More Tax Deferral

Client Scenario


At 23, Jon received a gift of rental property from his father Karl—a shrewd investor who hoped the gift would provide Jon a more comfortable life in his later years. Karl’s foresight reaped great rewards for Jon in the intervening years—he purchased the rental properties in an up-and-coming neighborhood. Consequently, property values have risen steadily.

Rental income from the properties also provided a nice supplement to Jon’s income, and granted him and his small family the ability to travel. For the past 10 summers, they have enjoyed experiences they may not otherwise have been able to afford. But the headaches of maintaining the properties and finding new tenants has been exhausting.

Now 47, Jon wants to simplify his portfolio, get out of the business of being a landlord, and sell at the top of the market. After a long conversation with his fee-only fiduciary planner, Kenneth, Jon is concerned about the ongoing tax drag that cashing out his rental properties may become.

Kenneth drew up a plan to sell the properties, put some money aside for a dream trip with his Dad, invest some of the proceeds in mutual funds in his brokerage account, and defer taxes on the remaining money in a low-cost, no-load variable annuity. Offering a ceiling of $1 million, Jon was easily able to take advantage of the greater tax-deferring capacity of an annuity.

Because internal costs are low, and the variable annuity offers access to low-cost investment options from Vanguard and DFA, Jon is able to leverage the compounding power of tax deferral at a low cost. And through months of preparation, his once-in-a-lifetime trip to climb Mt. Kilimanjaro with his father afforded them the rare chance to reconnect.


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