Q. My husband and I are in our early 60s and retired. We recently attended a seminar that exposed us to IRS 72(e) which would allow us to shelter all interest income, including our IRA's, from Social Security taxes until we draw out the monies. It also does away with the rule that you must withdraw at 70 years of age and is insured to $1 million dollars. In order for us to be able to use this rule we would have to place our money in a variable annuity offered by Golden American Life Insurance Company.

Supposedly, we would still be in control of our IRA's and other monies now turned into a special annuity that is protected from the government taxing our Social Security benefits. The gentlemen who came to our home said he had to have four licenses to be able to offer this to us and not many people were willing to secure them in order to work with people on this basis. He also said this rule protects our money from litigation and bankruptcy. We did not discuss managerial fees

Since we have never heard of this rule in all the retirement/IRA seminars that we have attended in preparation for retirement, we are not sure if what he is telling us is valid. We are really puzzled. I am enclosing their brochure and other materials.

----G.D., Dallas, TX

  

A. The brochure, printed by Senior Benefits of America Network, is titled "How to Avoid the Taxing of Social Security Income."   It states, "Let's say you have a $100,000 IRA in a mutual fund that you are not touching. Let's say it earned 10 percent last year, or $10,000. You don't need the money and you reinvest the dividends and capital gains. The IRS will still count that income against you when evaluating the Social Security tax!" (underlined in brochure).

In fact, the brochure is wrong.   Earnings inside an IRA account--- whether dividends, interest, or capital gains--- are not taxable. Money from IRA accounts is only taxed on withdrawal.

But don't just take it from me.

"I've never heard of anything like that," Alan Goldfarb said when I called him. Mr. Goldfarb, a Certified Financial Planner since 1978, is Director of Financial Planning for AXA Advisors in Dallas.

The only way to avoid this tax, the Ernst and Young Tax Guide for 1999 suggests on page 161, is by "staggering the recognition of income," making large IRA withdrawals in one year and none in the next. (To understand how this pernicious tax works, see my recent column on the subject, Sunday, August 13, 2000.)

Further, the marketing brochure says that only a "deferred annuity, fixed or variable, when registered under Internal Revenue Code 72(e) is exempt from Social Security taxation." This is also balderdash. As with an IRA account, a tax deferred annuity allows you to defer taxes until you withdraw money at a later date. It does not exempt them.

Calls and faxes to Senior Benefits of America Network were not returned. The compliance officer for Golden American Life Insurance had no comment before seeing the document and then did not return phone calls.

Whether this is a case of ignorance or misrepresentation, what we've got here is a sales seminar pure and simple. The salesmen did not discuss fees because the cost of their product is worse than the tax burden they offer to "protect" you from.

Let me demonstrate with a broad example. The GoldenSelect variable annuities offered by Golden American Life Insurance typically carry insurance expenses of 1.40 percent a year. Over the last five years the average intermediate government bond fund has provided an annual return of 5.24 percent. Subtracting the 1.4 percent insurance fee from that return means that you are volunteering to give the insurance company 26.7 percent of your return just to defer a federal tax rate of 23 to 42 percent on the income that remains. Even if they were correct in their reading of the tax code--- and they are dead wrong--- it simply wouldn't be worth it.

Now let's try a specific example. Suppose that you had invested in a GoldenSelect variable annuity five years ago. What would your return have been? Their limited maturity bond fund sub-account earned 4.09 percent a year, net of fees.

With fees like that, who needs to worry about the taxman? Worse, any accumulated income would still be subject to taxes when it was withdrawn. Vanguard GNMA, a low expense, no-load fund frequently mentioned in this column earned 6.52 percent annually over the same period. A 5-year Treasury earned at a 6.01 percent rate over the same period.

Bottom line: they are selling an expensive gimmick that doesn't work.