Investing In Funds & ETFs: A Monthly Analysis --- Ask Encore: A Do-It-Yourself Annuity: The Pros and Cons --- Also: Answering a reader's question on naming a charity as a 401(k) beneficiary Ruttenach, Glenn . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]08 Sep 2020: R.4.
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FULL TEXT Q: I'm approaching retirement, and the turmoil in the markets this year has me thinking, for the first time, about
buying an annuity. I like the idea of predictable income, but I don't like the idea of handing my money, permanently,
to an insurance company. What do you think about a person building his or her own annuity? Is there a good way
to do this?
A: Yes, there are ways to create an annuity. And I think it's wise to consider how an annuity might help you and
your nest egg. But I think the do-it-yourself approach can be difficult for many investors and carries some sizable
To start, I'll focus on the product you seem to be considering: an immediate fixed annuity. In other words, you hand
a lump sum to an insurer, which, in turn, guarantees you a monthly paycheck for life. Period. (We'll save, for
another day, talking about more-complicated products, such as equity-indexed annuities.)
If you wish to build something resembling an immediate fixed annuity, you could, for instance, assemble a "TIPS
ladder," a collection of Treasury inflation-protected securities of various maturities. Or you could construct a bond
portfolio with high-quality corporate and municipal bonds. Both approaches would produce a predictable stream of
Even something as simple as a "balanced" mutual fund, one with a mix of stocks and bonds and a long history of
solid returns, could, in theory, serve as an annuity. An example: T. Rowe Price Balanced Fund (RPBAX) has posted
an average annual total return of 9.46% since its start in 1939.
The point: With each of these strategies, you retain control of your cash.
But let's take a step back. Do you have the skills and time to build, say, a TIPS ladder or search for top-notch
bonds? I would argue that many people don't. And a balanced fund, however simple, highlights some of the
limitations involved with the DIY route. Among them:
-- Longevity: Even the best investments can have rough years, which could hurt the long-term prospects of a
homegrown annuity. That's where a highly rated insurance company typically has an edge: It will keep pumping out
cash, year after year, regardless of market and economic conditions.
-- Risk: Yes, TIPS and corporate bonds tend to be safer investments than most others-but there is still some risk.
State governments mitigate some of the risk of annuities by requiring insurers to maintain specific levels of capital
to make annuity payments. If you build your own annuity, you won't have the protection of a regulator looking over
-- Discipline: You might be able to build an annuity-but will you have the discipline to keep from fiddling with it? Put
another way: Will the next market meltdown prompt you to undo your handiwork?
Again, I think it's smart to look at annuities; most retirees want, and need, predictable lifetime income. But doing
this yourself could be a stretch. If you're concerned about handing over your life savings to an insurer, consider
buying a series of smaller annuities from different insurers over a period of years. In this way, you reduce the risk
of any single insurer failing to make its payments. What's more, if interest rates rise, you won't be locked into an
annuity that's tied to today's low rates.
And always remember: The single best annuity is right under your nose-Social Security. The longer you wait to
claim it, the better the monthly payout, for life.
Q: I am a 78-year-old retiree taking required distributions from a 401(k) plan I accumulated while I was working. I
am considering naming a charitable organization as the plan's beneficiary. When I die, will the funds be paid to the
charity without being taxed, or is there a provision in the tax code that would tax the payment?
A: The answer, happily, is simple. And this question gives me the chance to remind readers about a second way to
be charitable, one with its own tax advantages.
Yes, you can name a charity as the beneficiary of a retirement plan, and no, there would be no tax on the transfer to
the charity after your death.
"For anyone who is charitably inclined, funds like individual retirement accounts or 401(k)s are actually the best
assets to leave to a charity," says Ed Slott, an IRA expert in Rockville Centre, N.Y. "That's because they are loaded
with deferred taxes that will never get collected when the funds are donated."
Still, you might decide, at some point, that you would like to see how your donations are helping others before you
pass on. In that event, consider making a qualified charitable distribution, or QCD.
As we've noted in earlier columns, a QCD is a tax break for individuals age 70½ or older. It allows you to transfer
money, tax-free, from an IRA to a charity. (And that presents a wrinkle for this reader: You first would have to roll
the funds from your 401(k) into an IRA to take advantage of a QCD.)
Recent changes in tax laws offer additional reasons to consider using a QCD, Mr. Slott says. For instance,
Congress recently ended the so-called stretch IRA, which allowed nonspouse beneficiaries (typically, children and
grandchildren) to stretch withdrawals from inherited IRAs, along with the tax bite, over their lifetimes. Now, such
individuals are required to withdraw all the money, and pay the associated taxes, within a decade of the original
account holder's death.
Given that, QCDs could help your heirs in the long run. Let's say you begin donating funds from your IRA in the form
of QCDs. When you die, your beneficiaries will inherit less of your IRA, which is taxable. But, ideally, these same
beneficiaries will inherit more of assets outside your IRA that might have been used for charitable contributions,
like cash, stocks, bonds or mutual funds. These, for the most part, won't be taxable and/or will get a "step up" in
cost basis. (Meaning, in effect: Your heirs could save a bundle in capital-gains taxes.)
In short, Mr. Slott says, "by doing the QCDs, you are giving the taxable assets to charity -- at no tax -- and leaving
the other, better assets to your beneficiaries."
Of course, decisions about bequests are highly personal. You might have good reasons for waiting to donate
money to a charity until after you die. (Example: You might need your required distribution each year to live on.)
And no single approach to gifting is necessarily better than another. Simply be aware that there are other options --
options with their own tax advantages -- when it comes to helping others.
Mr. Ruffenach is a former reporter and editor for The Wall Street Journal. His column looks at financial issues for
those thinking about, planning and living their retirement. Send questions and comments to [email protected]
Credit: By Glenn Ruttenach DETAILS
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Subject: Taxes; Donations; Municipal bonds; Bond portfolios; Retirement; Beneficiaries;
Annuities; Deferred compensation
Publication title: Wall Street Journal, Eastern edition; New York, N.Y.
First page: R.4
Publication year: 2020
Publication date: Sep 8, 2020
Publisher: Dow Jones &Company Inc
Place of publication: New York, N.Y.
Country of publication: United States, New York, N.Y.
Publication subject: Business And Economics--Banking And Finance
Source type: Newspapers
Language of publication: English
Document type: News
ProQuest document ID: 2440605511
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Copyright: Copyright 2020 Dow Jones &Company, Inc. All Rights Reserved.
Last updated: 2020-09-08
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- Investing In Funds & ETFs: A Monthly Analysis --- Ask Encore: A Do-It-Yourself Annuity: The Pros and Cons --- Also: Answering a reader's question on naming a charity as a 401(k) beneficiary