When people save for retirement they almost automatically use accounts that avoid tax now. IRAs, 401(k)s, 403(b)s, 457s, all pretax retirement savings plans. Certainly, long term savings uninterrupted by withdrawals and the effect of compounding interest on interest earned is unarguably valuable, but doing that in pretax accounts is NOT the only way to have that happen! Non-qualified annuities and Roth IRAs allow the same mechanics of compounding to happen, and in retirement both can be as valuable depending on the circumstances and actions of the retiree.
Annuities are underappreciated as a tax planning tool, because of the way earnings are treated as ordinary income upon withdrawal. However if annuitized at retirement (an option the advisors that distribute them don’t often value) instead of withdrawing from them, they can offer a dynamic change to the tax profile by way of “exclusion ratio” on each payment, which can work out as a great tax planning tool.
Roth IRAs are a class of IRA that allow for tax free growth and tax free withdrawals, and many misunderstand how they can be funded. People who cannot make a contribution because of earning too much income can still convert IRA, 401(k) and other pretax accounts to a Roth IRA. Making a contribution is different than making a conversion into one. It sounds like splitting hairs but it is not. So, anyone can have a Roth IRA, it just takes several steps for some people and less for others. As long as you have a good tax planner, it can be done!
These are only a few examples, but as with most things there are many other options available. But the moral of the story is: Don’t automatically save in pretax accounts. Look at the post tax options as well and sit down with a tax planner as your Sherpa to help you accomplish your retirement goals!
