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Rebalance and Shelter Your Portfolio With a Variable Annuity


One of the biggest problems facing investors is reducing equity exposure on assets outside of retirement plans while minimizing the tax impact usually triggered by such portfolio reallocations. According to a recent article from ThinkAdvisor, some of the more common strategies for dealing with this situation include tax-loss harvesting, making a charitable donation using appreciated stock, and a more complex plan of using options to build an insurance overlay on the portfolio. These strategies all have one thing in common: they are trying to solve a problem instead of avoiding it altogether.  Wouldn’t it be easier if there was a way to regularly rebalance the stocks and bonds in a portfolio with minimal tax impact, all while aligning with your risk tolerance? Enter a variable annuity.

At some point, advisors seemed to become convinced that a variable annuity had to always be sold with a living benefit in order to lock in a predetermined amount of retirement income. Some how, the financial industry forgot that a variable annuity can be a great way to shelter portfolio gains from income taxes. Several variable annuities today offer a variety of investment selections, giving clients the flexibility to invest in domestic and foreign stock, fixed income funds, commoditites, etc. If the need to rebalance should arise (i.e. risk tolerance shifts or the markets change), any gains continue to be tax-deferred as long as the money stays in the annuity.

Consider this scenario. A 70-year-old client holds the majority of his assets with a non-qualified trust account. His previous advisor recommended the traditional 40/60 portfolio expected for a client his age. But between his pension and Social Security, income is not a concern for him. After considering his objectives and risk tolerance, he and his current advisor agree that he could benefit from more equity exposure. But, between his pension, Social Security and investment income, his taxes were creating a substantial burden. In order to address this, the new advisor sold about 20% of the non-qualified fixed income portfolio to buy a variable annuity. Sure, this sale triggered a taxable event, but the goal was to set this part of his portfolio up to avoid triggering taxable events when rebalancing in the future. The variable annuity allowed the investment of the client’s money in a real estate fund, a multi-strategy fund, an oil and gus fund, and a science and technology fund, in addition to an equity index fund, providing diversification within a single product.

After two years steady gains in the market, the total investment grew to almost 30%. Naturally, the client grew nervous about how much money he had in the stock market, and his questions about market corrections became more frequent. It was obviously time to take some equity risk off the table, but how could the advisor rebalance without creating taxes? The answer: he could start with the variable annuity. The advisor moved some of the investments to a fixed income allocation, and with a goal of creating a 50/50 mix in the client’s portfolio, the advisor coupled the rebalance in the variable annuity with one in his traditional IRA. Because the client was a “pensioner,” the size of the IRA account paled in comparison to his non-qualified account. But the reallocation within the IRA combined with the reallocation within the variable annuity, allowed the advisor to get the portfolio back to an overall 50/50 balance. The relatively small IRA account assisted with tax-efficient rebalancing, but the advisor wouldn’t have been able to avoid income taxes without the variable annuity.

If you, or your client, are worried about the taxes due on investment earnings – especially due to the required mutual fund distributions – remember that a variable annuity could provide a solution. A living benefit is not always required, and variable annuities can provide a way to shelter gains from income taxes. Of course, these products are not appropriate for everyone, and it is always recommended to talk with a trusted financial advisor before entering into a contract. For more information on variable annuities, visit our website at www.annuityfyi.com.  

Written by Rachel Summit

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