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Using annutities for tax deferral
USING ANNUITIES FOR TAX DEFERRAL
An annuity is a tax advantaged way to put aside
money for retirement, or other, objectives. Annuities
may be among the best ways to create retirement income.
They allow savings to grow tax-deferred, building
assets faster than other investments.
The way this works is that money is invested with
an insurance company. Annuities may be a good
investment for many long-term goals, but several
features make them especially well suited for
* No Annual Investment Ceiling. There is no limit
to the amount that can be put into an annuity each
year. Other tax-advantaged plans such as IRAs should
not be overlooked for retirement savings, but the
amount that can be contributed each year is limited.
* The Power of Tax-Deferral. Money will grow
faster than in a taxable vehicle with a similar rate of
return for several reasons. Not only does the interest
accumulate tax-free until withdrawal, but funds that
otherwise would have been used to pay taxes remain in
the account for additional earnings. And if the
payments are not taken until retirement, the recipient
is probably in a lower tax bracket at that time.
* Security for One's Family. If the purchaser
dies before distributions begin, their family (or other
beneficiaries) can receive the full value of the
annuity. By naming a beneficiary, the annuity may even
bypass probate and eliminate the associated costs and
* Simplicity. There are no annual IRS forms to
file, and there is no entry on Form 1040 until the
payments actually begin.
An annuity can offer the investment returns of a
mutual fund, but deferring the tax until after
retirement. Though unglamorous, an annuity is one of
the investment industry's fastest-growing products.
The annuity also contains some of the tax-deferred
benefits of an individual retirement account or
employer-sponsored 401(k) plan. Although it has been
available for more than 20 years, sales have boomed in
the last few years.
With an annuity, savings grow, tax deferred, until
withdrawn, with no restrictions on how much can be
invested -- unlike an IRA or other retirement plan.
And because an annuity is also an insurance
product, it promises a guaranteed regular income after
retirement, regardless of how long the investor lives.
Sales of domestic annuities in the U. S. are now
running around $50 billion per year. But the real
reason for the growth is that as the American
population ages, it is waking up to the fact that
retirement self-sufficiency is an important issue. The
annuity has some ideal characteristics for them.
An annuity, often described as the opposite of
life insurance, is a financial contract with an
insurance company. These can be structured so they make
regular monthly payments for life, no matter how long
the recipient lives.
While technically the investor doesn't own the
investments the annuity makes, he benefits from their
investment. And because he doesn't own the
investments -- the insurance company does -- savings
can grow, and the gains are tax-deferred.
Just as with an IRA, no taxes are due on
investment gains while the funds remain in the annuity
account. This helps savings grow faster, and it allows
individuals to better control when they will pay taxes.
Taxes are due when money is withdrawn. Just as
with an IRA or 401(k) account, withdrawal of funds
before age 59 1/2 incurs a 10 percent penalty.
While these investments do enjoy tax-deferred
status as do other retirement accounts, individuals
still get greater tax savings under traditional IRA or
401(k) plans, at least to the degree that contributions
to those accounts are also tax deductible. But once
beyond the level of what can be deducted, annuities are
for investors who want to build substantial tax-free
growth, not just be limited to a government-mandated
maximum amount of savings.
In an IRA or other retirement account, initial
investments under certain limits are deposited before
taxes. That allows wage earners to shield current
income from tax, as well as allow investments to
accumulate on a tax-deferred basis.
With an annuity, the initial investment is made
with post-tax dollars, although after that, investment
gains are tax-free until withdrawn.
This is a supplemental retirement tool, after all
the other things. In an annuity one can set aside as
much money each year as retirement or other future
plans require. Other tax-advantaged plans such as IRAs
should not be overlooked for retirement savings, but
the amount that can be contributed each year is
Owning an annuity also can prevent some tax
liability that often hits mutual fund holders. When a
mutual fund is purchased, at the end of the year they
pay a capital gains distribution, and even if they
reinvest it, it is a taxable event. With a variable
annuity, any profit made, as long as it stays there,
Other considerations in selecting an annuity
include important safety questions, such as the
financial health of the insurance company guaranteeing
Because annuities are insurance products, the fees
paid by investors are different than for mutual funds.
Typically, there are no front-end load fees or
commissions to buy an annuity, but there are
"surrender" charges for investors who withdraw funds
early in an American annuity, usually during the first
five or six years. (This is not the case in the Swiss
annuities discussed later.).
The money in an annuity will grow much faster than
in a taxable vehicle with a similar rate of return, for
several reasons. Not only does interest accumulate
tax-free until withdrawal, but funds that would
otherwise have been used to pay taxes remain in the
account for additional earnings. And by the time of
retirement, the recipient is usually in a lower tax
bracket, and will thus pay less tax on the annuity
Although salesman like to point out that an
annuity's value is "guaranteed," that promise is only
as strong as the insurer making it. An annuity is
backed by the insurer's investment portfolio, which in
America may contain junk bonds and troubled real estate
investments. If an American insurer has financial
problems, the investor may become just another creditor
hoping to be paid back. For example, when the New
Jersey state insurance department took over bankrupt
Mutual Benefit Life, the state temporarily froze the
accounts of annuity holders, preventing them from
withdrawing money unless they could prove a significant
Some American annuity marketers inflate their
yields by playing games with the way they calculate
them; others advertise sumptuous rates that have more
strings attached than a marionette. The most
widespread form of rate deception is the bonus annuity,
in which insurers tack on as much as eight percentage
points to their current interest rate. But many of
these alluring bonuses can be illusory. In most cases
the bonus rate is only paid if the annuity is held for
many years, and then taken out in monthly installments
instead of a lump sum. If the investor asks for the
cash in a lump sum, the insurer will retroactively
subtract the bonus, plus the interest that compounded
on the bonus, plus a penalty on the original
Even more insidious are tiered-rate annuities --
so named because they have two levels of interest
rates. They ballyhoo an above-average interest rate.
But as with their bonus-rate cousins, the accrued
earnings in the account reflect this so-called
accumulation rate only when the payout is made over a
long time. A straight withdrawal, by contrast, will
knock the annuity down to a low "surrender value" rate
for every year invested.
Other insurers simply resort to the time-
dishonored practice of luring customers with lofty
initial rates that are lowered at renewal time.
All of this nonsense has given the American
annuity industry a bad name, and it is not surprising
that most investors simply hang up the telephone when
an annuity salesman calls. But the tax structure has
much to offer, and it is worth shopping around.
Long-term asset protection to beat the dollar -- tax-
According to Swiss law, insurance policies --
including annuity contracts -- cannot be seized by
creditors. They also cannot be included in a Swiss
bankruptcy procedure. Even if an American court
expressly orders the seizure of a Swiss annuity account
or its inclusion in a bankruptcy estate, the account
will not be seized by Swiss authorities, provided that
it has been structured the right way.
There are two requirements: A U. S. resident who
buys an annuity from a Swiss insurance company must
designate his or her spouse or descendants, or a third
party (if done so irrevocably) as beneficiaries. Also,
to avoid suspicion of making a fraudulent conveyance to
avoid a specific judgment, under Swiss law, the person
must have purchased the policy or designated the
beneficiaries not less than six months before any
bankruptcy decree or collection process.
The policyholder can also protect the policy by
converting a designation of spouse or children into an
irrevocable designation when he becomes aware of the
fact that his creditors will seize his assets and that
a court might compel him to repatriate the funds in the
insurance policy. If he is subsequently ordered to
revoke the designation of the beneficiary and to
liquidate the policy he will not be able to do so as
the insurance company will not accept his instructions
because of the irrevocable designation of the
Article 81 of the Swiss insurance law provides
that if a policyholder has made a revocable designation
of spouse or children as beneficiaries, they
automatically become policyholders and acquire all
rights if the policyholder is declared bankrupt. In
such a case the original policyholder therefore
automatically loses control over the policy and also
his right to demand the liquidation of the policy and
the repatriation of funds. A court therefore cannot
compel the policyholder to liquidate the policy or
otherwise repatriate his funds. If the spouse or
children notify the insurance company of the
bankruptcy, the insurance company will note that in its
records. Even if the original policyholder sends
instructions because a court has ordered him to do so,
the insurance company will ignore those instructions.
It is important that the company be notified promptly
of the bankruptcy, so that they do not inadvertently
follow the original policyholder's instructions because
they weren't told of the bankruptcy.
If the policyholder has designated his spouse or
his children as beneficiaries of the annuity, the
insurance policy is protected from his creditors
regardless of whether the designation is revocable or
irrevocable. The policyholder may therefore designate
his spouse or children as beneficiaries on a revocable
basis and revoke this designation before the policy
expires if at such time there is no threat from any
These laws are part of fundamental Swiss law.
They were not created to make Switzerland an asset
protection haven. There is a current fad of various
offshore islands passing special legislation allowing
the creation of asset protection trusts for foreigners.
Since they are not part of the fundamental legal
structure of the country concerned, local legislators
really don't care if they work or not -- the fees have
already been collected. And since most of these trusts
are simply used as a convenient legal title to assets
that are left in the U.S., such as brokerage accounts,
houses, or office buildings, it is very easy for an
American court to simply call the trust a sham to
defraud creditors and ignore its legal title -- seizing
the assets that are within the physical jurisdiction of
Such flimsy structures, providing only a thin
legal screen to the title to American property, are
quite different from real assets being solely under the
control of a rock-solid insurance company in a major
industrialized country. A defendant trying to convince
an American court that his local brokerage account is
really owned by a trust represented by a brass-plate
under a palm tree on a faraway island is not likely to
be successful -- more likely the court will simply
seize the asset.
But with the Swiss annuity, the insurance policy
is not being protected by the Swiss courts and
government because of any especial concern for the
American investor, but because the principle of
protection of insurance policies is a fundamental part
of Swiss law -- for the protection of the Swiss
themselves. Insurance is for the family, not something
to be taken by creditors or other claimants. No Swiss
lawyer would even waste his time bringing such a case.
Swiss annuities minimize the risk posed by U. S.
annuities. They are heavily regulated, unlike in the
U.S., to avoid any potential funding problem. They
denominate accounts in the strong Swiss franc, compared
to the weakening dollar. And the annuity payout is
Swiss annuities are exempt from the famous 35%
withholding tax imposed by Switzerland on bank account
interest received by foreigners. Annuities do not have
to be reported to Swiss or U.S. tax authorities.
A U.S. purchaser of an annuity is required to pay
a 1% U.S. federal excise tax on the purchase of any
policy from a foreign company. This is much like the
sales tax rule that says that if a person shops in a
different state, with a lower sales tax than their home
state, when they get home they are required to mail a
check to their home state's sales tax department for
the difference in sales tax rates.
The U.S. federal excise tax form (IRS Form 720)
does not ask for details of the policy bought or who it
was bought from -- it merely asks for a calculation of
1% tax of any foreign policies purchased. This is a
one time tax at the time of purchase; it is not an
ongoing tax. It is the responsibility of the U. S.
taxpayer, to report the Swiss annuity or other foreign
insurance policy. Swiss insurance companies do not
report anything to any government agency, Swiss or
American -- not the initial purchase of the policy, nor
the payments into it, nor interest and dividends
A swiss franc annuity is not a "foreign bank
account," subject to the reporting requirements on the
IRS Form 1040 or the special U. S. Treasury form for
reporting foreign accounts. Transfers of funds by
check or wire are not reportable under U. S. law by
individuals -- the reporting requirements apply only to
cash and "cash equivalents" -- such as money orders,
cashier's checks, and travellers' checks.
Swiss annuities can be placed in a U. S. tax-
sheltered pension plans, such as IRA, Keogh, or
corporate plans, or such a plan can be rolled over into
Investment in Swiss annuities is on a "no load"
basis, front-end or back-end. The investments can be
canceled at any time, without a loss of principal, and
with all principal, interest and dividends payable if
canceled after one year. (If canceled in the first
year, there is a small penalty of about 500 Swiss
francs, plus loss of interest.)
Although called an annuity, these plans act more
like a savings account than a deferred annuity. But it
is operated under an insurance company's umbrella, so
that it conforms to the IRS' definition of an annuity,
and as such, compounds tax-free until it is liquidated
or converted into an income annuity later on.
The most practical way for North Americans to get
information on Swiss annuities is to send a letter to a
Swiss insurance broker specializing in foreign
business. This is because very few transactions can be
concluded directly by foreigners either with a Swiss
insurance company or with regular Swiss insurance
agents. They can legally handle the business, but they
aren't used to it.
JML Swiss Investment Counsellors is an independent
group of financial advisors. Since 1974 they have
specialized in Swiss franc insurance, gold and selected
Swiss bank managed investments for overseas and
European clients. To date the group is servicing
nearly 16,000 clients worldwide with investments
through JML of more than 1 billion Swiss francs. Their
services are free of charge to you because they are
paid by the renowned companies with which you invest
your money. Their commissions and fees are standard,
and all transactions are subject to strict regulation
by the Swiss authorities. JML represents the Swiss
Plus program discussed in this book.
All of their staff are fluent in English, and
understand the special concerns of the international
investor. They know about all the many little details
that are critical to you as a non-Swiss investor, and
have answers to your tax questions and other
Contact: Mr. Jurg Lattmann.
JML Swiss Investment Counsellors AG,
telephone (41-1) 363-2510
fax: (41-1) 361-074, attn: Dept. 212.
When you contact a Swiss insurance broker, be sure
to include, in addition to your name, address, and
telephone number, your date of birth, marital status,
citizenship, number of children and their ages, name of
spouse, a clear definition of your financial objectives
(possibly on what dollar amount you would like to
invest), and whether the information is for a
corporation or an individual, or both.
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