Here's a possible way to increase your tax-sheltered income using the health-adjusted SPIA explained in the August issue of this newsletter.
Let's take a look at the hypothetical case of Mr. Jones, age 70 with a $500,000 portfolio of municipal bonds, earning 5% tax-free. He receives $25,000 of annual tax-free income.
If his health qualifies him for a health-adjusted Single Premium Immediate annuity, he could get $56,834 annually for the same $500,000 (the exact amount depends on an analysis of his medical records by the annuity company). Of this amount, approximately 60% is not taxable so his net after-tax income would be $48,877. His spendable income increases by $23,877 annually without risk of changing interest rates, bond defaults in his portfolio or the trouble of handling maturing issues.
However, remember that an immediate annuity does not leave anything for the heirs. So, Mr. Jones does the following with his additional $23,877 annually:
--He keeps $3,877 for himself and takes an extra cruise.
--He gifts the other $20,000 annually to his children and they purchase a life insurance policy on Mrs. Jones, who is in good health. In these circumstances, the policy would provide a death benefit exceeding $900,000 guaranteed to age 94.
In this scenario, Mr. Jones has captured more income for his own needs or, as he chose, provided an additional $400,000 tax-free death benefit to his children.
In some cases, a single premium immediate annuity can produce more after-tax income than tax-free bonds. If you own tax-free bonds exceeding $200,000 in value, we are happy to do an analysis for you.
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