FAIRTAX TREATMENT OF INSURANCE III

Hopefully we can finish up with insurance today, or Monday at the latest. Then maybe we can hit on something more interesting, like buying a car, or talking about gas and oil. Then again, that sounds a bit boring too.

I try to cut these things down as far as possible and still make sense to you. If you need
examples, or just want to suck in all the info you can get on insurance, feel free to go to the White Pages of the Research part of the FairTax.

We continue today with:

ANNUITIES:

Annuities can be sold as either qualified plans (IRAs, 401ks, Seps, etc.) or non-qualified, (such as mutual funds). Premiums to non-qualified annuities are made with after-tax dollars. Cash values grow tax deferred. Withdrawals are taxed as ordinary income and they slap a penalty on you if you withdraw anything before the age of 59½. This early withdrawal penalty applies to both qualified and non-qualified annuities.

The growth on non-qualified annuities is tax deferred; however, gains are taxed as ordinary income when withdrawn. The more traditional non-qualified investment, such as a mutual fund, would receive more favorable capital gains treatment.

Annuities also have higher costs than other investments. These extra costs are for administration and protection benefits, such as guaranteed minimum death benefits or living benefits.

Here is a comparison of the current income tax system and the FairTax in the treatment of non-qualified annuities:

Premiums:

Income Tax: The premium is paid with after-tax dollars and is not deductible.

Fair Tax: The FairTax treats the annuity premiums like all other forms of investment: does not tax them. Premiums are purchased with pre-tax dollars. The consumer has increased take-home pay (100%!) to invest. Any service charges are taxed, but these costs will be lower due to the removal of embedded income/payroll taxes in the cost of doing business.

Cash Value:

Income Tax: Accumulations are tax deferred. When withdrawn, cash values are taxed as ordinary income, in the highest income tax bracket for the consumer and with a 10% penalty if withdrawn before age 591/2.

FairTax: Accumulations are tax free. Withdrawals are also tax free. Pre-tax prices of goods and services purchased with the proceeds should be less expensive due to the removal of embedded costs.

Death Benefit:

Income Tax: At death, any gains are taxed as ordinary income to the beneficiaries.

FairTax: None of the proceeds are taxed at death.

Well, we still need to cover Health Insurance, so I guess we go into Monday. Have a good Friday and a great weekend. May all your favorite football teams win (unless they're playing mine!)