Fidelity Personal Retirement Annuity
·2 mins
Overall #
- Pros:
- Tax-wise, annuity works out better than holding the same assets in an individual brokerage account. (See below.)
- Annuity will come out ahead by 0.62% in the best case scenario but, in reality, the number will be lower. So, question is whether this number is big enough to justify the additional complexity in my portfolio.
- Tax-wise, annuity works out better than holding the same assets in an individual brokerage account. (See below.)
- Cons:
- The annuity gains, whenever withdrawn in future, are taxed as income, not capital gains, tax. And, at least today, income tax > capital gains tax.
- This may be similar to how a 401k works but, in that case, you are putting pre-tax dollars, so you are saving tax. Therefore, not a justified comparison.
- There is no step-up in cost basis when these assets are passed on to heirs. If we don’t use the money before we die and all of it goes to our kid(s), they’ll have to pay income tax on that. That’s a major concern because chances are high we’ll hit this scenario.
- Only money that I am sure I’ll withdraw during retirement should go into this. (If I withdraw earlier, the penalty will bite.) I don’t know how much money I want to spend between today and retirement, so I’d be taking a major risk by locking up money in such a vehicle.
- The annuity gains, whenever withdrawn in future, are taxed as income, not capital gains, tax. And, at least today, income tax > capital gains tax.
Cost calculation #
Assumptions:
- VTI: 60%
- VXUS: 40%
- Invested amount: 100k.
- Income tax rate: 35%.
Cost comparison:
- Individual brokerage account:
- Effective tax-drag for the portfolio: 0.82%. Math:
- Yield:
0.35 * (0.6 * 1.52 + 0.4 * 3.57) * 100,000 / 100= $819 in a year.- Here, ETFs usually only distribute dividends, not capital gains. So, I assume that all of the distributions are taxed as income tax.
- VTI’s and VXUS’s “12-Month Yield"s were 1.52 and 3.57% respectively. However, some parts of it will be marked qualified distributions and, therefore, taxed at a lower rate of 20% or something. So, the real number will be lower than $819.
- Yield:
- Expenses:
(0.6 * 0.03 + 0.4 * 0.07) * 100,000 / 100= $46. - Total waste: 0.86% or less.
- Effective tax-drag for the portfolio: 0.82%. Math:
- Fidelity Personal Retirement Annuity:
- Tax-drag: 0%. (This is because all distributions will be tax-deferred.)
- Fees:
(0.25 + 0.6 * 0.12 + 0.4 * 0.17) * 100,000 / 100= $390. - Total waste: 0.24 to 0.39%, depending on whether Fidelity’s fees are 0.10 or 0.25% respectively.