Assistance with Garret Recommendation

[firehawkocean]

Hello all,

I finished advising with a Garret Financial Advisor (fee-only). I wanted to get your take on what she recommended.

My income is NOT eligible for a Roth IRA or standard IRA. I have triple confirmed this. It is considered "non-earned income". Therefore she recommended that I take part of my $410,000.00 on hand cash and purchase:

"a Variable annuity directly from Jefferson National (jeffnat.com)". She gave me the number of a representative. She said he was not a broker. She recommended I put $200,000.00 split 4 ways equally into:

50K PIMCO VIT real return admin

50K Vanguard VIF total bond mkt index

50K Franklin Income securities CI2

50K Vanguard VIF Balanced

She states that they will charge a transaction fee of 49.99 for each purchase of the vanguard funds.

She also suggested that I change my VFINX investor shares into VFIAX admiral shares, so as to get a lower charge from vanguard.

She suggested I sell all VEURX
Sell all VIVAX
Sell all VGTSX
Buy 20K VTIAX
Exchange VTSMX investor shares for admiral VTSAX
Buy another 25K in VTSAX
Buy 20K VSMAX

I had to remind her, but she confirmed that I should do this in January 2012, to avoid dividend taxes.

She finally suggested that for the next year, I start building my savings account up (I will save about 100K a year).

What do you guys think? Any input would be greatly appreciated.

[disneysteve]

How old are you?
What is your annual income? What portion of it is being considered unearned income and where is that coming from?
Does your employer have a retirement plan (401k, 403b, etc.)?
Is any of your income from self-employment?

As for your Vanguard holdings, they automatically converted me from Investor shares to Admiral shares when my balance met the requirement to do so. In fact, they recently sent me a statement showing how much I saved in fees since doing so. So if your shares weren't converted, I'd definitely give them a call.

I'm not a fan of variable annuities due to the steep fees they charge. I think you will almost always do better investing on your own. I'd be curious what type of relationship she has with the annuity company she is referring you to.

[bjl584]

I'm not a fan of annuities either. We need to know your age to determine if this mix of funds is ideal.

Also, what are your goals? Do you own a home? Are you planning on buying one? Do you need a new car anytime soon?

I'd also like to know why your financial planner recommended these particular funds. Does she own any of them herself? If she believes in them strongly enough, I think that she should.

[Petunia 100]

There is no way I would ever consider a variable annuity. You effectively convert your low tax-rate capital gains into ordinary income, taxed at your highest marginal rate. No thanks. Instead, choose tax-efficient investments. Vanguard has a number of tax-managed funds.

I am stunned that a reputable fee-only advisor recommended a variable annuity.

[disneysteve]

I am stunned that a reputable fee-only advisor recommended a variable annuity.

Same here. I don't know a lot about Garrett but I thought they were a reputable firm. This advice really makes me wonder though.

[Petunia 100]

Same here. I don't know a lot about Garrett but I thought they were a reputable firm. This advice really makes me wonder though.

It's akin to going to John Hopkins for medical advice and being recommended snake oil. I just don't get it.

[Nobulladvisor]

....
She finally suggested that for the next year, I start building my savings account up (I will save about 100K a year).

A reputable fee-only advisor would FIRST recommend you have an emergency/ savings account fully funded before taking about investments.

I agree with Steve and Petunia, I’m also stunned that a fee-only advisor would recommend an annuity.

What was the reason for the advisor to make that recommendation??

[firehawkocean]

[QUOTE=disneysteve;310152]How old are you?
27 wife is 26

What is your annual income? What portion of it is being considered unearned income and where is that coming from?

Annual income is 1764,000 net. All is considered unearned income. It is coming from a tribal stipend (share of indian gaming profits).

Does your employer have a retirement plan (401k, 403b, etc.)?

NO

Is any of your income from self-employment?

NO

My house, 2 cars, is paid off. I have zero debt. My net worth is over 800k.

[disneysteve]

Annual income is 1764,000 net. All is considered unearned income. It is coming from a tribal stipend (share of indian gaming profits).

Very interesting. I honestly have no idea how unearned income is handled for tax purposes. Maybe this is one of those rare circumstances where an annuity might make sense (though I'm still skeptical).

Other than collecting this stipend, what do you do for a living? You're only 27.

[firehawkocean]

Graduate school for Psych.

[disneysteve]

I honestly have no idea how unearned income is handled for tax purposes.

Not sure where my brain was when I wrote that. Of course I know how it is handled. Investment income, interest and dividends and capital gains are all unearned income. How they are handled for tax purposes varies, though. For example, short term gains are taxed as regular income. Long term gains are taxed at 15%. How is your income taxed? Is it all taxed at regular income rates like dividends?

If so, I'm trying to figure out why the annuity would be advisable. Why not just invest in tax-efficient funds or ETFs and avoid the fees and not tie up your money in an annuity.

I'd be very curious to hear the advisor's reasoning behind this recommendation. Have you ever spoken to other members of the tribe to see how they deal with this money?

[firehawkocean]

[QUOTE=disneysteve;310289]Not sure where my brain was when I wrote that. Of course I know how it is handled. Investment income, interest and dividends and capital gains are all unearned income. How they are handled for tax purposes varies, though. For example, short term gains are taxed as regular income. Long term gains are taxed at 15%. How is your income taxed? Is it all taxed at regular income rates like dividends?

The entire stipend is taxed as federal & state misc. income rates. It is not taxed in a less rate (like dividends). It is taxed as income the same as income from a W-2. I could email her and ask her more. Maybe I will. She explained that she thought the tax deferrals were a great option and also because the 200k will not be needed for an extended period of time.

[disneysteve]

It is taxed as income the same as income from a W-2. I could email her and ask her more. Maybe I will. She explained that she thought the tax deferrals were a great option and also because the 200k will not be needed for an extended period of time.

That's what I figured. So if it was earned income, you'd be eligible to put it into at least a traditional IRA - possibly not a Roth depending on the total income (I'm not sure what your income was from the way you typed it). I guess her point is to find you a way to shelter the money from taxes. You could accomplish that reasonably well and at lower cost by selecting appropriate tax-efficient investments or even tax-free investments like municipal bonds.

[Nobulladvisor]

[QUOTE=firehawkocean;310285]

How old are you?
27 wife is 26
.

Any advisor who recommends an annuity to a 27 year old should get their license suspensed maybe revoked!

The amount of fees you will pay over that long period of time is ridiculous and should be illegal.

Annuities are an insurance product NOT an investments. It is designed for guarantee income. If income and and safety is not your concern, annuities is not for you. Tax deferral is a benefit but the amount of fee you will pay will outweigh that benefit.

As Steve said. Tax-efficient funds or ETFs will be the better choice. Clearly that advisor does not have your best interest at heart

FYI. Annuities pays the advisor 5% up to 10% up front and 1-3% annually.

[kv968]

Although I'm definitely no fan of Variable Annuities, I have a feeling the advisor is telling you to open one since she is putting the most tax-inefficient assets in there (i.e bonds and a balanced fund) while your taxable account will have the most tax-efficient. Plus she's probably getting some money on it too

However, considering the fees, expenses and lock-up periods involved with a VA and the availablity of tax-efficient bond funds out there, I think she could have done better job of providing you more information on the other alternatives out there if that in fact was her reasoning for opening a VA.