I want to make a comment on your article, "What's All This Tax-Deferred Stuff, Anyhow?" (Electronic Design, Feb. 8, p. 101).
I just completed my 1998 tax forms, and there is yet another financial vehicle that deserves a skeptical eye: variable life annuities, which are marketed by life insurance companies and fraternal organizations. My wife was the beneficiary of a couple of these annuities during 1998, when her mother passed away. This was a gift, but an inheritance that came with a tax bill.
You see, my dear old mother-in-law was sold on the tax-deferred growth idea by a couple of fraternal organizations. They promised her tax-free growth on her investments and that, upon her passing, these instruments would "pay like life insurance" to her designated beneficiaries. What in fact she bought was a mutual fund with sales commissions and insurance charges eating away at the gains, and yes, tax deferral. The dear old woman watched with great apprehension as these variable life annuities rose and fell with the stock market.
The things that sold her on variable life annuities were the slick salesmen and the illusion of tax-free growth. For you see, Bob, when they pay out upon the annuitant's passing, they come to the beneficiaries with a 1099-R that is taxed as ordinary income. In the case of my wife and I, we were pushed into the 31% federal bracket, lost our 1998 child tax credit, and lost some of our schedule A deductions as a result of this spike in our taxable income. The actual incremental tax rate is more like 35 to 40%.
I'm not complaining too much. It was a gift from one generation to another. But my dear old mother-in-law would have passed on more wealth to her kids and grandkids if she would have simply put her money into T-bills and paid her 15% taxes year by year. Furthermore, she would have lowered her stress level by not participating in funds that fluctuate wildly. There are two folks who would disagree with me—the salesmen that earned a tidy commission for themselves when they sold a pensioner these variable life-annuity contracts. I will approach tax deferral with greater caution, and will avoid variable life-annuity contracts as I plan my own investments.
Gee, Scott, there sure are a lot of tax-related ideas that don't give the advantages they are claimed to, eh?—RAP
Re: "Prediction Stuff" (Electronic Design, Jan. 11, p.129).
- Standard analog video is phasing out so that the TV receiver industry and suppliers can make more money selling us resolution that we don't need to watch drivel we can't stand. Your 13-in. TV will still work, but there may be no more live source material.
- Thanks for the tip on Alphasmart. It may well fit my travel documentation needs, as well as the note-taking needs of my son, a college student.
- Lastly, in five years I'll be driving a 1974 BMW. I've been driving it for 25 years and over 0.3 million miles. That's how I pay for #2 above.
I notice Sony and Mitsubishi and four other manufacturers are selling ANALOG TVs costing $1200, $2300, $3600, and up. I'll be greatly amused when they try to tell these guys that their "nearly new" TV sets have to be junked, or else they have to spend $750 on a set-top box. Can you see a FIRESTORM of complaints? I can. We agree on Alphasmart.—RAP
All for now. / Comments invited!
RAP / Robert A. Pease / Engineer
Mail Stop D2597A
P.O. Box 58090
Santa Clara, CA 95052-809