be an awesome tool. 

Bottom line is you can't hold growth stocks forever, at some point they are going to top out and their PE is going to shrink big time.  That means you can't have a buy-and-hold strategy with ALL growth stocks.

The arguement that Growth stocks should not be owned in an IRA is irrelevant in MY OPINION.  Growth stocks are more appropriate to trade than any other stock, large-mid-small.  If they are owned in an IRA then trading them is a lot easier than trading in a non-qualified account.

[quote=anonymous]

It is a major mistake to assume that tax deferral is a good thing.

Freelunch, I agree with you.  My point is that saying growth stocks don't belong in an IRA makes as much sense as saying an annuity doesn't belong in an IRA.  Neither statement makes sense.  It depends on the individual case.

Possible disadvantages of tax deferral:

1) "surrender charges until age 59 1/2" (think 10% penalty)

2) client can be in a higher tax bracket at retirement

3) taxes, in general, can be higher in the future

4) loss of step up of basis at death

5) extra tax penalty depending on use (think unqualified 529 distribution)

6) trading of capital gains tax for income tax

7) in the immortal words of our top gun friend TANSTAAFL

I am not saying that tax deferral is bad.  It is good in many instances.  I'm only saying that it is a mistake to ASSUME that it is always good.

Let me get your opinion on a case I'm working on.

High income married couple - $300k+ annual income.  He is age 44.  Desires to retire in 10 years.

His concern:  He's only invested in money markets.

His question:  Should he invest in more real estate, or invest in the markets?

His goal:  Retire in 10 years with a GROSS annual income of $160k per year WITHOUT touching any "qualified" retirement money.

My solution:  A non-qualified variable annuity with a Return of Principle guarantee.  (Not one of those 5% for life because he plans to retire too early to make good use of such a guarantee.)

Begin the annuity with $300k.  Add $125k per year for 10 years.  Total principle contributions:  $1,550,000.

Assuming an 8% ROR:  $2,458,000.  Principle guarantee will allow up to 7% withdrawals for 14.2 years.  Income could be as high as:  $172,000.

Take a 72q distribution beginning at age 54 to last until 59 1/2.  The 72q distribution will be LESS than the guaranteed amount, so the money will last that much longer.  We ARE locked into it under 72q rules, so that is a disadvantage.  But it does avoid the 10% penalty and works with the client's overall plan.

Of course, the hypo that I ran with the VA company looks better, but he and I want to work with a conservative estimate.

The VA is the tool to get us to where we need to go.  It is the proper tool because: 1) money for retirement income, 2)  allows for greater tax deferral of dividend income from the subaccounts, 3)  His goal is to defer INCOME, and the have an INCOME stream.  4)  He knows that he'll still be in a higher tax bracket anyway.

I did bring up life insurance, and he was satisfied with what he had (20 year term).  Since I'm not paid very well on life insurance, I left it at that.

I also did hypos with a CA muni bond fund.  The problem is that the money doesn't GROW as well as the VA could under the same circumstances.  It IS another alternative to the VA if he still wanted to invest in rental real estate and use the tax-free income to pay it down (which I think is a foolish idea).

But I'm a whore for money, so I'll present other ideas depending on how well they are received.  I always give the client a choice.

Based upon the facts as given, the client has an unachievable goal.  I’ll explain later if I have time.

Anonymous,

You made some great points earlier.  If someone does need money before 59.5 out of their annuity, they are hit with that 10% penalty and they lose all the benefits of that tax-deferral.  PLUS they paid a higher fee all that time to get that tax-deferral.

You are right on the money Anonymous.

Skippy - Regarding your situation.

Eaton Vance has some great tax-managed growth&value funds.  they also have some very impressive Municipal funds.  Don't you think you can build a tax-efficient, well-balanced portfolio & far outpace the VA?  It would be far less complicated in my opinion.  What you're doing is a great idea..but I'm just a believer that a solid, powerful, very diversified portfolio will inevitably Crush the returns and benefits of a VA.

[quote=FreeLunch]

Anonymous,

You made some great points earlier.  If someone does need money before 59.5 out of their annuity, they are hit with that 10% penalty and they lose all the benefits of that tax-deferral.  PLUS they paid a higher fee all that time to get that tax-deferral.

You are right on the money Anonymous.

Skippy - Regarding your situation.

Eaton Vance has some great tax-managed growth&value funds.  they also have some very impressive Municipal funds.  Don't you think you can build a tax-efficient, well-balanced portfolio & far outpace the VA?  It would be far less complicated in my opinion.  What you're doing is a great idea..but I'm just a believer that a solid, powerful, very diversified portfolio will inevitably Crush the returns and benefits of a VA.

[/quote]

My VA clients have averaged 25%/year over the last 4.5 years. Please suggest a way to "Crush" these returns.

No they haven't.

Your inferiority complex is fully justified

[quote=FreeLunch]

No they haven't.

Your inferiority complex is fully justified

[/quote]

Dear 5 digit midget,

Can't crush those returns, can you?

L.O.L

Of course I could.

Skippy, your guy also sounds like a good candidate, given his age, for a LEAP.  Insurance funded retirement for a portion of his retirement needs.  If he is in good health and can afford to fund a life insurance program to the max, this would be a good way to possibly retire early without the 59 1/2 problem. 

[/quote]

First, he's not your client. Second, you're pissed that you can't play with his money. Did you really think that noone would see through your bullsh*t?

[/quote]

Bobby Dull, you are such a pathetic idiot.  Of course he is my client.  There is no bullsh*t here, he is a young client (35), is not worried about risk at all, and wants to invest in individual stocks.  In case you're not familiar with what an individual stock is, many of them make up mutual funds, and several of those mutual funds make up annuities which seems to be all you know.  Sure, for the right client, annuities are great, but for this client, it was the wrong product.  How often do you invest in annuities for your clients without telling them?  Personally thats not how we run our business.

[quote=wallstreeter]

[/quote]

First, he's not your client. Second, you're pissed that you can't play with his money. Did you really think that noone would see through your bullsh*t?

[/quote]

Bobby Dull, you are such a pathetic idiot.  Of course he is my client.  There is no bullsh*t here, he is a young client (35), is not worried about risk at all, and wants to invest in individual stocks.  In case you're not familiar with what an individual stock is, many of them make up mutual funds, and several of those mutual funds make up annuities which seems to be all you know.  Sure, for the right client, annuities are great, but for this client, it was the wrong product.  How often do you invest in annuities for your clients without telling them?  Personally thats not how we run our business.

[/quote]

This could be interesting!

Yesterday we had a client in his mid-30's come in to talk about moving his $150,000 IRA to us.  We look at his statement and it is obvious to us that it is in an annuity.  He has had several 401(k) rollovers before starting his own business and they all went into the annuity.  He said when he met with the guy who did this, all he wanted was an IRA.  He was never told anything about an annuity.  Most of it is still in surrender as it was a 6 year product.

Even worse is that his wife's $10,000 IRA was also put into an annuity.

What are the worst things you have seen done by another broker?

Unless you sold him those annuities, he's not your client. Again, you're pissed because you can't make any money off of his money. Tough sh*t. That's one of the many good things about annuities - it's hard for an unethical asshole, like you, to churn the client's dough.

[quote=anonymous]Based upon the facts as given, the client has an
unachievable goal.  I’ll explain later if I have time.[/quote]



On 1.55M you can’t pull 160K and expect that to last for life, you’d need 3.2M assuming a steady 5% withdrawal rate.



Assuming an 8% Net Return inside the annuity requires a pre-fee return
of ~10.5% assuming 2.5% all in costs. That seems a bit high.



When the GMWB expires in 14.2 years, then what?

[quote=FreeLunch]

Eaton Vance has some great tax-managed
growth&value funds.  they also have some very impressive
Municipal funds.  Don’t you think you can build a tax-efficient,
well-balanced portfolio & far outpace the VA?  It would
be far less complicated in my opinion.  What you’re doing is a
great idea…but I’m just a believer that a solid, powerful, very
diversified portfolio will inevitably Crush the returns and benefits of
a VA.

I didn't cover his QUALIFIED retirement assets in my scenario.  They are MUCH larger than his NON-QUALIFIED assets.

14.2 years will be long enough.  His other goal is to go as long as possible without touching his qualified assets.  I didn't mention this in my post.  Sorry.

We don't need THIS money to last for "life."  Just so he can retire at age 54 and see him through until age 59 1/2 to access qualified money w/out penalty and age 62 to get his measly social security benefits.

The 8% ROR in the annuity was also assuming a straight-line return, not factoring in any negative years in the "sequence of returns" we keep hearing about too.

Of course, (now that I'm thinking about it) it wouldn't matter if he took the money from qualified OR non-qualified money since he would need to take a 72t or 72q distribution at the same tax rates.

I still like the idea, and it'll pay me well to implement it.

If God came to your client on his death bed and gave him a choice between leaving $5,000,000 behind or nothing, which would he prefer?

[quote=Bobby Hull][quote=wallstreeter]

[/quote]

First, he's not your client. Second, you're pissed that you can't play with his money. Did you really think that noone would see through your bullsh*t?

[/quote]

Bobby Dull, you are such a pathetic idiot.  Of course he is my client.  There is no bullsh*t here, he is a young client (35), is not worried about risk at all, and wants to invest in individual stocks.  In case you're not familiar with what an individual stock is, many of them make up mutual funds, and several of those mutual funds make up annuities which seems to be all you know.  Sure, for the right client, annuities are great, but for this client, it was the wrong product.  How often do you invest in annuities for your clients without telling them?  Personally thats not how we run our business.

[/quote]

This could be interesting!

Yesterday we had a client in his mid-30's come in to talk about moving his $150,000 IRA to us.  We look at his statement and it is obvious to us that it is in an annuity.  He has had several 401(k) rollovers before starting his own business and they all went into the annuity.  He said when he met with the guy who did this, all he wanted was an IRA.  He was never told anything about an annuity.  Most of it is still in surrender as it was a 6 year product.

Even worse is that his wife's $10,000 IRA was also put into an annuity.

What are the worst things you have seen done by another broker?

Unless you sold him those annuities, he's not your client. Again, you're pissed because you can't make any money off of his money. Tough sh*t. That's one of the many good things about annuities - it's hard for an unethical asshole, like you, to churn the client's dough.

[/quote]

hey ASSHOLE bobby - he moved his non-qualified account to us 2 months ago and now he wants to move his and his wife's qualified accounts to us, which is in the process of being transfered.  So yes, he is a client and no we did not sell the annuity.  Maybe it was your unethical "let's slam EVERYONE with an annuity" dumb ass that sold it to him.  The reason I'm pissed is because we can't do what he wants us to do (individual stocks) because of the 6 year surrender that will penalize him $5,000.  Maybe I'm the ethical one because I won't sell out of it because of the penalty. 

[quote=wallstreeter][quote=Bobby Hull][quote=wallstreeter]

[/quote]

First, he's not your client. Second, you're pissed that you can't play with his money. Did you really think that noone would see through your bullsh*t?

[/quote]

Bobby Dull, you are such a pathetic idiot.  Of course he is my client.  There is no bullsh*t here, he is a young client (35), is not worried about risk at all, and wants to invest in individual stocks.  In case you're not familiar with what an individual stock is, many of them make up mutual funds, and several of those mutual funds make up annuities which seems to be all you know.  Sure, for the right client, annuities are great, but for this client, it was the wrong product.  How often do you invest in annuities for your clients without telling them?  Personally thats not how we run our business.

[/quote]

This could be interesting!

Yesterday we had a client in his mid-30's come in to talk about moving his $150,000 IRA to us.  We look at his statement and it is obvious to us that it is in an annuity.  He has had several 401(k) rollovers before starting his own business and they all went into the annuity.  He said when he met with the guy who did this, all he wanted was an IRA.  He was never told anything about an annuity.  Most of it is still in surrender as it was a 6 year product.

Even worse is that his wife's $10,000 IRA was also put into an annuity.

What are the worst things you have seen done by another broker?

Unless you sold him those annuities, he's not your client. Again, you're pissed because you can't make any money off of his money. Tough sh*t. That's one of the many good things about annuities - it's hard for an unethical asshole, like you, to churn the client's dough.

[/quote]

hey ASSHOLE bobby - he moved his non-qualified account to us 2 months ago and now he wants to move his and his wife's qualified accounts to us, which is in the process of being transfered.  So yes, he is a client and no we did not sell the annuity.  Maybe it was your unethical "let's slam EVERYONE with an annuity" dumb ass that sold it to him.  The reason I'm pissed is because we can't do what he wants us to do (individual stocks) because of the 6 year surrender that will penalize him $5,000.  Maybe I'm the ethical one because I won't sell out of it because of the penalty. 

[/quote]

If you think you can do a better job than the annuity, then you have a moral and ethical obligation to take the penalty and move on. The FACT that you haven't done that tells me that you don't have much to offer and that you know it. Some of the best work I've done is convincing people to pay a little now to fix a mistake rather than pay the higher price of ignoring the mistake. I'm not shocked that you don't have the guts to do that.